R.I.P. Financial Advisors?

Dear Rich Lifer,

In the past year, we’ve been forced to do things from our couch that we strolled down the street to take care of in the past…

Groceries… video chat happy hours… work meetings via Zoom… streaming theatrical releases on our flatscreens…

We’ve learned that many of us can work our jobs from our kitchen table and that our children can attend class from their bedrooms. 

And the changes to our lifestyle could accelerate a personal finance trend that was already well underway. 

Many investors are foregoing the traditional financial advisor and instead are turning to robo-advisors. 

If you’re trying to decide between sticking with a traditional financial advisor or pivoting to a robo-advisor, you are in luck! Today, we break down the key differences between both services and explore if the days of the financial advisor are numbered…

Key Differences  

Robo-advisors are services that use computer algorithms to build and manage your investment portfolio. You can easily set metrics like your timeline and risk tolerance and let the computer do the rest for you. 

With this type of service, there will be very little human interaction and much lower costs. 

A personal financial advisor is a professional human you can hire to help manage aspects of your financial life, from investing to real estate planning. You would likely meet in person with your financial advisor to go over a more comprehensive financial plan. 

The Pros of Robo-Advisors 

There are many areas in which robo-advisors stand out. One big selling point is the cost of a robo-advisor. Most financial advisors charge around 1% of AUM (assets under management) to handle your investment portfolio.

Meanwhile, robo-investors’ fees are much more affordable, ranging from 0% for Schwab Intelligent Portfolios, to 0.89% for benefit-rich Personal Capital, with the average fee being 0.25%. The difference in fees can save you a substantial amount of money over time. 

Robo-advisors also typically require smaller minimum balances, so if you’re a new investor and don’t have a huge chunk of change, you will also benefit from this perk.

Another pro of using a robo-advisor is that it will automatically rebalance your investment portfolio for you as markets are moving in real-time. Research suggests that periodically rebalancing your portfolio will help you improve on returns and reduce volatility. 

Finally, robo-advisors are perfect if you want a “set-it-and-forget-it” attitude regarding your investments. Whether you’re new to investing or just looking for an easier way to invest, you can have more peace of mind knowing your portfolio is being managed and automatically rebalanced to keep your assets on track to make returns. 

Meg Bartelt of Flow Financial Planning comments, “To a large extent, passive investing — the strategy to buy and hold a broadly diversified portfolio and don’t mess with it — has won the day.”

Pros of Financial Advisors 

Although the ease, cost, and automated nature of robo-advisors can be perfect for some investors, there are aspects of having a financial advisor that do stand out. 

If you have a very high net worth and are looking for someone to help manage your finances on a wider scale, a robo-advisor might not be hands-on enough for you. 

A financial advisor will be able to examine your entire financial picture and provide holistic advice on everything from your retirement plan to tuition planning for your children. 

If you are looking to build a personal relationship with someone and get one-on-one attention, you may want to stick with your financial advisor. Having a financial advisor means you have someone to call or text with any financial questions; it gives you someone to help you plan short-, medium-, or long-term goals. 

Robo-investors are typically limited in the types of investments they will make for you. So if you are someone who wants a wide range of investments, including peer-to-peer lending, master limited partnerships, closed-end funds, individual stock, bonds, currencies, or options, you likely will want to stick with a person rather than a computer. 

Barley observes, “Where a human financial advisor really thrives is addressing the other 90% of your financial life. The big questions like how to buy a house, a car, quit your job and start your own business, or have a baby in the next five or 10 years.”

Are the Days of Financial Advisors Numbered? 

According to a CNBC Invest in You survey from 2019, only 1% of those polled said they used a financial advisor. 

This leads us to wonder: will financial advisors soon be a thing of the past? 

There may still be a place for financial advisors… for now. 

However, many are adapting to keep up in our highly technological age and becoming more niche. 

It’s now more common for financial advisors to have a very specific focus; for example, a financial advisor with a focus on small businesses will be able to provide investment advice and offer other core expertise. If you have your own business or are hoping to start your own, a robo-advisor isn’t going to cut it for you. 

What’s most important is being aware of your specific financial needs and then finding a financial advisor who can provide the advice needed for you to thrive. 

There are numerous specializations in the financial advice industry, including retirement planning specialists (RPS), who help you prepare for and live in retirement; certified financial transitionists (CeFT), who help clients through major life transitions, such as selling a business or the loss of a spouse; and estate planners, who help prepare your estate for your beneficiaries.

Obviously, these advisors will be incredibly different, and it’s important to do your research and speak with multiple financial advisors before picking one. 

So while robo-advisors may be an exciting and relatively new way to begin your investment journey, the traditional financial advisor will remain crucial for providing in-depth and personal guidance. 

To a Richer Life,

The Rich Life Roadmap Team 

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