Difference Between Financial Advisors and Robo Advisors

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Like many aspects of modern life, personal investing is becoming increasingly automated. This hasn’t meant the end of human financial advisors, but it has led many people to abandon them in favor of robo advisors. You might wonder what the difference between the two is, so let’s take a look.

Bias

One of the notable benefits of the automated approach is reduced bias. Human beings will always feed their biases into investment decisions, no matter how thorough and well-intentioned they may be. Consequently, people as financial advisors get pulled toward emotional impulses like wanting to see a bull market keep going even after it’s exhausted. Automation eliminates these biases by focusing on whatever the algorithm and the investor’s approach favors.

Responsiveness

A major benefit of automation is responsiveness to ongoing investing needs. For example, SoFi encourages its users to employ automated investing in rebalancing their portfolios on the fly. If you’re trying to keep the right balance between stocks and bonds to limit your risk while building a college fund for your child, for example, automation can keep your portfolio balanced. More importantly, it can do this with little or no human intervention, depending on how much you want to rely on automated investing tools.

You can also use automation to target general investing goals. For example, automation can detect whether your stock portfolio has become overloaded with tech. In a scenario where growth companies suffer due to changing interest rates, that can be a tough place to operate. However, an automated system will sell securities in one sector and buy in another to keep your risk profile diversified.

Costs

Unsurprisingly, human advisors tend to charge fees for their services. Most robo advisors are either included with your broker’s plan when you sign up or available at a lower cost. Even if going automated gives back half a percent of your investment value, that will help you compound returns over many years.

Tax Loss Harvesting

No portfolio will have a perfect batting average. However, even losses have value because they can offset your annual tax bills. Automation allows a system to identify tax losses and harvest them as they appear so you can more precisely offset your taxes.

A human financial advisor can do this, but it’s harder for them to handle the task quickly and with precision. Consequently, they might not harvest the losses as efficiently.

Focus

Notably, a human financial advisor can provide greater focus when you need specialized or personalized advice. Fortunately, you don’t have to abandon a person’s advice to use automated investing. Simply use the right tool for the correct job. When you have something mundane, rely on automation. If you need to have someone do a deep dive before advising you, talk with a person.

Automation tends to make a lot of tasks simpler, and investing is no different. While robo advisors can’t replace human ones entirely, they can make much of the investing process simpler, faster, more efficient, and cheaper.

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