It used to be that if you wanted help with your money, you’d ask your friends for referrals and go talk to a financial professional. Nowadays, though, you don’t even have to leave your home. All you have to do is turn on your computer and take your pick from dozens of online investment platforms.
These automated investment service platforms, commonly known in the financial industry as robo-advisors, tend to be cheaper than flesh-and-blood financial advisors, but are they worth the (non-)expense? And if you go with a human advisor, who should you pick?
Let’s take a look.
Robo vs. Human Advisor
No doubt, robo-advisors are increasingly sophisticated. Many of them will regularly rebalance your investment portfolio and offer money-saving strategies such as tax loss harvesting. And they do this at less expense than most financial advisors will. While advisor fees are generally 1% of the assets that the advisor manages for you, robo-advisors will charge about 0.25% to 0.50%.
The downsides to a robo-advisor? First, the investment options are usually fewer in number than what you would find with an advisory firm. And the services will be focused on investing. Some platforms offer the chance to talk with a financial advisor on non-investment matters, but you’ll probably pay more for the opportunity.
Ultimately, a robo-advisor simply lacks the human touch. When you work with the right financial planner, they know you not as an algorithm, but as a person. They know your financial situation as well as they know their own. And they will plan for your life milestones. A robo-advisor is never going to call you and suggest you come in to consider your Social Security options since you’re turning 65 next year. A robo-advisor is never going to act as a calming influence when markets get rocky, like they have recently.
With a robo-advisor, you have to drive the relationship. You have to know the questions to ask. If you are comfortable with that, then a robo-advisor may work for you, especially if you are younger and your financial picture is simple. But as you age or your finances get complicated, then you may welcome the outreach of a good financial planner who understands you as a person and makes proactive recommendations.
What to Look for in an Advisor
Shopping for a financial professional can get confusing. You’ll face a seemingly endless procession of titles that professionals go by, and an alphabet soup of certifications and designations.
You want an advisor who is worth your money, and that means they should save you time and effort by managing your finances so you don’t have to. They should keep you disciplined in tough markets and suggest strategies that grow your money and reduce your taxes that may never have considered on your own.
My personal opinion is that the advisors best able to handle these obligations have the following characteristics:
Fee-only: They don’t charge commissions or get kickbacks for referrals. They get paid by you and you only. (Beware the phrase “fee based,” as some form of commission is likely to be involved.)
Fiduciary: Registered Investment Advisory firms have a fiduciary duty to you, meaning they are obligated to act in your best interest, not their own.
Independence: They work for themselves, rather than a larger, national company. This can eliminate sales pressure and conflicts of interest.
CFP® designation: The CERTIFIED FINANCIAL PLANNER™ designation is the most respected financial designation available. To maintain it requires a commitment to experience, education, and ethics.
Some advisors will offer only investment management. Many offer comprehensive planning so you can get financial strategies that work together holistically, including taxes, retirement, estate planning, and college funding.
Experience is important, but I think a proactive perspective is just as crucial. Don’t sell yourself short by working with someone who isn’t talking with you regularly or isn’t calling you ahead of major milestones like marriage or retirement. Your goals should be as important to them as they are to you, and a good advisor will do the work to help you achieve them.