Robo Advisors vs. Traditional Advisors: Which One Should You Choose?

Financial advisory can be quite opaque. Many clients find it difficult to understand how their advisor is making investment decisions on their behalf, and whether they could be generating higher annualized returns if they switched to a robo advisor.

The inherent benefits and drawbacks of both robo advisors and traditional advisors mean that both of these options cater to particular client needs, which makes it crucial for investors to carefully consider which is the right option for them.

In this article, we’ll help you understand what robo-advisors are, how they operate, and what the benefits and drawbacks are of using one. We’ll also introduce you to the first robo advisor focused exclusively on private credit–and one that has a $100 minimum investment requirement, so you can get started immediately should you decide to ‘test the water.’

**Key Takeaways **

• Robo advisors are digital platforms that automate the investment experience through the use of algorithmic technology
• There are numerous benefits to robo advisors, including lower costs and digital convenience, but there are also drawbacks, including a lack of personalization and limited investment options
• Heron Finance–the first robo advisor focused exclusively on private credit–offers accredited investors an opportunity to try out a robo-advisor with a $100 minimum investment requirement

What is a Robo Advisor?

A Robo advisor is a digital platform that provides algorithmically-driven financial advisory with minimal or no human supervision.

This kind of platform works by collecting information from clients about their current financial situation, as well as their goals and objectives. Robo advisors then use that data to automate investment on behalf of the client, including periodically rebalancing the client’s portfolio.^[1]

In short, robo advisors provide a ‘set it and forget it’ investment experience, enabling them to provide low-cost investment options to clients.

How Do Robo Advisors Work?

Robo advisors leverage technology to offer a modern, efficient and streamlined investment experience. These platforms eliminate the need for lengthy in-person meetings with financial advisors by using computer algorithms for portfolio construction and rebalancing.^[2]

The process is both user-friendly and straightforward:

1. The client typically answers a few questions about risk tolerance, financial goals, and investment preferences,
2. Robo advisors analyze this data to allocate client assets into a diversified portfolio catered to their specifications.
3. The platform continuously monitors the portfolio, and typically rebalances the investment allocations to match the client’s preferences and objectives.

In addition to the above, robo advisors also provide real-time updates on portfolio performance and current market trends.^[3]

Are Robo Advisors Worth it?

As robo advisors offer a low-cost approach to financial planning and investment, they have become an increasingly popular choice among investors.^[4] That said, there are benefits to utilizing a traditional (human) financial advisor–namely that they can provide both personalized advice and broader financial services, including retirement planning and estate planning.^[5]

So which should you choose?

The answer is entirely dependent on your personal preferences and financial goals. To help you make an informed decision, let’s break down the benefits and drawbacks of using a robo advisor.

Key Benefits:

• Lower Costs: The obvious benefit is that compared to human financial advisors, robo advisors are usually a more cost-effective option due to their lower rates and reduced overhead costs.^[6]
• Automation and Accessibility: Robo advisors offer automated and hassle-free asset management services making them a practical choice for clients who prefer convenience.
• Digital Experience: Robo advisors offer a seamless digital investment experience, enabling clients to manage their investment portfolios in a user-friendly manner via their laptop or mobile phone.
• Fraud Mitigation: By utilizing machine learning and cloud-based applications, robo advisors can reduce the risk of both fraudulent activity and human error.
• Rebalancing and Tax Optimization: These platforms often provide automatic portfolio rebalancing, and some might also offer tax-loss harvesting, which can help save on taxes.^[7]

Primary Risks:

• Lack of Personalization: Robo advisors might not fully cater to individual financial goals, risk tolerance, or unique circumstances due to their lack of personalized advice.
• Limited Investment Options: Robo advisors typically provide fewer options compared to human advisors, making them less suitable for those with specialized financial considerations.
• No Emotional Support: Robo advisors cannot provide support or guidance during times of economic distress, which some clients seek from their financial advisors. Some robo-advisors do offer hybrid solutions, where clients can mix automated investment with advice from a human financial advisor, yet these often come with an additional fee associated.^[8]

One should always consider the pros and cons of any investment decision–though experimenting with a low cost robo advisor would be an excellent way of testing the water to see if using a robo advisor is the right fit.

The First-Ever Robo Advisor Exclusively for Private Credit

While many popular robo advisors like Betterment and Wealthfront dot the financial landscape, newer entrants are distinguishing themselves by focusing on specific asset classes.

One example is Heron Finance, the first-ever robo advisor exclusively focused on private credit.

Private credit has long been part of the investment strategy of institutions and the ultra-wealthy. Currently, the asset class is booming, as 2023 experienced record-breaking private credit fundraises and deals, with investors able to secure double digit annualized returns.^[9]

Unfortunately, due to the large capital investment requirements, individual investors have traditionally been unable to access private credit transactions. The good news is, Heron Finance is changing that. The robo advisor provides accredited investors access to private credit deals without the large minimum investment requirement.

So this is a perfect opportunity to dip your toe into the robo advisor water–while diversifying your investment portfolio at the same time.

Heron Finance is available to accredited investors only, but the platform makes the accreditation process easy. Here is a brief article which outlines the 4-step process for verifying your accreditation status through Heron Finance.