Financial Advisor vs. Robo-Advisor: Which is Better?

Apr 7, 2019

People often ask me if they should use robo-advisors for their financial planning needs. Like most topics in personal finance, there is not a clear answer.

As a financial advisor who wants to grow his own practice, a technology enthusiast, and a person who wants to see more people receive some form of financial advice, I have lots of opinions.

Here is my thought process.

What is a Robo-Advisor? 

Robo-advisors are digital platforms that offer financial services at a low cost and with small investment minimums.

Portfolios are driven by algorithms with little to no interaction with humans. Since robo-advisors focus on low costs, the investments that make up these portfolios are typically passive.

Services range from automatic rebalancing to tax optimization. A few robo-advisors offer some form of human-to-human financial planning services via call centers.

Where Do Robo-Advisors Fall Short?

Investment Choice

By design, robo-advisors have limited investment choices.

Most robo-advisors build their portfolios out of low-cost passive funds, which are baskets of investments that aim to mirror the behavior of an index, like the S&P 500.

Nothing is wrong with passive investing. However, in my opinion, there are sometimes situations when active investing might be more appropriate. Therefore, robo-advisors may not give some investors enough flexibility.

In a four-part series, I describe the differences between active and passive investing in depth. Reading these posts will provide context on why I believe investing is complex. Hence, why I do not think robo-advisors are for everyone.


Active vs. Passive Investing Part I: Introduction
Active vs. Passive Investing Part II: Do Fees Matter?
Active vs. Passive Investing Part III: True Statistics Can Be Misleading
Active vs. Passive Investing Part IV: Your Choices Matter

Financial Planning

By their nature, robo-advisors focus on investment management. This is not the same as comprehensive financial planning.

Real financial planning is a process, not a product. It is the long-term method of managing your finances so you can pursue your goals, while at the same time working through the financial pressures that may arise in life.

In a previous article, I discussed how great financial planners help their clients with financial pressures using organization, accountability, objectivity, proactivity, and education. In my opinion, it is difficult for digital platforms to automate this.

As mentioned before, some robo-advisors offer limited financial planning services. They include tools and calculators that help you budget, save, and invest. For an additional fee, you can speak with a licensed financial advisor over the phone to go over specific issues. Although speaking to financial advisor over the phone is better than nothing, there are potential drawbacks as explained in the next section.  

Personal vs. Impersonal

Based on experience, I know that one of the most important parts of financial planning is the personal aspect. Although some robo-advisors offer limited financial advisor interaction, it is impersonal.

Personal interaction has its advantages over impersonal interaction in other fields like medicine. I learned this a few years ago when I got sick after a business trip. I opted to go an urgent care so I could receive immediate medical attention. The doctor ran many tests and thought I had a heart murmur and prediabetes.

Given the severity of her diagnosis, I decided to get a second opinion from my primary physician. After a few tests, my doctor determined that I only had a virus and all I needed was to rest for a few days.

Upon reflection, I think the big disparity in their diagnosis came down to their personal interaction with me.

My primary physician has treated me and other members of my family for many years. In fact, he lives next door to my grandmother. I believe that the nuances of our long-term relationship helped him determine why I was sick. The urgent care doctor could only run tests based on my perceived symptoms.

Using this same logic, I am skeptical of robo-advisors with on demand financial advisors. In my experience, the ongoing process of getting to know my clients well allows me to ask the right questions. This personal interaction helps me build their financial plan. I do not think that the impersonal nature of call centers can replicate this.

Who Should Use a Robo-Advisor?

Despite my misgivings, I think financial advisors and robo-advisors can coexist because a significant percentage of the American population receive no financial advice.

For whatever reason, legitimate or not, some people will never speak with a financial advisor. Therefore, I understand the market need for robo-advisors.

Here are some reasons why some people should consider robo-advisors:

  • Novice investors who do not plan on working with a financial advisor.
  • Investors with minimal assets as some financial advisors have high account minimums.
  • Investors concerned about cost as working with a financial advisor is more expensive.
  • Investors who want the latest technology experience.


Robo-advisors grew out of a market need to serve investors who were underserved by traditional financial advisors. Although I am naturally biased against robo-advisors, I think their development is positive for the industry.

The growing popularity of robo-advisors forces firms to figure out how to make the overall client experience better. For example, firms will have to lower account minimums, create alternative pricing options, and invest in better technology so clients can collaborate with their financial advisor. Furthermore, the existence of robo-advisors forces financial advisors to convey their actual value proposition to their clients.

Based on my observation, I do not believe robo-advisors can completely replace financial advisors. There are too many parts of the client-advisor relationship that are valuable. For example, reassuring clients through difficult markets, persuading clients to take action, and synthesizing custom solutions.

Nevertheless, I do not think one is better than the other. I think they serve completely different markets. For example, some people use online tax filing services to file their taxes, yet accountants still exist.

As with any life choice, you should figure out what type of guidance you want and select a financial advisor or robo-advisor that suits your style.

The information in this post is provided for discussion purposes only and should not be misconstrued as investment or tax advice. Under no circumstances does this information represent a recommendation to buy or sell securities. 
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
Mutual Funds and Exchange-traded funds are sold only by prospectus. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained directly from the company or from your financial professional. The prospectus should be read carefully before investing or sending money.

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