Choosing Between a Financial Advisor and a Robo Advisor

In the past few years, much has been written about the rise of robo advisors, websites offering automated investment-allocation advice and other portfolio management services. These investment platforms typically offer little or no human contact; clients receive investment advice based on algorithms that take into account factors such as their risk tolerance and investment time horizon. If a client’s financial circumstances change, or if their investment allocation deviates from the recommended allocation due to market fluctuations, robo advisors will generally provide automatic portfolio rebalancing services.

As an investor seeking investment advice, how do you choose between a human financial advisor and a robo advisor? While making such a choice will depend on your personal financial circumstances and preferences, this article will outline some general criteria you can use in making such a decision. Before directly comparing robo advisors and actual financial advisors, we will first take a deeper look at how robos, as they are sometimes called, operate.

Robo Advisors, MPT and Passive Investing

Many investors have at some point purchased passively invested index funds, such as those sold by the Vanguard fund group, whether on their own or through a financial advisor. These funds typically track a major stock or bond index, for instance the Standard and Poor’s 500, commonly known as the S&P 500. The funds were designed to match the performance of the index as closely as possible rather than to outperform it. Electronically Traded Funds (ETFs) take the same passive investing approach but can be traded during market hours like a stock. Robo advisors typically focus on diversifying your investments across a basket of ETFs or index funds representing different investment categories such as asset type and location.

The theory underlying the asset allocation approach taken by many robo advisors is known as Modern Portfolio Theory (MPT). The theory holds that, over the long run, diversifying your investments across various asset classes based on their historical performance characteristics enables an investor to earn optimal returns for a given level of risk. Robo advisors following MPT use algorithms based on the theory to provide asset allocation advice to their clients.

This type of investment advice has, of course, long been provided by financial advisors. The innovation robos offer lies in their ability to offer advice over the Internet on the basis of a standardized financial situation questionnaire without direct contact with an advisor. This enables these services to charge lower asset management fees than are typically charged by financial advisors, generally in a range of 0.20 percent to 0.60 percent yearly on assets under management as compared to an average financial advisor fee of 1 percent or so per year. Robo advisors that offer the chance to contact a human representative typically charge fees on the higher end of this range while those that don’t are usually at the lower end.

Benefits and Drawbacks of Robo Advisors

Now that we have explored the services offered by robo advisors in some detail, we can develop some criteria for selecting between a robo and a human advisor. In doing so, we should first point out some of the benefits and drawbacks of robo advisors. These include:


  • Investment advice based on MPT or similar theories
  • Low fees
  • Online account access and management
  • Portfolio rebalancing
  • Low account minimums


  • Lack of flexibility in investment approaches
  • Usually not designed to outperform the market
  • No or limited access to a human advisor

Comparing Robo and Financial Advisors

The next step in comparing robos with financial advisors is to analyze which of the benefits offered by robos are also offered by human advisors. In the case of portfolio allocation based on MPT or other investment models, financial advisors have access to software that can perform similar calculations. One significant advantage financial advisors possess in this regard is the ability to select between a variety of investment approaches. This is valuable because, historically, different investment strategies have performed better than others during different time periods. Thus, the historical data relating to asset class performance used by robo advisors to construct portfolios may not in fact be the optimal portfolio allocation in the present day if that performance data doesn’t apply to current market conditions.

One lesson that can be gleaned from studying past investment periods is that whenever an investment trend gets too popular, it is prudent to be wary about following the herd and investing in that trend. This was seen recently in the tech crash of 2000 as well as the subprime mortgage crisis that led to the substantial market decline of 2007-2008. The takeaway here is that markets are adaptive, and oftentimes approaches or theories that worked in the past are less effective in the present. A financial advisor has the flexibility to take heed of this phenomenon and make adjustments to portfolio allocation strategies as the investment climate changes, while a robo advisor is likely to be much less adaptable in this regard.

Lack of access to a human advisor, or having only limited access, is a major feature of robos. While this may not seem like a big deal to sophisticated Do-It-Yourself (DIY) investors who don’t require extensive advice from an advisor, for many investors, this is a significant negative. Given the extreme volatility financial markets can exhibit, being able to speak with a financial advisor on demand is a major benefit of hiring someone to help manage your investments.

Portfolio rebalancing, another strong point of robo advisors, is also a service that is offered by many, if not most, financial advisors.

Lower Fees Don’t Necessarily Lead to Better Performance

As the above analysis shows, the main robo advisor benefit that, in most cases, does not represent a service that financial advisors also supply, is lower fees. However, while the level of fees you pay as an investor is certainly something to keep in mind, as with anything else in life, you get what you pay for when purchasing investment advice. As we’ve discussed, financial advisors typically offer greater flexibility in choosing an investment strategy than robos, and they can also offer more personalized advice based on your personal situation.

If markets perform in the future very similarly to how they performed in the past, the MPT-derived strategies used by most robos might be a reasonable approach to take. However, given that the markets have shown a marked tendency to evolve over time, with different asset classes subject to varying performance characteristics in different time periods, it is by no means clear that this is likely to be the case going forward. As a result, while using a robo advisor may save you somewhat in fees, any such savings could be more than offset by subpar performance.

Which Advisor Type is Right for You?

It seems clear that, given their limitations, robo advisors are likely to function primarily as a niche financial product for certain specified types of investors, rather than having broad appeal to investors as a whole. Below are some criteria an investor may want to consider when choosing between a robo advisor and an actual human financial advisor.

A financial advisor may be preferred by the following investor types:

  • Investors who prefer to retain the flexibility to take a variety of investment approaches rather than being shoehorned into the limited portfolio buckets offered by a robo advisor
  • Investors who want advice in taking an active approach to investing to attempt to outperform the market
  • Investors who want advice as to what type of investment approach best fits their personal circumstances
  • Investors who want access to a financial advisor on an on-demand basis to discuss their investments and financial plans as needed

The following investor types may prefer a robo advisor:

  • Investors with small amounts to invest who aren’t able to meet the minimum account balance level required by most financial advisors
  • Investors who want to invest some portion of their portfolio using MPT and prefer to use a robo advisor to do so in order to save on fees
  • DIY investors who want some help investing their money passively and require no (or very little) human interaction in the process
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