Investing: Self-Directed vs. Robo-Advisor vs. Financial Advisor

When you set out to invest, you first have to determine whether you’re going to handle everything yourself or outsource the process to a robo-advisor or financial advisor.

In this article, I’ll explain the three different ways you can manage your investments, how they differ and which one may be best for you.

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Defining and Comparing the 3 Major Investment Methods

If you’re reading this article, you probably either want to start investing or have already done so. Your choices for “how” are 1) to invest on your own, 2) to give your money to an automated investing company, known as a “robo-advisor,” or 3) to hire a full-service financial advisor.

But what are the differences between these three methods? I’ve written in-depth on each of them (links in sections below), but this article should serve as a summary and a look at money expert Clark Howard’s insight on each of the three.

 Annual FeesStock PickingTax/Estate PlanningRebalancingTax-Loss HarvestingRisk
Self-directed0%XXXVaries wildly
Financial advisor1%XVaries

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Deciding Which Investment Method Is Best for You

Self-directed: Are you looking just to invest and don't need help with anything more than that? Then you'll choose between doing it yourself and using a robo-advisor. The same is true if you don't have a lot of money to invest. The DIY option is probably best for you if:

  • You're interested in paying the fewest possible fees
  • You're emotionally disciplined
  • You understand the basics of a long-term investment strategy

Robo-advisor: If you don't need help beyond investing but you'd rather outsource it to someone else, using a robo-advisor could be your perfect solution.

Financial advisor: If you need help with your finances beyond investing, you may want to hire a financial advisor. That's especially true if you're nearing retirement or if your portfolio includes a large amount of money.

Still not clear on which of the three options to choose? I've made a decision tree that walks you through the choice step-by-step.

Should You Manage Your Own Portfolio?

When you start to invest your money, your first decision is whether you want to do it yourself or want to outsource it.

There’s nothing wrong with managing your own portfolio. In fact, if your financial life is simple and if you’re in the first few decades of your career, it may be preferable. You’ll avoid paying fees, and if you do your homework, you’ll probably end up investing your money in basically the same way they’d do for you.

Investing on your own opens a wide spectrum of possibilities, from day trading to putting every dollar into a target date fund. Active investing, or making frequent, sometimes short-term trades, involves more risk and can end up being more expensive. Passive investing, putting your money into target date funds or low-cost index funds, involves less risk but basically eliminates the probability that you’ll earn an outsized return.

If you decide to handle your own investments, make sure you know Clark's advice. Also, be sure that you're educated on the tax implications of your investments and that you're emotionally prepared for market swings.

What Is a Robo-Advisor and Who Should Use One?

Not long ago, if you wanted someone to invest your money for you, you needed to pay an advisor. Because of their fees and high minimum investment requirements, that just wasn’t possible for a lot of regular folks.

Around 2010, robo-advisors emerged as a new way to invest. Robo-advisors provide investment guidance that’s usually equivalent to what you’d get working with a financial planner, only the rates are much cheaper. Typically, you fill out a questionnaire focused on things like your age, income and retirement goals. The robo-advisor then recommends a pre-built diversified portfolio based on that information.

The portfolios typically include low-cost exchange-traded funds (ETFs) and bonds. They're designed to be stable and long term and will get you into the right mix of investments.

If you’re still in the “accumulation phase” of investing, this may be an method worth considering. Perhaps you don’t have many investable assets and don’t really need the other services good financial advisors offer.

If you'd like to outsource your portfolio and need help only with investing (not financial planning or tax strategy or estate planning), a robo-advisor could be perfect. You'll pay about 0.25% annually for automatic rebalancing, tax-loss harvesting and perhaps most importantly, a well-diversified portfolio that will put your investing on autopilot.

What Is a Financial Advisor and Who Should Use One?

A financial advisor is a professional who can give you advice and guidance on anything related to your finances — not just investing.

Financial advisors come from a wide range of educational backgrounds and sometimes have other titles (e.g., wealth manager), but you want a Certified Financial Planner (CFP). There’s a stringent process to earn that designation, and CFPs are bound by fiduciary duty. That means that they’re legally obligated to give you advice that’s going to help you the most even if it’s not the advice that earns them the most money.

