If you’ve contemplated investing at some point, you may have considered what kind of advisor would be the right fit for you – a human advisor or a robo-advisor. Well, to shed some light on the subject, here are some noteworthy differences between the two.
A robo-advisor is a technology company that uses a specialized algorithm to invest your money into various assets that are appropriate for you based on four areas – goals, risk tolerance, timeline and constraints. In order to determine suitability, they will regularly rebalance the money to carry out the target mix of bonds and stocks.
Robo-advisors normally work with exchange-traded funds (ETFs).
In a conventional financial institution, usually you talk to an advisor before they invest your money. They ask you about the risk tolerance, goals, constraints and timelines. They provide you with advice about the investments (asset mix). They’ll invest the money in mutual funds. As time goes on, you and the advisor meet to talk about your life’s needs, the market changes and the most effective way to appropriate your investments.
What Kinds Of Fees Would You Expect?
An actual financial advisor charge is dependent upon the financial institution and the service received. At the lowest level, you pay for the invested products such as mutual funds, which are charged as a fee known as Management Expense Ratio (MER). These fees can vary – from under two percent (ideal) to more than two percent (terrible). Ask about the fees before you do any kind of investing to ensure you don’t pay more than you have to.
Robo-advisors normally have just two fees – the ETF’s and MER fees (usually range from 0.05 to 0.5 percent) and an additional fee for the robo-advisor’s service. This can be a monthly set fee or a percentage fee – dependent upon your chosen robo-advisor.
Robo-advisor fees tend to be lower than the traditional human advisor. This is especially true if you’re not investing a lot into assets. An advantage in using a robo-advisor over a human one is the minute sum of fees you pay to start the investment process. However, people generally find that building a rapport/level of comfort with their human advisor gives them a level of trust that they wouldn’t otherwise get with a robo-advisor which many feel warrants the fee.