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While robo-advisors still make up a small percentage of the asset management industry, they're disrupting it with automated, low-cost solutions that appeal to digitally savvy investors.

A robo-advisor is an automated investment service that can build and manage your portfolio - based on your goals and risk tolerance - using AI-based algorithms. Some services are fully automated, while others offer limited human interaction.

As Morningstar puts it:“Robo-advisors occupy a middle ground between a wealth manager and a do-it-yourself trading platform (1)."

The growth of the robo-advisor market is being fuelled by“the growing millennial and Gen Z investor populations who are digitally native and comfortable with technology-driven financial management” as well as a“rising preference for personalized financial planning, particularly amongst individuals with smaller investment portfolios,” according to a report by Data Insights Market (2).

While Gen Z and millennials might be driving adoption, the DiMarket report notes that robo-advisor platforms are increasingly targeting high-net-worth individuals by offering“personalized services and higher investment thresholds.”

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Human vs robo human advisor fees

Compared to human financial advisors, robo-advisors offer a low-cost alternative - especially for investors with smaller amounts of money to invest.

In 2024, the median robo-advisor fee was 0.25%, according to Morningstar (3). However, the fee could be slightly lower or higher, depending on the platform. It's sometimes paid as a flat monthly rate or annual fee.

Human advisors offer a few different fee structures. Many charge an AUM (assets under management) fee, which is a percentage of your assets. Typically it's 1.0% to 2.0% a year in Canada (4). They might also charge by the hour, offer a flat monthly or annual retainer fee or work on commission.

But they may have 'hidden' fees, such as management expense ratios (MERs) in mutual funds and exchange-traded funds (ETFs). So even if you're paying a 1% management fee to your advisor, you could also be paying a 1% MER fee within a mutual fund, for a total of 2%.

Robo-advisors, too, may have fees on these underlying funds - plus, there could be account maintenance or trading fees. So there's more to consider than the flat monthly fee. In some cases, a robo-advisor platform might offer an 'all-in' fee that can range from 0.5% to 1%.

Pros and cons of each approach

You don't need to be filthy rich in order to get started with a robo-advisor. According to Morningstar, about a quarter of robo-advisor platforms only require an account minimum of $50 or less (5).

This could be an option for those who only have a small amount of money to invest (where it wouldn't make sense to pay a percentage of assets under management). Also, some human advisors may have high minimum investment requirements or only work with high-net-worth individuals (6).

Robo-advisors could also appeal to new investors without a lot of institutional knowledge or more experienced, digitally-savvy investors who are comfortable with technology.

But not all robo-advisors are the same. Some may offer additional services, such as tax-loss harvesting, which helps you reduce the taxes you pay on any investment gains. So it's worth doing your homework to find the right platform for your needs.

A human advisor can offer advice for larger, more complex portfolios, as well as long-term financial planning, including estate planning, tax planning and insurance and risk management.

A human advisor can also provide reassurance and support during major life events or downturns in the market, possibly helping to prevent panic-selling.

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Comparing outcomes and risks

Robo-advisors help take the emotion out of investing, which could potentially result in better returns. But they don't necessarily outperform traditional financial advisors; it depends on various factors, including your risk tolerance, which securities you're invested in and even the quality of the algorithm (7).

Robo-advisors surveyed for The Globe and Mail's 2024 Robo-Advisor Guide said investors generated after-fee returns ranging from 22% to 26% for the year (ending Sept. 30). However, three-year annualized returns were lower, ranging from 5.5% to 8%.

With a human advisor, you can always pick up the phone and have a conversation. But what happens when your robo-advisor makes decisions with your portfolio that you don't agree with?

“When your AI stock-picking assistant mixes up a disastrous portfolio, you might be tempted to take it to court. But unfortunately, the algorithm itself can't be sued since it's not a real legal person,” according to Legal Reader (8).

While human advisors have a fiduciary duty to put their clients' interests ahead of their own, robo-advisors could breach this duty if the AI system“makes choices that benefit itself or the company more than the client,” such as recommending investments that earn higher fees for the company.

“However, this is a new area of law, and courts still need to deal with many cases like this,” according to Legal Reader (9).

For those who prefer to use a robo-advisor but want the support of a human, they may want to consider a hybrid option instead. Some robo-advisor platforms give you the option of working with a human advisor from time to time - though it may come at an additional cost.

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Article sources

We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.

Morningstar (1, 3,5 ), DiMarket (2 ); Cooper Pacific (4 ); SmartAsset (6 ); Investopedia (7 ); Legal Reader (8,9 )

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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