Over the past few years, fintech has transformed the finance industry as we once knew it. Historically, only the most experienced financial advisors were worth getting investment advice from. Nowadays, finance researchers and even computer algorithms are viewed as some of the best sources of credible financial advice for novice and seasoned investors alike.
Some of the greatest fintech developments in recent years have been robo advisors and peer-to-peer lending platforms. Robo advisors are computer algorithms designed to optimize customers’ investments and allocate funds into a spectrum of portfolio types ranging from very conservative to very aggressive, depending on an individual’s age and purported investment goals.
You’ve probably already heard about major robo advisors like Betterment, but what about the newer form we call “hybrid robo advisors?” This latter type of robo advising refers to a system in which portfolios are primarily controlled by computerized investment advisors. But, human financial advisors are also on hand for investors seeking further advice and support. Some of these hybrid robo advisors include Betterment Premium, Ellevest Premium, Personal Capital Advisors, Wealthsimple, and many more.
If leaving your investments solely up to a computer algorithm seems daunting, then investing with a hybrid robo advisor may be an excellent alternative. It’s certainly a booming industry. Some reports suggest $3.7 trillion of the world’s investable assets will be held by hybrid robo advisors by the year 2020.
Let’s explore the pros and cons of this newer type of robo advising to see if it’s right for you.
Pros and Cons of Using a Hybrid Robo Advisor
Advantages of Hybrid Robo Advisors
The primary advantage of hybrid advisors is that they attempt to combine the efficiency and stability of a computer algorithm with the human element of a personal financial advisor. A common concern among newer investors is that leaving an algorithm in control of their investments could leave them vulnerable to market volatility or online security threats. But, the opposite is actually true in many cases.
Studies have shown that robo advisors tend to outperform manually managed portfolios, and robo advisement companies have invested heavily into the security of their online platforms. Hybrid robo advisors offer additional peace of mind by giving customers access to a real person to speak to about their investments. And not just an unqualified customer service rep, either, you get access to a trained and experienced financial advisor.
Robo advisors are also preferable to human-only investment management. The overhead costs are much lower compared to traditional investment advising, which leads to lower portfolio management fees for customers.
Disadvantages of Hybrid Robo Advisors
Since you’re paying for access to a highly reputable investment advisor, hybrid robo advisors obviously charge higher fees than pure robo advisors. For example, a regular Betterment account charges 0.25% in management fees, while a Betterment Premium account charges 0.4%, which includes unlimited meetings with certified financial planners.
Wealthsimple gives all clients access to financial advisors, but it’s 0.5% fee costs more than some of its competitors. Other companies, like Schwab Intelligent Advisory, charge fees of 0.28% but you can’t invest unless you’re able to meet the account minimum.
Thus, the main downsides to hybrid robo advisors are related to costs. If the value of access to a certified financial planner outweighs the extra cost, however, then a hybrid robo advisor could be the way to go.
What’s the Best Option?
There’s no clear winner in the battle between human financial advisors, robo advisors, and hybrid robo advisors. It really comes down to what you value most from an investment platform. Do you prefer personalized advice? Efficient investment allocations? Or, low account management fees?
If you prefer the “set it and forget it” method to invest, then a pure robo advisor with no human element is likely a good option for you.
If you’re actively investing for a long-term goal like retirement and want continuous feedback on your progress from a financial expert, then the hybrid robo advisor would likely be a better option for you. As long as you research your options beforehand and write a list of your priorities when it comes to investing, then you’ll be well on your way to finding the best robo advisor for your financial goals.