I've written about the best places to find a financial advisor with the right qualifications.

Clark believes that financial advisors best serve investors who have already accumulated assets, want to make good decisions about their retirement and protect their future. In addition to financial planning, financial advisors are good at protecting you from yourself if you’re a skittish investor. They can also provide sound tax advice and estate planning.

You probably don’t need a financial advisor if you’re just starting out. In fact, most require you to make a large deposit before they’ll work with you.

The benchmark fee for a financial advisor in 2021 is about 1%, but there's some evidence that financial advisors can make up for those fees and more.

A Brief History of Investment Methods

At one time, if you wanted to invest, you really had just one option: hire a broker.

Trades were costly to execute.

But the investing landscape has changed significantly with more than one wave of disruption of the “old guard.”

In the late 1970s, companies like Charles Schwab started offering discounted commissions on trades. In the 2010s, Robinhood started offering no-cost trades.

That sort of disruption is typically good for the consumer.

The average expense ratio for mutual funds has declined every year since 2000. Fintech has made investing accessible to anyone via free trades, low (or no) minimum deposits, mobile trading apps, fractional shares trading and more.

Investment Methods Are Slowly Blending

You won’t find many older investment companies at the bleeding edge of innovation. But they’re happy to adapt to new ideas if their modern digital competitors get traction with them.

New companies competing for your investment dollars also add features that they may lack in the beginning in an attempt to emulate older competitors and offer a wider range of services.

As a result, the lines between the different investment methods are getting blurred. Two of the companies Clark recommends offer access to Certified Financial Planners while investing your money via a robo-advisor. Some robo-advisors offer impressive financial planning tools. Brokerages that have long served self-directed retail investors and/or have offered personal financial advising services are introducing robo-advisors as well.

Now that you understand the three investment methods, it will be easier for you to recognize and evaluate those hybrid options.

Clark Howard’s Investment Strategy

The great thing about Clark's free, simple investing roadmap is that his recommendations apply no matter which investment method you select.

Clark recommends putting your money into a target date fund if you invest on your own. He also wants you to automate your investing. And he says that, over time, you should increase the amount you regularly add to your investments. If your employer offers a retirement savings plan, Clark says that's the first place to invest (especially if the company offers a match).

Of course, you should have savings in an emergency fund before you start investing.

Use This Decision Tree To Pick an Investment Method

1. Have you built an emergency fund?

Yes: Proceed to No. 2.

No: Start by stashing a little money from every paycheck into a savings account at a credit union or online bank. Click here for more of Clark's perspective on emergency funds.

2. Are you more than 25 years from retirement?

Yes: You probably don't need a financial advisor yet even if you have considerable assets. Most people consider hiring a financial advisor when they're making decisions for retirement beyond saving and investing. Proceed to No. 5.

No: Proceed to No. 3.

3. Are either of these true: a) Your personal finances are complex (you have a significant amount of money; you own a business; you want to retire early) or b) You are nearing retirement age?

Yes: Proceed to No. 4.

No: Hire a financial advisor if you feel that you have a good reason to do so. But there's a strong chance you don't need one. Proceed to No. 5.

4. Do you need any of these: retirement, tax, estate or general financial planning?

Yes: Consider hiring a financial advisor. Click here to read Clark's recommendations.

No: Proceed to No. 5.

5. Do you really want to handle your own investments?

Yes: Start by putting your money into a target date fund or into low-cost index funds.

No: Consider investing with one of the best robo-advsiors.

Final Thoughts

There’s nothing wrong with being ambitious and investing on your own. It’s OK to take reasonable risks, especially if you’ve established a strong core investment portfolio that follows Clark’s recommendations.

But for most people, mitigating risk and taking advantage of moderate returns over long periods of time is a good choice. You can keep it simple by investing in a target date fund or through a robo-advisor.

The two enemies of long-term profits are too much risk and too many fees. That doesn’t mean you should avoid financial advisors at all costs. Just consider whether you need a financial advisor for more than just investing.

No matter which method you use to invest, make sure you find a reasonably-priced option.

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