Robo-Advisors Versus Human Financial Advisors

When you set up a portfolio to save for retirement, you have a choice between a robo-advisor or a human financial advisor. Robo-advisors are automated wealth management services that can invest your money in mutual funds and other investments without human involvement. They charge lower fees than human advisors but provide fewer services. This article compares the benefits and drawbacks of human fee-based advisors and robo-advisors.

Many Robo-Advisors Are Fiduciaries

Human financial advisors include commission-based advisors and fee-based advisors. Fee-based advisors are fiduciaries who have a duty to select the best investments for their clients and don’t earn additional commissions for selling you mutual fund shares. Commission-based advisors are not fiduciaries and are more like sales representatives who earn money when you buy shares of a specific mutual fund. As a result, they might pick a fund that offers the highest commission rather than the fund that offers the client the highest return. This fund may come with high annual fees and also charge an upfront fee, or load, when you invest in it.

Many robo-advisors are fiduciaries, or fee-based advisers. But the definition of a fiduciary is complex and robo-advisors are not all fiduciaries. One important factor to consider is whether the robo-advisor can purchase exchange-traded funds (ETFs) from multiple brokerages, not just one brokerage. Fiduciaries are not allowed to have conflicts of interest. A financial advisor should show you the mutual fund with the lowest costs even if it’s not being sold by the advisor’s brokerage.

Robo-Advisors Charge Lower Fees Than Human Fee-Based Advisors

When you invest your money with a financial advisor, you will pay two types of fees. The first fee is the fee that the advisor charges the client directly. For fee-based advisors who serve wealthy clients, this fee is often around 1 percent of the portfolio value per year. Then, the mutual fund managers who manage the funds in the portfolio charge annual fees on top of that. And they’ll still collect their fees even if the advisor doesn’t charge a fee directly.

Commission-based advisors might sell you funds with 2 percent annual fees, for example, even if they don’t charge an annual fee themselves. Robo-advisors often invest in index funds with fees that are closer to 0.1 percent. Index funds are mutual funds that attempt to match the performance of the broader market instead of paying a human manager to attempt to outperform the market, which is called active management. The annual fee charged by the mutual fund manager is called the expense ratio.

Robo-advisor fees are often in the 0.25 percent range and the index funds they invest in have expense ratios of around 0.1 percent. So if you invest $10,000 with a robo-advisor you would be paying about 0.35 percent, or $35, in annual fees and expense ratio charges.

A human advisor would charge an annual fee of around $100 on this portfolio. The expense ratio would be in the $10 range if they invested in index funds, so the total cost would be in the $110 range. But annual costs could be higher if the human advisor invested in actively-managed funds designed to outperform the market or protect investors from stock market crashes.

Fee-Based Advisors Offer More Funds

Robo-advisors usually offer a limited selection of funds. For example, one of their funds might invest 80 percent in an index fund and 20 percent in corporate bonds. And another fund might invest 70 percent in an index fund and 30 percent in corporate bonds. Their clients can adjust their overall risk level by picking a fund with a different mix between the stock ETFs and the bond ETFs. And a robo-advisor can automatically switch a client’s holdings to lower-risk funds as they get closer to retirement. But these automated investment services aren’t set up to provide a wide selection of funds run by active managers.

Fee-based advisors provide several benefits to their clients. They can access a much larger number of mutual funds. These include mutual funds designed for financial institutions that have lower expense ratios than ETFs. These funds include institutional index funds as well as actively managed mutual funds. Human advisors can also provide services such as tax loss harvesting and portfolio rebalancing. Some robo-advisors don’t offer these services and others only offer them in premium tiers that have higher annual fees.

A financial advisor often buys shares in more than one mutual fund for their clients. Tax-loss harvesting occurs when the advisor sells a fund at a loss to obtain tax benefits. Portfolio rebalancing occurs when the advisor sells shares of one fund and buys shares of another one so the client’s holdings aren’t overly concentrated in one market sector. Tax-loss harvesting improves returns while portfolio rebalancing reduces risk.

But the main benefit that human advisors offer is that their clients can call them on the phone and receive personal financial advice. An automated system can’t provide the same level of assistance. As a result, some robo-advisors have set up hybrid wealth management services that provide access to a human advisor for investors in premium service tiers.


Robo-advisors are known for charging lower fees than human fee-based advisors but there are still situations where using a human advisor could be less expensive overall. Even if a human advisor also invests in index funds for their clients, they can use investment strategies that generate higher returns for their clients even after including their 1 percent annual fee. But a robo-advisor that also automates these strategies may offer the best overall deal.

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