Digital Comfort vs. Human Touch
Your comfort level with technology plays a significant role in determining whether a robo-advisor is a good fit. If you're a digital native or comfortable with online banking and investing, you may find a robo-advisory service more appealing. On the other hand, if you prefer personalized, face-to-face interactions, you might lean towards traditional financial advisors.
Paul Brahim, president-elect of the Financial Planning Association and managing director of the Wealth Enhancement Group, highlights the unique value that human advisors bring. "Perspective, judgment, and coaching — talking through something and addressing fears and concerns, such as managing a client's reaction to short-term market volatility," Brahim explains.
Cost is another crucial factor. Traditional financial planners can be expensive, often charging thousands of dollars for a comprehensive financial plan, plus ongoing fees based on assets under management. However, the barrier to entry is lowering, with many fee-only planners offering subscription-based models or hourly rates for specific issues.
Robo-advisors, on the other hand, are generally more accessible. For example, Vanguard recently reduced the minimum investment for its Digital Advisor service to $3,000. The annual fee for this service is estimated to be 0.15% of assets under management. If you have some active funds, the fee ranges between $11 and $20 annually.
Brian Concannon, head of Vanguard Digital Advisor, notes, "These fees are in addition to the expense ratios of the underlying funds. In Vanguard’s case, our all-index portfolios have an average expense ratio of 0.05%, or $5 for every $10,000 invested."
For those with $50,000 or more to invest, Vanguard offers a premium hybrid service called Personal Advisor, which includes access to human advisors at still relatively low annual fees.
Assessing Your Financial Needs and Growth Potential
Understanding your specific financial goals and risk tolerance is essential when choosing a robo-advisor. You'll be asked questions about your objectives, comfort with risk, and financial concerns when signing up for a service. Clarity on these points will help you determine if a robo-advisor can meet your needs.
Concannon points out that major life events often trigger the decision to seek financial advice. "Think having kids, buying a house, or planning to retire in a few years. Or it could be getting your first job and steady paycheck. The next big trigger: A desire to reduce financial stress," he says.
If you're just starting out and don't have a lot of money, several well-known firms can help you get started with a suitable asset allocation and automated portfolio management. However, as your assets grow and your financial situation becomes more complex, you may need additional services.
Ben Johnson, Morningstar’s head of client solutions in asset management, advises considering whether the robo-advisor platform can grow with you. "Is there room for you to grow on the platform with respect to different levels of service?" he asks. Tax and estate planning issues, for example, might become more relevant as you accumulate wealth.
Paul Brahim shares an example of a client who faced a significant tax bill due to a misunderstanding about IRA withdrawals. "An automated portfolio management program might have indicated that cashing out an IRA would incur taxes and penalties if it’s not properly rolled over to another tax-deferred retirement account. But a planner might have been more persuasive in advising the client to avoid that mistake," Brahim explains.
When choosing a robo-advisor, it's essential to select a service run by a reputable, well-financed company that offers a diversified range of investment options. Avoid firms that focus on the latest "shiny object" in investing.
Morningstar regularly compiles "best of" lists for robo-advisors. Its top overall picks for 2023 include Vanguard, Fidelity Go, Schwab Intelligent Portfolios, Betterment, and Wealthfront. These firms were assessed based on price, portfolio quality, parent company reputation, and breadth of services.
