Choosing Between Financial Advisor or Robo Advisor

Here’s what you need to know about financial advisors vs. robo advisors. Maybe you don’t need to choose between them at all.

For some, it may seem innovative and perhaps even comforting to have a computer take over for financial advisors. After all, technology continues to advance faster than most people can keep up with and machines are able to do much more than even just a decade ago. 

But what if machines didn’t need to take over for the financial services industry completely? This notion of the ‘robo-advisor’ makes it sound like a machine will be able to manage money without human intervention. Sure, technology can aid in the management of finances, but thinking that technology will completely erase the need for a true financial advisor is probably a long ways off from being introduced to the marketplace, if not completely far off from reality.

In fact, robo advisors are now embraced by some financial advisors as a welcoming tool they are able to leverage on behalf of their clients. More and more advisors are adopting the newest technology for their own practice management and it seems to be working to the benefit of both financial advisor and client. 

Here's why you may not need to choose between a financial advisor and a robo advisor.

Here's What Robo-Advisors Do...

You can think of a robo-advisor as a calculator or a financial tool. With data and some parameters, it uses a statistically accurate formula to create the right mix of investments to fit those parameters. With the information it is given, it is able to spit out answers that serve an investor’s needs.

Just like any database, the results are only as good as the data it’s been given. Therefore, the robo-advisor formula is entirely dependent on the input you give it, and cannot make adjustments for outside factors that aren't part of the formula, such as market conditions, personal goals, and other important factors that affect your wealth.

And Here's What Financial Advisors Do...

Financial advisors are educated and trained to identify and work through your financial goals and needs. They are able to then align your financial plan with what matters to you most and optimize your finances to focus on your goals. The financial plan a financial advisor is able to produce for you is not simply to reach a certain return amount, but about getting you from where you are today to a point you want to be in the future.  As you might imagine, that may require more than simply investing x amount of money. It often requires behavioral changes that a robo advisor cannot and will never advise on.

Unlike the robo-advisor, investment management is just one of many hats a financial advisor might wear. Depending on their specialties, they can help you figure out how you'll afford to retire, pay for college, buy a home, or plan your estate.

What’s the right solution? Maybe combine them...

Financial advisors may include investing as part of any financial plan - and that's where a robo-advisor might be helpful. Financial advisors can utilize robo-advisors to help them manage the mechanical details of managing your investment portfolio with their close and careful oversight. This can provide you as the investor the best of both worlds where you can have the personalized experience with a financial advisor with the innovation and accessibility of a robo advisor. 

At the end of the day, a financial advisor is in the business of caring for your financial well-being. If your financial advisor is able to do that even better with a robo advisor platform, than that’s good news for investors and financial advisors.


CGP.jpg

Christopher Girbés-Pierce, CFP® is the founder of Enlightened Wealth Management, a fee-only wealth management firm located in Santa Monica, CA. EWM specializes in providing comprehensive financial life planning services for clients who wish to align their financial resources with their goals and values.

Christopher and I became friends through NAPFA & the XY Planning Network and I asked him to write some thoughts on <subject of article> as a guest topic for The Northwoods Blog.