Are you trying to decide between a Robo-advisor or traditional financial advisor to manage your money? You've come to the right place as I used to work in finance for 13 years. Further, I have consulted with a couple robo-advisors based here in the San Francisco Bay Area.
A robo-advisor, also known as a digital wealth advisor, uses computer algorithms to help you asset allocate and manage your money. The algorithms are there to tailor an asset allocation model to your risk profile and adjust automatically over time. A robo-advisor does not incorporate a human advisor, which means you need to be comfortable trusting the algorithms in order to pay lower fees.
The robo-advisor industry as lower management fees significantly since Betterment, the first robo-advisor was introduced to the masses in 2011. Traditional wealth management firms like Merrill Lynch and Raymond James would charge between 1% – 2% of your assets under their management each year forever. This fee drag would seriously reduce returns over the long run.
With a robo-advisor like Wealthfront, they charge only 0.25% and provide excellent investment services. They are one of my favorite robo-advisors as they've built their platform as a robo-advisor first and has the most experience.
Robo-Advisor Or Traditional Financial Advisor
A robo-advisor is a great way to get started investing. The sooner you start investing, the sooner you can let investment returns compound over time. Saving and investing are the keys to financial freedom.
In the past, so many people didn't know where to start. They couldn't go with a traditional financial advisor because their account minimums and fees were too high.
But with a robo-advisor like Betterment, you can get started with just $500, answer a number of questions, and they can start investing for you right away. Once you set up an automatic debit from your checking account, everything goes on autopilot.
If you are young, have a simple overall net worth, and lack investment experience and time, using a robo-advisor to manage your money is a great way to go.
As you get older and more sophisticated in your financial knowledge, you can allocate a larger percentage of your net worth to your robo-advisor or go with a hybrid solution like Personal Capital.
Hybrid Robo-Advisor Is Probably The Best Choice
Personal Capital uses both technology and human advisors to personally help you navigate your financial journey. They can see your overall net worth, and not just the portion that you give a robo-advisor to management.
At the very least, I recommend everybody sign up for Personal Capital's free financial tools. I've used them since 2012 to track my net worth, manage my cash flow, analyze my investments, and plan for my retirement future. Since 2012, I've seen my net worth skyrocket because I've been able to stay on top of my money.
Everybody should at least sign up to run their numbers through Personal Capital's free Retirement Planner to see if your finances are on track.
A Robo-Advisor And Human Advisor Comparison Chart
Here's a quick chart that highlights the differences between managing your money yourself, using a robo-advisor, and using a financial advisor.
It is attractive to start managing money yourself by buying several index ETFs. But what I noticed over time is that people don't regularly contribute to their investment accounts and don't properly manage their asset allocation of stocks and bonds because life just gets in the way.
I've personally gone for months without contributing to my after-tax accounts or rebalancing because I was traveling, had a baby boy, or was simply too busy with work. With a robo-advisor or a traditional financial advisor, your investments will never be neglected, and that's a great thing.
If you are young, have a simple overall net worth, and lack investment experience and time, using a robo-advisor to manage your money is a great way to go. The fees are usually 0.25% of assets under management or less.
As your net worth grows and gets more complicated with a house, private investments, a business, a trust, and estate planning, that's when you can consider hiring a hybrid like Personal Capital. But in the meantime, use Personal Capital's free tools to stay on top of your finances. That which you measure can be optimized!
About the Author:
Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1.5 million organic pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal.