Courtesy Jeff Rose
Jeff Rose is the CFP-blogger behind Good Financial Cents.
As a financial adviser, I'm probably supposed to loathe robo-advisers that offer online financial advice and portfolio management at a lower cost. The reality, though, is that I don't hate robo-advisers at all. I just don't think they're right for everyone.
Paying less for financial help is a smart move if you can pull it off without sacrificing the quality of the help you receive, but it's crucial for consumers to understand what they're really getting - and what they're not getting with a robo-adviser.
If you're on the fence about using one over a regular financial planner, you'll want to consider the pros and cons. Here's what I really think about these companies - both good and bad.
Robo-advisers can be a low-cost alternative to traditional advisers
One of the biggest benefits of using a robo-adviser is the fact that they tend to cost less than in-person advice. Where a traditional financial adviser may charge a fee equal to 1% or your portfolio or more (and may also earn commissions on the investments they sell you), most robo-advisers cost half of that or less.
With Betterment, for example, you'll pay 0.25% per year on your balance - or about $25 per year for every $10,000 invested in your account. You can also pay for a premium plan with more hands-on help for a fee of just 0.40% per year.
Open a brokerage account with Betterment today and watch your money grow »
Also note that robo-advisers can be a good choice for anyone who is just starting to build wealth. Where a lot of traditional financial advisers require a high minimum net worth to work with them, most robo-advisers let you get started with a minimum account of just $500 or $1,000.
Robo-advisers can be good for DIY investors who need some basic help
If you're someone who is self-employed and mostly managing your money on your own, a robo-adviser can provide some basic services that can help you maximize your income for retirement.
For example, an account with Wealthfront gives you access to automatic account rebalancing, tax loss harvesting, and their selection of chosen low-cost ETFs - all benefits you don't get when you're investing on your own.
Sign up with Wealthfront today and take advantage of these great services »
The bottom line: If you know how much you need to save for retirement and have a plan to get there, a robo-adviser can provide you with a boost in benefits that can help you minimize taxes and increase your earnings.
Some robo-advisers offer free tools
While traditional financial advisers don't usually offer anything for free other than an introductory meeting and basic financial analysis, some robo-advisers offer free tools you can use whether you become a customer or not.
Personal Capital, for example, offers free financial calculators and a free fee analyzer tool that will look at your personal investment accounts to see how your fees compare to the benchmark. You can also connect all your investment accounts to Personal Capital in order to track your net worth, keep an eagle eye on your spending, and see all your investments in one place.
Save money on investment fees using Personal Capital's free tools »
Robo-advisers can be a poor choice if you have tons of investing questions
One major downside of robo-advisers is they don't offer a ton of personalized financial advice. You may be assigned to an investment manager who can answer your questions or have access to an online chat feature, but it's just not the same as building a long-term relationship with a financial adviser who knows your situation inside and out.
The reality is, a robo-adviser can leave you feeling shortchanged. If you need to figure out how much to save for college or whether you can afford to have kids, for example, a robo-adviser won't offer much help with that type of situation.
If you want someone who truly understands your life and your goals, you'll want to fork over the money to work with a traditional, full-service planner in your area.
Robo-advisers aren't best if you have a complex financial situation
Finally, don't forget that robo-advisers can be truly limited in scope. If you have an extremely complex tax situation or you need help planning a multi-million dollar estate to minimize taxes and pass more money to your heirs, for example, you'll want to pay for professional help from an estate-planning attorney or financial planner with expertise in this area.
The reality is, robo-advisers do a great job at what they offer - portfolio management, smart tax-minimization strategies, rebalancing, and help selecting low-cost investments. Any other help you need should come from an individual professional who has the time to learn your situation and understand your life on a higher level.
The bottom line
Robo-advisers can absolutely be a good deal, but they're best for certain types of investors. Make sure you know the kind of help you need and the type of investor you are before you sign up for one. And if you decide you want a more personal touch when planning for your future, a full-service financial adviser might be what you need.
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