Get a new kind of financial adviser at a discount

Financial advisers—the flesh-and-blood people you find in offices all over America’s Main Streets—can sometimes get a little sniffy when the topic of online financial advisers comes up. One reason could be that the online players often trump human financial advisers when it comes to getting attention from the media. And then there’s all of the financial attention they get from venture capitalists.

Yet collectively, the dozen or so “robo-advisers” in the market are still small players in the world of financial advice. They manage almost $16 billion—a drop in the bucket compared with the trillions in assets traditional advisers manage. Though the lure of these robo-advisers is that they are cheaper and possibly more objective than humans, they’re still no substitute for the broad array of services that human registered investment advisers offer clients.

That hasn’t stopped the robo-advisers, which often think of themselves as disrupters in the financial-advice market, from taking plenty of potshots at RIAs.

They claim a number of advantages, but the primary one is that the advice they give to clients is based on computer algorithms, taking emotion out of the equation, thus making them more objective. They also argue that human investment advisers are too expensive, that they are often poor investors themselves, and that too many of them try to beat the market, often with disastrous consequences. Sometimes, the robo-advisers claim, the humans simply don’t act in their clients’ best interests.

Visit the Consumer Reports Investing Center for investor education and resources.

Borrowing from each other

Can’t they just play nice? There are signs that they are beginning to do just that. In recent months, RIAs and robo-advisers have been taking pages from each other’s playbook. In an attempt to differentiate their services, robo-advisers have been adding human components to their core offering of asset allocation and investment selection. Venture capitalists, hoping to profit from this trend, have already invested more than $100 million this year in robo-advisers.

Financial advisers, realizing they’ll need more than rapierlike wit if they’re to survive in the coming years, have also started borrowing from the robo-toolkit. Some RIAs are employing investing platforms designed by robo-advisers. Increasingly, investment advisers are turning to exchange-traded funds (the primary investment vehicle that many robo-advisers, such as Betterment, use to lower their costs).

By borrowing from each other, both sides hope to strengthen themselves and gain a competitive edge.

The giants in the online brokerage industry are also taking an interest in those online programs. Vanguard, for example, is testing its Personal Advisor Services (which pairs clients with a human adviser) with low advisory fees of 0.3 percent to investors with more than $100,000. Another brokerage firm, Charles Schwab, is reportedly testing a robo-advisory platform as well.

Human RIAs, facing a limited number of high-net-worth customers to go around, are also trying to expand their markets, increasingly competing for new clients considered “mass-affluent”—those with $50,000 to $250,000 in investable assets. (In an annual survey of financial advisers, nearly half cite finding new clients as their biggest challenge.) So not only do robo-advisers and human beings compete with each other, but there’s also competition within their ranks.

As competition picks up, robo-advisers also face challenges. They need to differentiate their product from other online financial programs to keep from becoming one of the also-rans. Their asset allocations, at least based on one sample we took this summer, won’t be enough of a differentiator to do that. We plugged in a hypothetical example to see what kinds of asset allocations the robo-advisers recommended. Though there were differences among the individual investments chosen, most of the asset allocations did not vary greatly (see table below).

The increasing competition, though, could be good news for investors. The vast majority of RIAs still charge 1 percent or more annually for accounts with balances under $500,000. Many robo-advisers charge no more than 0.5 percent for similarly sized accounts. RIAs, though, do offer value-added services to justify their higher costs. Most offer estate-planning services and insurance products, and facilitate charitable giving—services that almost none of the robo-advisers currently offer.

Do it yourself

If you don’t want to go with a human adviser or a robo-adviser, you can always manage your portfolio yourself. There is nothing to prevent you from logging into a robo-adviser, answering some questions, and taking a peek at the asset allocation it suggests for you. Then you can use that information to design your own portfolio. FutureAdvisor, one of the larger robo-advisers, even acknowledges that you can do that in the FAQ section of its website.

Of course, when you take the reins of your portfolio, you miss out on the benefits that come with having an adviser. For example, an adviser can manage the periodic rebalancing of your assets so that the amount of risk you take remains comfortable for you. You’ll also have to figure out some aspects of portfolio management, such as optimizing buying and selling of investments for greatest tax efficiency. That’s something robo-advisers such as Wealthfront and Betterment build into their allocation models and in some cases is beyond the ability of many individual investors.

Perhaps most important, when the market becomes disagreeable, you’ll need to have the discipline to keep your finger off the panic button (another reason a good human adviser may be preferable to a robo-adviser). When emotion enters buying and selling decisions, returns tend to fall.

Which is right for you?

Deciding whether to go with a robo-adviser or a human RIA shouldn’t be difficult. Keep in mind that you do not need to pay for services you won’t use. If your needs are simple—let’s say you just graduated from college or are starting to accumulate wealth—a robo-adviser could be adequate. If your financial situation is more complex—say you need guidance about leaving a sizable inheritance to your family, or need a referral to a tax-preparation firm for your small business—then the additional half-percent per year for a human adviser may be money well spent. The more complex your financial situation, the less likely you are to benefit from a robo-adviser.

This article originally appeared in the October 2014 issue of Consumer Reports Money Adviser.