A robo-advisor is software that builds and rebalances an investment portfolio, and it’s cheap: Vanguard Digital Advisor charges a gross 0.20% a year, and Betterment and Wealthfront charge 0.25%, so $2,000 to $2,500 a year on $1 million. A financial advisor is a person who works on the decisions around the portfolio: taxes, retirement income, stock grants, insurance, a house, an inheritance. Fee-only advisors who publish prices charge a median $4,500 a year for ongoing planning, $2,000 for a one-time plan or 1% of assets. If investing is the only job you want to hand off, a robo-advisor does it well. If you have decisions to make, you want a person, and you don’t have to pay a percentage of everything to get one.
The short version
| Robo-advisor | Fee-only financial advisor | |
|---|---|---|
| What it does | Builds and rebalances a portfolio of funds, often with tax-loss harvesting | Plans cash flow, taxes, retirement income, insurance and estate, and often manages investments |
| What it knows about you | What you enter in an online questionnaire | Your tax return, benefits, accounts and goals, from conversations |
| Price | About 0.20% to 0.25% of assets a year, plus fund costs | A median $4,500 a year flat, $2,000 per plan, $300 an hour, or 1% of assets |
| Minimum | $100 at Vanguard; none for Betterment Digital | Of firms that state one, 50% say they have none |
| Legal status | Registered investment adviser | Registered investment adviser |
| When markets fall | Rebalances by its rules | Talks it through with you, and can change the plan |
Both are investment advisers under the law, so both owe you a fiduciary duty. The difference is how much advice that duty covers. For most robo-advisors, it’s the portfolio and nothing else.
What a robo-advisor does well
The SEC describes the process plainly: a robo-advisor has you complete an online questionnaire about your goals, time horizon, income, other assets and risk tolerance, and “based on that information, it creates and manages an investment portfolio for you.”
That’s genuinely useful. You get a diversified portfolio of low-cost funds, rebalanced on schedule, with no meeting to book. Many add tax-loss harvesting, which sells investments at a loss to offset taxable gains; Vanguard includes it in its Digital Advisor fee. And software doesn’t panic. If the alternative is cash sitting in a checking account, or trading on headlines, a robo-advisor is a clear step up.
What it doesn’t do
The same SEC bulletin warns that some robo-advisors “may obtain and consider only limited information about you,” and that “there may be no initial or subsequent conversation with a person.” The questionnaire usually doesn’t see:
- Which funds in your 401(k) to use, or how your accounts fit together
- When to claim Social Security, or which accounts to draw from first in retirement
- Whether to convert to a Roth, pay down the mortgage or invest the difference
- Stock options and RSUs, and the tax your employer doesn’t withhold
- Insurance gaps, a will, or what happens to an inherited IRA
These decisions are often worth more than the portfolio’s fee. Our guide to whether financial advice is worth it puts numbers on a few of them.
What each costs
Fund expenses come on top of every option. Two things the chart shows:
You don’t have to choose. A robo-advisor for the investing plus an hourly planner at a median $300 an hour, or a one-time plan every few years, costs far less than 1% of a large balance.
Robo fees grow with your balance too. At 0.20% to 0.25%, a robo-advisor costs more each year as you save. On $2 million, Vanguard’s 0.20% is $4,000, and Betterment’s rate (0.25% on the first $1 million, 0.15% on the next) also comes to $4,000. That’s close to the median flat planning fee of $4,500. Past that point, a flat-fee planner who also manages the money can cost about the same as software.
In between sit hybrid services: software investing with access to human advisors, for more. Betterment Premium, for example, charges 0.65% on the first $1 million with a $100,000 minimum. Our guide to virtual financial advisors compares those.
When a robo-advisor is the better choice
- You’re early and your money life is simple. A salary, a workplace plan, steady saving, no big decisions on the horizon.
- Your questions are about funds, not about taxes or timing. A robo-advisor answers “what should I own?” well. It doesn’t answer “when should I retire?”
- You’d otherwise not invest, or would trade on emotion. Automatic deposits and rules-based rebalancing fix both.
- You already have a planner who doesn’t manage money. Advice-only planners leave the investing to you, and a robo-advisor can do that part.
When a financial advisor is the better choice
- A decision that’s large or hard to undo. Retirement income, a stock grant, selling a business, a divorce or an inheritance. See retirement planning and tax planning in the public graph.
- Your money is spread out. A 401(k), an old IRA, a spouse’s accounts, equity pay and a rental property are invisible to a robo questionnaire.
- You know you’d sell in a crash. A rule can rebalance; it can’t talk you out of selling.
- You want the advice to cover everything. A person can change the plan when your life changes. A robo-advisor waits for you to update your answers.
How to check which one you’re talking to
Plenty of services in the middle use the word “advisor.” Some are software with a support line; others pair software with a team of people you may or may not see twice. Four checks:
- Read the brochure. Every registered firm’s Form ADV Part 2A, Item 4, has to “describe the types of advisory services you offer.” Look the firm up on the SEC’s adviser search, open the brochure, and see whether it describes an automated program, a team, or planning by a named person.
- Ask who you’ll talk to. “Will I have one named person? Will they read my tax return? Can I call them when markets drop?” The SEC suggests asking exactly this kind of question about human contact.
- Ask what information they use. If the answer is a questionnaire, the advice can only be as complete as your answers.
- For a person, check how they’re paid. A fee-only advisor is paid only by you. Our guide to telling whether an advisor is fee-only shows where to look, and fee-only vs fee-based vs commission explains why it matters.
If you’re moving from a robo-advisor to a person, you usually don’t need to sell anything; our guide to switching advisors covers the transfer. And if you’re weighing a percentage fee once you get there, compare it with a flat one in flat fee vs percentage of assets.