AI is taking the world by storm. Chatbots, like ChatGPT and Google Bard, help a wide range of individuals and organizations access specific, straightforward information within seconds, leading to faster problem solving and enhanced productivity. But this intelligence is quick to dismiss any requests for personal financial advice stating, “The information I provide should not be considered as personal financial advice. It’s always recommended to consult with a qualified financial professional or advisor who can take your specific financial situation, goals, and risk tolerance into account.” 

The industry’s leading chatbots won’t provide you with personalized financial advice but there is another breakthrough technology that will – robo advisors. Robo advisors are algorithm-based planning and investment services technology that leverage data analysis and mathematical models to manage investment portfolios without the need for one-on-one human interaction. In a post-COVID world, the thought of reduced human interaction may seem like a dream, but is it at a cost? We examine the role of robo advisor vs. human advisor and the financial benefits, expertise, and considerations when selecting the right investment advisor for you.

Robo Advisor

Robo advisors provide automated financial guidance powered by AI technology and knowledge based learning modules. This service, which is offered by everyone from large financial institutions to small tech startups, varies in fees, capabilities, and performance based on the service provider.  At its core the goal of a robo advisor is the same, offer a hands off approach with less human interaction to actively manage investment portfolios and offer financial advice. 

With nearly $460 billion in assets under management by robo advisors, it’s clear that this technology is growing in popularity. 

Benefits of Using a Robo Advisor 

Accessibility and Convenience 

Largely organized through online application, robo advisors provide users with an easily accessible means to invest and manage their finances. These platforms give anytime, anywhere access and enable users to act instantly without the need for human advisor intervention. 

Services and offerings differ by provider, but most robo advisors offer automated portfolio management, portfolio rebalancing, tax loss harvesting, and goal-based investing.

Lower Costs and Fees

Many robo advisors will charge an advisor fee based on the assets under management. This fee could range from 0.15% to 0.50% of the total portfolio value, so if you have $100,000 invested and the annual service fee is 0.25% you would pay $250 a year. Other robo advisors may charge a flat fee, instead of calculating by portfolio value. This fee could range from $250 to $500 per year. 

These costs are typically lower than those of a human advisor, whose compensation structure may be fee-only or fee-based, and can range from 0.5% to 1.25% of the entire portfolio value. 

It is important to note that while the cost of the service provided may be lower, account owners are still responsible for additional fees specific to their investments, such as fund expense ratios. 

Automated Portfolio Management

For inexperienced investors or those with less complex financial situations, automated portfolio management may be ideal. This removes the need for the investor to actively build their own portfolio and instead builds the investor a portfolio that balances risk and potential returns. 

To do this the robo advisor will likely ask you to complete a brief questionnaire about your assets, risk tolerance, goals and any other pertinent information. From there the robo advisor will build a portfolio based on your responses. Many robo advisors follow the principles of Modern Portfolio Theory and assemble the portfolio with risk, diversification, and correlation in mind. 

By removing the need for extensive human intervention, robo advisors can provide efficient, cost-effective, and scalable investment management services to a broader range of investors.

Disadvantages of Using a Robo Advisor

Lack of Human Interaction

While many would consider the lack of human contact a plus, when it comes to your finances it may actually be a disadvantage. The automation behind robo advisors removes the personalized component of the investor-advisor relationship, which eliminates any unsolicited guidance or expertise specific to your situation. 

Many robo advisors will offer access to a financial professional via a chat or messaging tool for individual questions, but those still lack the background knowledge of your particular financial situation, especially when complex or unique. 

Limited Customizations 

Many robo advisor plans will assess your intake questionnaire and enter you into a portfolio that most closely aligns with your risk tolerance and investment goals, but rarely will you find a plan that allows you to adjust the portfolio based on your personal preferences or values, like those who follow ESG investing. 

Technology Limitations 

With robo advisors being available primarily online, users may experience technical difficulties that could disrupt access to their investments. Applications may be subject to technical glitches, system failures, or cyber attacks. To this end, users should also stay informed on cybersecurity tips when creating new financial accounts. 

In addition to glitches and bugs, because robo advisors are software based, the underlying code can change at any time, without notice.  In April 2023, Betterment, a well known robo-advisor, was fined $9 million by the SEC for making changes to its underlying tax-loss harvesting algorithm without notifying investors.  This change, according to the SEC, cost up to 25,000 clients up to $4 million in potential tax benefits.

