By Michael B. Cohen
Vice President of Global Operations
If you are looking for a financial advisor, you might be tempted to choose one of the many online platforms that offer automated investment services. These platforms, also known as robo-advisors, use algorithms and artificial intelligence (AI) to create personalized portfolios and provide financial advice based on your goals, risk tolerance, and time horizon. But are these platforms really as good as they claim to be? And how do they compare to human advisors?
In this blog post, I will explore the pros and cons of robo-advisors and human advisors, and help you decide which one is best for your financial needs.
Pros of Robo-Advisors
- Low cost: Robo-advisors typically charge lower fees than human advisors, as they do not have to pay for salaries, commissions, or office expenses. Some robo-advisors even offer free services for accounts below a certain threshold. According to a report by Backend Benchmarking, the average annual fee for robo-advisors in 2020 was 0.23%, compared to 1% for human advisors.
- Convenience: Robo-advisors are accessible 24/7 through your computer or smartphone. You can sign up, open an account, and start investing in minutes. You can also monitor your portfolio performance, adjust your settings, and withdraw or deposit funds anytime you want. You do not have to schedule appointments, fill out paperwork, or deal with sales pitches.
- Objectivity: Robo-advisors are designed to follow a set of rules and logic based on modern portfolio theory and behavioral finance. They do not have emotions, biases, or conflicts of interest that might affect their decisions. They also do not chase market trends or make impulsive trades that might hurt your returns.
Cons of Robo-Advisors
- Limited customization: Robo-advisors usually offer a limited number of portfolio options based on your risk profile and investment goals. They do not take into account your personal preferences, values, or unique circumstances. For example, if you want to invest in socially responsible companies, or if you have complex tax situations or estate planning needs, robo-advisors might not be able to accommodate you.
- Lack of human touch: Robo-advisors rely on algorithms and data to provide financial advice. They do not have the ability to understand your emotions, motivations, or aspirations. They also cannot provide emotional support or guidance during market volatility or life events. If you prefer to have a personal relationship with your advisor, or if you need more than just numbers and charts, robo-advisors might not be enough for you.
- Technical issues: Robo-advisors are dependent on technology and internet connectivity. They might experience glitches, errors, or downtime that could affect your portfolio performance or access. They might also be vulnerable to cyberattacks or data breaches that could compromise your personal information or funds.
Pros of Human Advisors
- Customization: Human advisors can tailor their services and recommendations to your specific needs and preferences. They can take into account your financial situation, lifestyle, values, and goals. They can also help you with more than just investing, such as budgeting, debt management, tax planning, retirement planning, estate planning, insurance, and more.
- Human touch: Human advisors can build a rapport and trust with you over time. They can listen to your concerns, answer your questions, and explain complex concepts in simple terms. They can also provide emotional support and reassurance during market fluctuations or major life changes. They can help you stay focused on your long-term goals and avoid making costly mistakes.
- Expertise: Human advisors have the education, experience, and credentials to provide professional financial advice. They have access to a wide range of resources and tools to research and analyze the market and the economy. They also have to adhere to ethical standards and regulations that protect your interests.
Cons of Human Advisors
- High cost: Human advisors typically charge higher fees than robo-advisors
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