If you want to invest but don't want to pick your own stocks, funds or bonds, today you have two popular options to choose from: Robo Advisor and Financial Advisor.
For most of modern history, only the wealthy had access to investment advisors to help them manage their money. Everyone else had to get by on their own, often with little or no knowledge of how to invest.
Today, anyone can access an automated advisor to manage their investments. Most are dramatically cheaper than their human counterparts, and do not require the same high minimums to invest.
But how do we know which one is better than the other? Today we tell you the main differences between a financial advisor and a robo advisor.
What is a Robo Advisor?
Robo advisors are also known by the term automated manager, since in reality, apart from advising, they manage your money for you. Therefore, robo advisors or automated managers are digital platforms that, through the use of algorithms, offer efficient automated fund portfolios at low cost and under limited human supervision.
Robo advisors make it easier to create investment portfolios customized for each individual and tailored to their profiles and objectives. The creation and maintenance of portfolios is fully automated.
The automated manager does it all:
- Builds your financial profile
- Creates your plan according to your situation and goals.
- It invests for you with strategies from expert investors
- Optimizes your portfolio on an ongoing basis
- Makes changes when necessary
- Manages your additional contributions
Thanks to its automation, this new capital management alternative offers investors lower costs and, consequently, higher returns.
The most common features of robo advisors are:
- Delegated portfolio management
- Low costs
- Accessible with little capital
- Use of passive instruments
- Passive/active management
- More digital customer service
- Global investment
Advantages of a Robo Advisor
The main advantages of a Robo Advisor are:
- Low costs and competitive commissions. Through automation and economies of scale, Robo Advisors are, on average, one third cheaper than a traditional investment vehicle.
- Simplicity. You just need to complete a risk profile survey and you will be assigned a portfolio in line with your profile. You don't have to do anything else to start investing.
- Automated process. Due to its algorithmic nature, it allows you to customize a standardized product for each client. In addition, this process highly reduces operational risk.
- They are regulated. Robo Advisors are regulated and controlled by the national and local authorities in each country (FCA, CNMV, etc.).
- Affordable minimum investment. There are Robo Advisors that allow you to invest from 1 € and others that will create a portfolio from 150 €, although it is normal that the initial amount ranges between 1,000 and 3,000 €, an affordable amount compared to other types of investments.
- They allow periodic contributions for a small amount of money. The Robo Advisor model is ideal for those who save money every month and want to invest it automatically.
- Delegated portfolio management. Having the capital managed instead of being advised. It would be equivalent to sitting down in a good restaurant to enjoy the meal instead of buying the ingredients, cooking them, interpreting the recipe, plating them, serving them, and then washing the dishes.
- Diversified and efficient portfolios. In this case, by using ETFs and index funds, a very high diversification is obtained, creating very efficient portfolios and optimizing the risk/return ratio for each risk profile.
- Portfolios adapted to the client's life. The way you invest and the risk you take changes throughout your life. The best Robo Advisors know this and will ask you to repeat the suitability test from time to time to adjust your investment profile.
- Transparency. Robo Advisors improve the accessibility and availability of information thanks to their online distribution. With them we can access our portfolio at any time and on any day. It is usually possible to do 100% of the transactions online. In addition, most of them are very clear and transparent when reporting their costs, commissions and returns.
- You avoid emotional biases and investment mistakes. A large number of researchers argue that human emotions are extremely present in investment decisions and this leads to the fact that we might overreact in certain scenarios instead of using rationality. In some cases, emotions could explain price bubbles and market behavior.
What is a financial advisor?
A financial advisor is a professional who helps manage the finances of an individual or company according to their income, assets and needs. In other words, advisors manage financial operations on behalf of their clients.
However, an advisor is not only limited to advising you on your domestic economy and whether you should invest in the stock market: his recommendations can range from how to maximize your money to whether you are at the right time to open a pension plan. It all depends on the type of questions you ask, and for this, it is vital that you establish a relationship of trust, sincerity and objectivity on both sides.
Advantages of a financial advisor
- Thoughtful decision-making. This avoids making rash moves that could negatively affect a client's finances in the event of widespread market declines.
- Financial coach. If you have an advisor you will be able to learn and solve doubts about situations, decisions or investment products.
- Personalized advice.
- Guides the financial organization of a person not only for short or medium-term investments but also, as with automated advisors, for vital projects such as university studies, mortgages or retirement.
Robo Advisor vs Financial Advisor: main differences
The portfolio is managed in an automated way, and performs all trades without human intervention. All trades are carried out at the optimal time for the investor based on a series of algorithms.
One or more persons are dedicated to managing the fund's assets, buying and selling those assets that best fit the fund's investment policy.
Very cheap services that analyze your profile after conducting a suitability test (without the need for prior research) and suggest an investment portfolio.
High costs that, although they have been reduced thanks to digitalization, are still higher than those involved in a Robo Advisor.
They are known for charging very low commissions (they offer portfolios composed of index funds and ETFs), an affordable initial investment and do not require excessive financial knowledge.
The minimum initial investment required is much higher. The average in the UK is around £150 per hour.
Robo Advisors can automate investment strategies, such as Modern Portfolio Theory (MPT), that optimize the ideal asset class weightings in a portfolio for a given risk preference.
Calculations such as those in MPT, though they can be done by hand, are laborious and prone to human error.
Certain Robo Advisors allow access to some investment funds and financial instruments that are not available to the general public, or at least not under the same conditions.
In the case of investment funds, it is difficult for this to happen since the marketers only allow access to retail classes or require quite high minimums for their other classes.
Information and customer service is digitized and available at all times. We can see the status of our investment and where our funds are in a transparent and independent manner.
We do not have the information about our investments at hand, as the most common way to access it is to contact the financial advisor.
Rizeapp's Automated Investment Service: Robo-Advisor
Passive management is here to stay. Thanks to Robo Advisors, anyone can now start investing in broadly diversified portfolios of index funds and ETFs with very low fees.
If you want a smart way to benefit from passive wealth management, you can start investing using Rizeapp. Much cheaper than a financial advisor, and definitely more effective.
Expand your investment with a diversified portfolio, customized with everything you're interested in. We'll automate it to help you maximize your returns.
With 24/7 support, we’ll give you guidance all the way from your profiling to your portfolio allocation. You'll have a portfolio personalized just for you, in no time!