Managing your investments can be an arduous task, especially when the market feels extremely volatile or you’re nearing a major milestone like retirement and you’re afraid of making a misstep. Luckily, though, you have different options to help guide you on your investing journey.
Financial advisors have always been a key asset to wealth management, but robo-advisors have grown in popularity over the years for their hands-off and low-cost approach to managing your investments. Before you decide which route you’d like to take to help you manage those assets, there are a few things you should consider about each option.
It’s important to note that a financial advisor can be more helpful to your overall financial health since robo-advisors are only meant to provide investment recommendations while financial advisors provide a more holistic approach to managing your money. Advisors can provide recommendations on more than just investing, including budgeting, spending, major life events and more.
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What’s the difference between a robo-advisor and a financial advisor?
Robo-advisors are essentially software platforms that invest on your behalf. A robo-advisor’s job is to create an investment portfolio for you and then manage it over time so you don’t have to. When using a robo-advisor, you’ll usually be asked a few questions which include your age, investment goals, investment time horizon and your overall risk tolerance.
The robo-advisor then uses this information to help decide how your assets should be allocated — like, should you hold more riskier assets or mostly conservative assets. As market conditions change, or as you invest more money, the robo-advisor will automatically adjust your portfolio to align with reaching your goals. This process is called rebalancing.
A financial advisor, on the other hand, is an individual who assists clients with specific, immediate financial matters — like your investments or estate planning. You can work with a financial advisor just a few times or you can choose to have an ongoing relationship with them. Generally, you’d have meetings with your financial advisor in their office but if they aren’t local, you’d have phone calls or virtual meetings with them instead.
Costs for a robo-advisor vs. costs for a financial advisor
Generally, both robo-advisors and financial advisors charge a percentage of the total assets being managed. However, the two differ in how big of a percentage they each charge. Robo-advisors usually charge anywhere from 0.25% to 0.5% of your assets managed per year, while financial advisors typically charge around 1% of your assets managed per year.