Robo-Advisors vs. Financial Advisors: How Are They Different?

5 Min Read | Published: October 3, 2024

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This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.

When it comes to choosing between a robo-advisor and a traditional financial advisor, you’ll want to consider your needs, the cost, along with pros and cons.

At-A-Glance

The first robo-advisor was launched in the late 2000s as a response to consumer demand for more transparency after the financial crisis.
Robo-advisors are digital investment services, which may provide traditional investment options, as well as alternative investments. Some may offer financial planning as well.
Traditional financial advisors can be hired to help you manage all aspects of your finances, from investing to estate planning, and more.

Automated investment platforms, known as robo-advisors, have been part of the financial world since the late 2000s.¹ Their popularity has dramatically increased over the past decade, sparking the robo-advisor vs. financial advisor debate. If you’d like to invest and are wondering whether a robo-advisor or traditional financial advisor is best, then read on to learn the pros and cons of both to help you decide which one makes the most sense for you.

Robo Advisors vs. Financial Advisors: Pros and Cons

Robo-advisors are digital investment services. Their capabilities have expanded significantly over the years and today, modern platforms may offer everything from traditional stocks and bonds to alternative investments. Some robo-advisors even offer additional services such as retirement planning, as well as tools to enable users to manage their finances.²

Traditional financial advisors, on the other hand, can be hired to help you manage all aspects of your finances, from investing to estate planning, and more. Typically, you meet your financial advisor in-person, at their office, to create a financial plan.

Did you know?

Some of the algorithms that are used by robo-advisors rely on Nobel Prize-winning investment theory to drive their models. Generally, the goal is to build an investment portfolio that offers the greatest return for the smallest risk.³

Robo-Advisors: Pros and Cons

Pros	Cons
Some charge no advisory fees or commissions.⁴ However, there may be other fees.	Limited personalization. Robo-advisors may offer model portfolios with less customization.
Accounts may have a low or no minimum balance required.	May not offer active trading. Investors may not be able to trade specific stocks or options.
Accounts are easy to open.	No human contact. There’s usually no one to call if you have questions.

Financial Advisors: Pros and Cons

Pros	Cons
Financial advisors can take a holistic approach to your investments and may offer multiple services.⁵	Fees vary between financial advisors; some fees and charges may not be as transparent as you’d like.
Financial advisors take the worry and the work out of investing. They make the strategic decisions for you.	A financial advisor who is not a fiduciary may push commissionable mutual funds and annuities you don’t need.
Financial advisors can help you plan for the unexpected and react to volatility with active trading to minimize losses.	Financial advisors aren’t always right. They could make poor investment decisions that could lead to a loss.

When a Robo Advisor Could Make Sense

Typically, robo-advisors offer lower costs than traditional advisors and accounts are relatively easy to open. This could make them appealing to people who are new to investing or those who would like to invest a smaller amount.⁶

According to Vanguard, the five-year average return for most robo-advisors is 2% to 5% per year.⁷ That can vary based on asset allocation and market conditions, but robo-advisor portfolios are designed to be consistent through the highs and the lows. They can be a good safeguard against volatility and typically require minimal input or action from the investor.

When a Financial Advisor Could Make Sense

Traditional financial advisors can provide comprehensive investment guidance and portfolio management. They may also be able to offer comprehensive advice on topics like estate planning. For this reason, they may be ideal for more complex situations, or for those who have higher wealth.

Frequently Asked Questions

A robo-advisor is a digital investment service, that builds a portfolio based on parameters including the investor’s risk tolerance. It then automatically manages and rebalances it using an algorithm.

Robo-advisors can be a relatively safe and inexpensive way to invest, but all investing carries an element of risk. Robo-advisor algorithms may include errors that could impact the best investment returns, but traditional financial advisors may also make mistakes.

The Takeaway

Robo-advisors and traditional financial advisors both offer advantages and disadvantages. Be sure to consider their pros and cons, along with your individual investment goals and financial needs when making your decision.

^1,2 “The History of Robo-Advisors and Automated Investing,” Redress Compliance

^3,4,5,6 “Robo-Advisor: Advantages and Disadvantages,” Investopedia

⁷ “Understanding Robo-Advisor Performance,” Vanguard

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Kevin D. Flynn is a financial services provider, business coach, and financial writer. He lives in Leominster, Massachusetts, with his wife Evelyn, two cats, and ten wonderful grandchildren.

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.

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