Investing | InspireHer: Plancorp Women’s Initiative | Investment Strategy
By: Ranie Verby December 6, 2023
If you’ve outgrown DIYing your investment management strategy, you have two options — use a robo-advisor or work with a wealth manager. Robo-advisors are a high-tech, hands-off alternative to a traditional financial advisor. With algorithms that automate investment portfolios, they offer a middle ground between doing it yourself and working with a human financial advisor. Robo-advisors may be a good choice for some people, but they have limitations that become more apparent as your assets grow and financial situation becomes more complex. Here’s what you need to know about both options to help you make the decision that’s right for you. Financial advisors have been helping people make investment decisions for generations. But they offer more than just basic investment advice. They provide comprehensive wealth management solutions, such as tax strategy, insurance planning, estate planning, retirement planning and more. Robo-advisors are the new(ish) kid on the block in the investment management world. Because they have low or no minimum balance requirements to get started, they are accessible to beginners who want to invest in the stock market but aren’t ready for or don’t have enough assets to work with a traditional advisor. However, they only provide investment management services. They can’t provide guidance for your other financial needs. Robo-advisor is a bit of a misnomer. First, here’s what it’s not: There are no robots working behind the scenes, advising you about how to invest your money. Robo-advisors are low-cost digital investment platforms that automate portfolio management by using computer algorithms to develop an investment plan based on a user’s risk tolerance, financial goals and investment timeline. Robo-advisor services often include tax loss harvesting and automatic portfolio rebalancing. A robo-advisor may be a good option for people with relatively simple financial situations who only want help managing their investment accounts. Here are some pros and cons of using one. Traditional advisory services are usually a better bet for high-net-worth individuals significant investable assets and/or a more complicated financial scenarios. While we say a traditional advisor, the reality is there is nothing traditional about comprehensive wealth management. Beyond investments, wealth management covers all aspects of your financial life to ensure alignment between your money, goals, and values. Here are some of the benefits and drawbacks of working with an advisor. Investing Philosophies. One major benefit of choosing wealth management is the ability to evaluate possible matches based on their investing philosophy. You may hear this as the traditional debate between passive and active, but here at Plancorp we strongly believe that an evidence-based and academic approach is best. We apply proven academic principles to construct more efficient portfolios with lower costs based on an investor’s risk tolerance and financial goals. In general, robo-advisors are less expensive than traditional wealth managers. But an advisor provides a holistic approach to your finances and individualized solutions based on your unique circ*mstances and goals. Wealth managers also stay up to date on the latest available financial products and investment strategies and use them to your advantage when appropriate. It’s common for both robo-advisors and traditional financial planners to get paid a fee based on assets under management (AUM). A typical fee structure for robo-advisors is 0.25% to 0.50% of AUM. Financial advisors often charge around 1% of AUM, but rates vary, so it’s important to ask. Regardless of what they charge, a good advisor is transparent about their pricing. Here are a few things to look for when selecting a wealth manager. Every equity compensation, employee stock purchase plan and deferred compensation package is different. If you want a basic overview of how each type works so you can decide what to do next, a robo-advisor may be sufficient. But if you want someone who will take a deep dive into your options and make recommendations based on your finances, tax liability and goals, a financial advisor is a better bet. Robo-advisors have their place. If you’re new to investing and your financial situation isn’t overly complicated, a robo-advisor may be a good fit. But if you’re further along in your career and have a substantial portfolio or complex compensation considerations, a robo-advisor may not be your best option. Here are seven signs working with a financial advisor could be worth your while. Still not sure? Take our money match quiz to understand where you land on the scale of DIY planning to comprehensive wealth management.Robo-Advisor vs. Traditional Wealth Manager: An Overview
What is a Robo-Advisor?
Advantages and Disadvantages of a Robo-Advisor
Pros of Using a Robo-Advisor
Cons of Using a Robo-Advisor:
Advantages and Disadvantages of a Traditional Wealth Manager
Pros of Using a Traditional Wealth Manager
Cons of Using a Traditional Wealth Manager
Cost Comparisons of Robo-Advisors vs. Traditional Wealth Managers
Robo-Advising vs. Traditional Wealth Manager for Complex Situations
What Type of Advisor is Right for You?
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As an enthusiast with a demonstrated understanding of investment strategies, I'm well-versed in the concepts discussed in the article "Investing | InspireHer: Plancorp Women’s Initiative | Investment Strategy" by Ranie Verby, published on December 6, 2023.
The article explores the choice between using a robo-advisor and working with a traditional wealth manager for investment management. Let's break down the key concepts used in the article:
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Robo-Advisor vs. Traditional Wealth Manager: An Overview:
- Traditional financial advisors provide comprehensive wealth management solutions, including tax strategy, insurance planning, estate planning, and retirement planning.
- Robo-advisors, on the other hand, are digital investment platforms that use algorithms to automate portfolio management. They are accessible to beginners due to low or no minimum balance requirements.
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What is a Robo-Advisor?
- Robo-advisors are digital platforms that automate portfolio management based on user input, including risk tolerance, financial goals, and investment timeline.
- They offer services like tax loss harvesting and automatic portfolio rebalancing.
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Advantages and Disadvantages of a Robo-Advisor:
- Pros include simplicity, lower costs, low minimums, automatic rebalancing, and tax loss harvesting.
- Cons involve limited functionality, restricted asset classes, lack of nuance, and no personal guidance on complex financial scenarios.
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Advantages and Disadvantages of a Traditional Wealth Manager:
- Pros of using a traditional wealth manager include a personal touch, comprehensive solutions, estate planning, tax planning, expanded investment options, and adherence to investing philosophies.
- Cons include higher minimums and fees compared to robo-advisors.
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Cost Comparisons of Robo-Advisors vs. Traditional Wealth Managers:
- Robo-advisors generally have lower fees (0.25% to 0.50% of AUM) compared to traditional wealth managers (around 1% of AUM).
- Wealth managers provide a holistic approach and individualized solutions based on unique circ*mstances and goals.
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Robo-Advising vs. Traditional Wealth Manager for Complex Situations:
- Robo-advisors may be suitable for basic overviews, while traditional wealth managers are recommended for complex financial situations, especially involving equity compensation.
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What Type of Advisor is Right for You?
- Robo-advisors may be suitable for beginners with simpler financial situations.
- Working with a financial advisor is recommended for those with substantial portfolios, complex compensation considerations, and specific financial goals.
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Factors Indicating the Need for a Financial Advisor:
- A desire for a tailored plan, regular check-ins, equity compensation guidance, tax obligation minimization, retirement planning, and wealth maximization are signs that a financial advisor could be beneficial.
The article concludes by suggesting that while robo-advisors have their place, financial advisors are crucial for individuals with more advanced financial needs. The decision between the two depends on an individual's financial situation, goals, and the complexity of their investment portfolio.