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Financial advisor vs robo-advisor

A robo-advisor is an investment adviser that runs a portfolio with software. It still files Form ADV. Read the brochure for what a human does and what you pay.

The short answer

A robo-advisor is an investment adviser that builds and rebalances a portfolio with software. You answer questions. A model, often a set of funds, does the rest. The company behind it still files Form ADV, the same public form a firm with people in an office files.

The brochure says the fee, and it says whether a person, a written plan, or tax-loss harvesting is included. Tax-loss harvesting means selling a loser to offset a gain on your taxes. A human adviser is the same kind of firm, with a person responsible for your account.

Compare the two in dollars on your balance, and compare what is included. Do not compare slogans.

Programs such as Betterment, Wealthfront, and Schwab Intelligent Portfolios are examples of this category. Naming them is not a ranking and not a recommendation.

Digital programHuman adviser
Who picks the fundsA model tied to your answersA person or a team, who may also use models
Form ADVYes. Look up the company.Yes. Look up the firm.
A planner you can nameOnly if the brochure sells that add-onAsk. Some firms include a plan. Some only manage money.
PriceA figure in the brochure, usually a percentA figure in the brochure: percent, flat fee, or hourly

What to do

  1. Search the company behind the program as a firm on Search. "Robo" is not a separate license.
  2. Open Item 5E and write down the pay method. Then open the brochure and copy the program fee, any higher tier that adds a person, and the fund list.
  3. In the brochure, mark what is in the product: automatic rebalancing, tax-loss harvesting, a human you can book, a financial plan, or the portfolio only. If the service you need is missing, the program does not include it.
  4. Read how much of the account the program keeps in cash. That slice earns the cash rate, not the fund return. The brochure or the method page is the source. Do not guess from a commercial.
  5. Read Item 9A custody. Custody is about who can control the money. The funds should sit at a named custodian, the company that holds them. You want statements from that company.
  6. Price your balance in the advisor fee calculator. Put the digital quote next to a human quote for the same dollars and the same job. If the job is a rollover, a pension choice, or a retirement paycheck, read is a financial advisor worth it? before you assume a questionnaire covers it.

What to look for on Best Investors

  • The company's firm page. Item 5E, Item 5G, and Item 9A are the same panels you would read on a local firm. A software brand does not hide the filing.
  • Item 5G services. See whether the firm reports financial planning or only portfolio management. The Item 5G guide explains the boxes.
  • Brochure link. The program fee, and the list of what is left out, live there. They do not live in the Yes or No rows.
  • Person pages at a giant firm. You may not have a named adviser. That tells you the scope. It is not a reason to skip the firm filing.

Common mistakes

  • Treating a robo-advisor as unregistered. If it charges for investment advice, the company behind it is an investment adviser with a Form ADV.
  • Comparing two percents and ignoring what is included. A lower fee that excludes a plan is cheaper for a different job.
  • Ignoring fund expense ratios on top of the program fee. Add both before you call one quote cheap.
  • Assuming every digital program holds a large cash pile. Some do. Read that program's method.
  • Assuming a fiduciary line on the site adds services the brochure leaves out. The duty covers the program they offer.
  • Using a "best robo" ranking on a homepage as the filing. Open the ADV.

Related questions

Is a robo-advisor a fiduciary?

The company is an investment adviser, so the advice relationship comes with a fiduciary duty. The duty covers the program in the brochure. It does not add retirement-income planning, a pension analysis, or tax advice the contract leaves out.

When is the digital program the wrong tool?

When the decision is hard to undo, and a model will not make it. A rollover out of a workplace plan, a lump-sum pension, a death, or a large block of company stock needs a written answer from a person. You can still leave ordinary dollars in a model after that decision is made.

Are Betterment, Wealthfront, or Schwab recommended here?

No. They show what this category looks like. Fees, cash rules, and access to a human change. Read each firm's current Form ADV and brochure, not a roundup article.

Can I hire a person later?

Yes. Keep the statements and the cost basis, which is what you paid for the shares. A later adviser can take the account or leave the funds where they are. Ask the custodian about transfer rules before you assume the move is tax-free.

Limits

This page does not rank digital advisers, and it does not tell you to use one. It is not legal or investment advice. Best Investors is not the SEC.

The firm filled out Form ADV. We do not audit assets, fees, or Item 11. Program fees change. The brochure in force on the day you sign is the one that counts. If our page and IAPD disagree, use IAPD.

Sources

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