Robo-advisor or Human: Which is the Best Financial Advisor for You?


When it comes to hiring a financial advisor, you’ve got a lot of choices today. In addition to a multitude of firms staffed by human advisors, you have a new choice: a robo-advisor. Also called digital advisors, robo-advisors are online investment advisors.

How do these digital advisors work? You start an account, you answer some questions about yourself and your financial situation, and the company’s computer algorithms automatically invest your money. All buys and sells of individual investments are made by the automated system. Some robo-advisors may allow you to adjust overall settings, but the computer makes all buy and sell investing decisions for you.

As you may have guessed, removing the human component allows these robo-advisors to provide financial advice for a lower cost.

The cost aspect is definitely a plus, and it’s always smart to consider fees in investing. After all, the less you pay in the fees, the more of your money will be working for you.

The low fees are a great feature. However, there’s one big concern here. Robo-advisors are very new, and no one knows exactly how these automated platforms will perform over the long run. Additionally, the model just covers part of what you need to help you protect and build wealth. So it may tempt an investor to think that they have everything covered when in fact they are only looking at a small portion of what’s needed to secure their future.

So it’s best to look at robo-advisors in a balanced way and learn about the unknowns as well as what is known. Here are a few things to keep in mind when deciding if robo-advisors are right for you.

1. There’s a lot more to your financial future than just investing

While robo-advisors and human advisors both help you with your investments, robo-advisors focus primarily on investing your money. Unfortunately robo-advisors can’t help you decide the many other decisions that make up a huge portion of your financial life:

• How to save more and spend less
• How to plan to protect your spouse or partner, children and/or pets if something happens to you
• Big financial decisions: take the new job at a startup? Buy or lease your next car? Refinance your mortgage? Buy a second home?
• The best way to finance your children’s college
• The best retirement plan vehicles for your small business
• How to structure your life to reduce taxes
• How to structure your life to protect your assets from creditors, lawsuits, and other threats

Ignoring all these things and focusing only on building up your investments can leave you in a precarious spot.

This is where a full-service, human advisor shines. They can help you avoid big losses, bad decisions, and emotional mistakes.
Unfortunately, a robo-advisor is not able to do that, yet.

2. A robo-advisor can’t help you with emotions and behavior

Along with doing the right things, a big part of the battle with money is avoiding emotional decisions. We all make them. In fact, it is downright difficult not to fall into some common traps, such as:

• Loading up on investments at the wrong time (tech stocks right before the dot com crash, or real estate after it had been rising for years)
• Panicking and selling when the market gets scary
• Gradually increasing your spending as your income increases
• Missing out on tax strategies that can save you money and help you build wealth

3. New product risks and unproven reliability during all market conditions

We’re now likely in the ninth year of a long bull market. Things have been easy for most U.S. investors. Things aren’t so easy during bear markets, which are inevitable. Those are the times when investors tend to make emotional decisions which set them back.

Think back to the dot com years. You probably saw that while the market was going up, everyone was excited about the stocks they owned because of the big gains. Fast forward to after the dot com crash. Were most of those same people still excited, or did they give most of—or even all of—their gains back?

This is when we all need an advisor most: To protect ourselves from our instincts.

But the jury’s still out on what will happen with robo-advisors during these more challenging market cycles. Just this year, when the U.S. markets went through some volatility, Bloomberg reported that Fidelity, Vanguard, Wealthfront and Betterment all experienced technical issues. All were unavailable during parts of the day, cutting clients off from their accounts. While that may have been a good thing if it short-circuited someone’s panic, it is not a good thing that just routine volatility overloaded their systems.

We had similar tests to new products in 2008. Target date funds are mutual funds that are designed to help people automate their retirement savings. Instead of worrying about investing specifically for your retirement, in theory you just pick a target date fund with a year close to when you’re planning to retire. Well, it sounded good in theory, but in the first bear market, the results showed it was far from a sure thing.

In fact, it was closer to a disaster. According to a Morningstar report, supposedly conservative, close-to-the-finish-line 2010 target funds lost an average of 37 percent during the decline of U.S. stocks from October 2007 to March 2009. For example, suppose you were a 63-year-old investor who was planning to retire in 2010. Being so close to retirement, you probably were not interested in taking big risks with your money. You trusted your 2010 target-date fund to keep you on track. Instead, during the bear market, 37% of your nest egg was wiped out, leaving you with precious little time to recover your losses.

Now, target date funds in the future will likely improve. But when your future is at stake, you may want to stick with what is tried and true.

Retirement planning is and has always been a complex process that needs to be customized for your situation. While an automated or “one size fits all” approach sounds good in theory, the target-date data shows us that it’s no magic bullet.
While robo-advisors may be different, the fact remains that this technology is very new and unproven through all types of markets and economic conditions.


What’s the answer?

For most people, full service advice is preferable. Investments are just a small part of the success equation, and with an advisor, you get a coach who can help you stay accountable to your own goals. You also get the all-important financial planning to help you plan so you can actually define a road map to your goals.

But when you work with advisors, you have to be careful. Not all people with the title “financial advisor” or “wealth manager” are the same. So you need to hire very carefully. See my previous article on tips to find a top advisor who is legally required to work in your best interests.

But choose wisely and you will have an advocate who can help you prepare for a great future and reach your goals faster.


For more tips on hiring and working with a financial advisor, download our free eBook.


John Odell, CFP® is CEO of Arroyo Investment Group, LLC, a fee-only financial planning and investment management firm based in Pasadena, California. As a GIPS®-compliant firm, we bring institutional quality, high performance investment management and comprehensive financial planning to individuals and families.  Together with Capital Research + Consulting, our sister firm, we collectively manage over $4 billion of assets for individuals and retirement plans.  Visit us at