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The Value of a Financial Advisor vs. the Cost of a Robo-Advisor

With the rise of financial planning software and algorithms, is a financial advisor even necessary anymore?

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Today is a very different time than it was 28 years ago when E-Trade first started its online trading platform. There are apps like Robinhood and Acorn that allow you to save and invest minimal amounts. Nowadays, you can even buy small fractions of a share of stock. Even better, most stock trading is free through discount brokerage firms. In the 1990s and basically all the way up to last year, trades ranged from $5 to $100 a trade, or based on a percentage of a purchase price. With the growth of the internet, Gen X and the millennial generation have grown up using computers in schools and wanting to try their hand at self-directed investing.

On top of that, most passive index funds have outperformed active management. However, technology also has given financial advisors better tools to help clients financially plan, along with online platforms that allow them to correspond better with the newer generations.

So, are financial advisors necessary anymore? Should you just use a robo-advisor, which provides digital financial advice based on mathematical rules or algorithms, to handle your financial needs or allocation?

Asset Allocation

From a financial advisor’s perspective, I would say it depends on what the value is to you. If you’re looking at your relationship with your financial advisor as simply an “asset allocation” relationship, then it depends on the value of your time versus paying someone to do the research and implementation necessary.

During the last six months, active management has really shown its true value in the midst of the pandemic, from a relationship perspective. You can hire a robo-advisor to develop your asset allocation and management for as low as 0.25 percent a year. However, the problem with these robo-advisor platforms is they don’t truly educate the clients on their investments. The investments are also very dull, typically, lacking good alternative exposure. Put simply, they are allocating your assets into a cookie-cutter, one-size-fits-all portfolio.

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Good financial advisors can help lower the overall risk of your portfolio using alternatives not available on robo-platforms, such as structured notes, REITS, private equity, etc. Tax harvesting is also a huge value add that financial advisors provide. In my opinion, as soon as a person turns 30, has children and/or has at least $100,000 in investable assets, a financial advisor starts to add value.

Bear in mind, there are advisors that just charge a fee for passive portfolio allocation, which you can get from a robo-advisor for a lot less, meaning there is value for some lower net worth clients to start with a robo-advisor. However, I believe the value of a good financial advisor who takes into account all areas of financial planning when constructing and managing your portfolio is well worth the additional cost.

Financial Planning

In my opinion, this is where a good financial advisor really adds the most value to their client. I would start off only using a CFP® professional, but I would not stop there. You want to ask specific questions as to what an advisor’s specific process is and how he or she develops your plan. There are many financial planners who have the credentials but do not actually spend any time with you on an ongoing basis working on your financial plan. Do they update your plan with you, truly understand your entire financial picture and have the knowledge in various areas to tie in your investments, insurance, estate planning and legacy planning needs? Are they up to date with all the new products and tools? Simply put, are they a “student of the game” and have a passion for financial planning? These questions are extremely important.

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There is financial planning software that you can pay for and try to use on your own. The problem with the software is you need to know how to tie in all the areas of financial planning, and the software doesn’t think outside the box. This is where a financial advisor/planner becomes extremely helpful. Financial planning is an art—not a calculation. Software is like a great paint brush without the artist.

Estate Planning

Most high net worth clients have an estate planner who has helped them prepare their wills, trusts, durable POA, health care POA, etc. Working with a quality financial advisor allows you to have someone who understands your entire financial picture to help you with ideas for your estate plan. A good financial advisor has many clients who might have similar wants or needs as you and can share ideas that have worked for them to see if they correlate with what you are looking to achieve. All estate planners are different as well, and some might not go the extra mile for you. Having many estate attorneys who I’ve worked with allows me, as a financial advisor, to help you pick and choose the right attorney for your situation. Most good financial planners or advisors use a few and do not get compensated for those referrals, helping to avoid conflicts of interest.

Be careful of the advisor who uses just one attorney or an advisor working out of an estate planning office. Is your estate plan pretty simple or does it have any complexities, like heirs with disabilities, generation skipping wants or estate tax issues? This also allows your financial advisor to make sure your accounts under advisement and any accounts held away are titled correctly based on your estate planning needs. Working with the right advisor allows you to make sure that as life events happen, or perhaps the estate laws change, you can check in with your estate planner to see what might need to be updated. I’ve never met robo-advisors that offer any service like this on an ongoing basis, as an algorithm doesn’t have real-life experience.


A tax return unlocks many things planners and advisors need to know when creating and updating your financial plan. It also shows us what your accountant might be doing or, in some cases, not doing, that should be changed to help you achieve maximum results. It allows us to see how a different strategy might need to be implemented based on your tax situation.

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A robo-advisor asks “what tax bracket you are in?” The software can’t actually know the rest of your estate planning needs or what might be coming up in a year or two. Most of these software platforms take months to update when tax law changes occur. A robo-advisor doesn’t know your capital gains situation on outside accounts, therefore it’s not able to harvest losses to offset gains. It also won’t be able to help you with special ways to save like a backdoor Roth IRA. A good financial advisor adds tremendous value in this area as well. Software tends not to be creative.

Investing in Knowledge

I would conclude the robo-advisor does have a place for someone just starting out. Many of the items that financial advisors handled 30 years ago can be done through a robo-advisor, like simply developing a dollar cost average process or developing asset allocation construction.

I think what an advisor does on top of all the things mentioned in this piece is understand the psychology of their clients and help them weather the storm that comes from market volatility and the ever-changing overload of information pushed out on a daily basis by media. Most of this information overload can cause clients to use emotion or gut feelings to craft their portfolio. If an advisor can help you stay invested when every emotion is telling you to pull your money out at the exact time you should be staying invested or adding, I would say there is huge value there, along with all their other areas of expertise.

Simply put, if you’re using a financial advisor for asset allocation purposes only, then nine out of 10 times, you’re probably paying too much. If you are taking advantage of the vast information a great financial advisor provides, such as estate planning, tax planning, financial planning, alternative investment allocation and asset allocation, the value is immense. As Benjamin Franklin said, “An investment in knowledge pays the best interest.”


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Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc.
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