Human Advisor Benefits 

Customized Investment Strategies

While robo advisors offer a level of convenience, human advisors are far better equipped to deliver personalized investment strategies. AI backed technologies tend to extend a “one-size-fits-all” approach, whereas a human advisor will take other personal considerations into account before offering a solution. 

A qualified financial advisor will also look at your investments holistically and make recommendations across the entirety of your finances, from day-to-day budgeting to education planning. Leveraging the expertise of an advisor, while potentially more costly on an annual basis, will pay dividends in the long run. 

Communication and Relationships

While some value the anonymity of a robo advisor relationship, others prefer building a sustainable relationship with their advisor. Having insight into your personal and professional life enables an exchange of data that could signal the advisor to adjust your investments accordingly. 

Customer service is another area where human advisors can have an advantage.  We’ve all experienced the blackhole of communication with internet-based companies.  Email responses to our concerns or issues may take up to 72 hours to get a response, chat requests are canned, and calls for assistance usually result in a maze of phone-tree options.  

Human advisors instead can provide responsive and prompt customer service. The best advisors take the time to discuss your questions over the phone or in-person, so you can be sure that your concern or question is adequately addressed.  It might be as simple as getting old statements or determining whether a retirement contribution is appropriate.  Other times it’s the ability for the human advisor to be both a counselor and a confidante in both financial and personal areas.

For example,  let’s say that you recently had some good news; you’re expecting to expand your family within the next year. A robo advisor will likely not make recommendations to adjust your contributions or consider education planning for your child’s future. A human advisor, however, will provide valuable guidance unique to you and your family. It might be about budgeting for the new baby, whether life insurance coverage will be adequate, or if you should make 529 vs Roth IRA contributions.  A human advisor that knows your situation can be invaluable in helping you plan during significant life events 

Experience with Estate Planning 

Another area that robo advisors typically do not offer advice is estate planning. Human advisors have a much better idea of who your beneficiaries should be and your personal wishes for inheritances, charitable donations, and/or wealth transitions. And an area that robo advisors will certainly not be able to assist with are the unique compliance requirements for trustees and fiduciaries. Trusts can be complex, have varying distribution schedules,  and involve regulatory and legal considerations that go beyond the capabilities of an AI generated platform. 

A human advisor, experienced with estate planning and trustee investing can help trustees, guardians, and conservators excel in their role as fiduciary by helping them comply with the UPIA throughout the investment and monitoring process. They are also well equipped with tax strategies that help preserve wealth and avoid any unnecessary losses. 

The importance of financial guidance is undeniable–whether opting for a robo advisor or human advisor. As you carefully consider which type of advisor meets your needs, look back to the advantages and disadvantages and whether your specific circumstances will require a more hands on investment approach. 

If you’ve concluded to move forward with a human advisor, Prudent Investors is here to help. Our team of knowledgeable advisors offer a personalized touch that robo advisors can’t, taking into consideration life changes, value-based investing requirements, and other factors when building your custom investment portfolio. We invite you to connect with our team to learn more about how we work with investors like you. 

This blog is general communication being provided for informational purposes only. This information is in no way a solicitation or offer to sell securities or investment advisory services. It is educational in nature and not to be taken as advice or a recommendation for any specific investment product or investment strategy. This does not contain sufficient information to support an investment decision. Any investment or investment strategy mentioned may not be suitable for all investors or in their best interest. Statistical information, quotes, charts, references to articles or any other quoted statement or statements regarding market or other financial information is obtained from sources which we believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All rights are reserved. No part of this blog including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Prudent Investors. Prudent Investors does not provide legal or tax advice. Please consult with your investment advisor, attorney or tax professional before making any investment decisions. Investment advice offered through Prudent investors Network, Inc., an SEC registered investment adviser.

Jared Ong

Jared Ong oversees portfolio management, trading and technology. He previously worked at the Capital Group as a business systems analyst where he was integral in improving the trade operations group’s equity, fixed income, and foreign exchange trade processes. A graduate from Brigham Young University, Jared holds a Bachelors in Music. In his spare time, he enjoys composing and arranging music.