Robo-Advisor vs. Personal Financial Advisor: How to Decide

The robo-advisor revolution has changed the choices and, importantly, the cost for investment management and advice.

Here's what to consider when choosing between a robo-advisor and a human financial advisor. (And keep in mind, you can get started now with a robo-advisor — which offer low costs and low or no account minimums — then hire an advisor later for comprehensive financial planning.)

Robo-advisor vs. financial advisor: What's the difference?

Robo-advisors are services that use computer algorithms to build and manage a client’s investment portfolio. They require little human interaction. You set your parameters, such as your time horizon and how much investment risk you'll accept, and let the computer models do the rest. They're a great, low-cost option, especially when you only want or need investment management rather than comprehensive financial planning.

Personal financial advisors or financial consultants are professionals you can hire, on an ongoing or temporary basis, to help manage aspects of your financial life — from investing to estate planning and more. You'll generally meet your advisor locally, at his or her office, to create and go over your financial plan.

However, several companies offer virtual access to financial advisors for less than you'd pay a traditional in-person advisor: Two examples are Facet Wealth and Empower, which both pair clients with a dedicated financial advisor. Meetings are held via video or phone, and the services include investment management.

Robo-advisor vs. financial advisor costs

Generally speaking, the more human touch required, the higher the cost for financial advice.

Robo-advisors charge fees from 0.25% to 0.50% of the amount managed per year, though most services fall toward the bottom of that range. Many will take on new clients with $0 to open an account.

» Learn about NerdWallet's recommended robo-advisors

At the other end of the spectrum, many personal financial advisors also charge a percentage of your assets — the median is 1% per year but it can range higher for small accounts and lower for big ones. Some traditional advisors require that new clients have a balance of $250,000 or more to manage. However, there are financial advisors who charge a flat-rate or hourly fee and require lower or no minimums to begin. Fee structure and professional qualifications are among the important questions to ask before you hire a financial advisor.

Online financial planning services also structure their fees in various ways, but they are generally cheaper than a traditional, in-person financial planner. Some charge a monthly or annual fee that may increase based on the complexity of the financial advice you need; others charge a percentage of your account balance.

» Find out how to choose a financial advisor

Here's a way to visualize the differences between robo-advisors, online planning services and traditional financial advisors:

Where robo-advisors shine

Be cautious about financial advisors who attempt to beat the market with their investing picks. “They charge a lot more and usually do no better — and often worse — than robo-advisors,” says certified financial planner Meg Bartelt of Flow Financial Planning.

» MORE: How to tell which robo-advisor is right for you

The robo-advisor industry was built on passive investing: using low-cost funds linked to a preset mix of investments; for example, the S&P 500 index of large companies. Rather than beat the market, which is extremely hard to do, these funds simply aim to match whole market gains over time.

“To a large extent, passive investing — the strategy to buy and hold a broadly diversified portfolio and don’t mess with it — has won the day,” Bartelt says.

» View NerdWallet's picks for the top robo-advisors

Where personal financial advisors shine

Robots are great at portfolio management — using software to automatically buy and sell assets and rebalance your portfolio over time. They aren't as great at helping you and your family diagnose your personal financial problems and opportunities for improvement, Bartelt says.

“Where a human financial advisor really thrives is addressing the other 90% of your financial life,” she says. “The big questions like how to buy a house, a car, quit your job and start your own business, or have a baby in the next five or 10 years.”

If a traditional, in-person financial advisor is outside your needs or budget, an online planning service can help you answer the above questions, create a financial plan and manage your investments for less.