Robo adviser v financial adviser: What's the difference?

Technology has been a game-changer in many aspects of our lives, including the way we manage our money. And a newer type of financial advice known as "digital" or "robo" advice is filling a key gap in the market. But how do robo advisers stack up against traditional financial advisers? We look at how both types of advisers work, the pros and cons of each, the key differences between the two and how to choose the right option for you.

What is a financial adviser? 

Financial advisers are professionals who help you plan and manage your money. They may offer simple advice on budgeting and saving through to complex matters such as planning for retirement.  

You may choose to speak to a financial adviser on a one-off matter like managing an inheritance or for broader support with a long-term financial plan. 

No matter what the case, all financial advisers are required to hold an Australian Financial Services Licence (AFSL), so you can be confident in the advice and recommendations you receive.  

A financial adviser can help you get more from your money. However, there are pros and cons to weigh up. 

The pros of a financial adviser  

• Personalised advice: The advice you receive should be tailored to your situation, tolerance for risk and personal goals.  
• Expertise and knowledge: A financial adviser can give you the benefit of expertise across everything from managing cash to investing and retirement planning while also staying on top of the latest rules around tax, superannuation, government entitlements and more. 
• A sense of being in control: Working with an adviser can help you feel more in control of your money. One study found 80% of people who use a financial adviser are less worried about money.  

The cons of a financial adviser  

• The cost: A key stumbling block can be the cost of financial advice. Research by Adviser Ratings found that only 6% of advisers have fees for new clients under $1,500. The median fee for ongoing advice in 2023 was $3,960. This can leave many people priced out of advice. 
• A shortage of financial advisers: Rising costs and increased regulation have seen adviser numbers fall to around 15,600 nationally, down from almost 28,000 in 2018. This may make it hard to find a local adviser you feel comfortable with, who charges fees that suit your budget. 
• Unclear fees: Financial advisers can charge a variety of fees such as a flat fee for an annual portfolio review or financial plan, an hourly rate to answer your questions, a fee based on a percentage of your investments, and commissions on insurance policies. You need to be clear on what you'll be asked to pay. 

What is a robo adviser?  

A robo adviser is an online platform that provides automated investing services underpinned by complex computer algorithms that match investors with a particular investment portfolio. Typically, you will be asked to complete a questionnaire asking about you, your life stage, goals and how you feel about risk.  

From here, the robo adviser will recommend an investment portfolio, often made up of a basket of low cost exchange traded funds (ETFs).  

You can track the progress of your portfolio online 24/7 and, behind the scenes, the robo adviser will automatically rebalance your portfolio so it continues to match your needs.  

A robo adviser can be a simple, affordable way to start and grow an investment portfolio. But it's a good idea to weigh up the pros and cons. 

The pros of a robo adviser  

• The cost: Robo advice is far more affordable than face-to-face advice. As a guide, InvestSMART, which uses a capped fee model, charges fees starting at just $55 annually. For investments over $100,000 the annual fee is capped at a maximum of $550. 
• Accessibility: You can start investing any time 24/7, and as it's all done online, you can become an investor from the comfort of home or anywhere you have internet access. 
• Lack of human bias: The investments recommended by a robo adviser are based on your needs while matching your appetite for risk. Unlike a human adviser, the recommendations you receive are free from product or provider preferences, without any personal biases. 

The cons of a robo adviser  

• No face-to-face contact: If you're keen on forming a long-term relationship with another person, this type of personal contact is more readily available with a traditional financial advice model.
• A focus on investment advice: Robo advice is primarily focused on investing and isn't suited to other types of support, such as navigating a divorce or managing a redundancy payout.
• Limited investment options: Most robo advisers put together diverse portfolios made up of various baskets of ETFs. It's not suitable if you plan to invest in directly held assets such as property, cryptocurrencies or alternative investments. 

What's the difference between a financial adviser and a robo adviser? 

Both traditional advisers and robo advisers play a valuable role though there are key differences between the two. Here are some we haven't already looked at: 

• Minimum capital: The low cost of robo advisers makes them accessible to virtually all Australians. On the other hand, a traditional adviser may only take you on as a client if you have a certain amount of capital to invest.  
• Management style: Robo advisers usually recommend a portfolio made up of various ETFs. Most (though not all) ETFs are passively managed, aiming to match the returns of a particular market index. A financial adviser is more likely to take an actively managed approach in a bid to beat the market. This contributes to higher costs though research confirms that an active approach is no guarantee of outperforming market returns.  
• Speed: If you want to get started investing sooner, robo advice can have you up and running in minutes. No need to make an appointment or take time off work for a meeting. Most of your contact is via emails, phone calls, and your personalised portfolio dashboard. It means you can become an investor - and start building long-term wealth - sooner. 

Both financial advisers and robo advisers are required to hold an AFSL. So you can be confident both are highly regulated.  

How do I choose the right option for me?

The decision to use a robo adviser rather than financial adviser can come down to five main factors: 

• You only need help selecting and managing investments 
• You don't want to pay high fees 
• You have limited money to invest 
• You are new to investing or happy being a hands-off investor  
• You are comfortable with the diversification and low fees that ETFs provide. 

Of course, you can always mix and match. You may, for example, partner with a financial adviser for certain aspects of your financial well-being, while using a robo adviser to manage your investments.  

Key takeaways  

The world of money is becoming more complex. Financial stress levels in Australia are at their highest point in 10 years and just one in three working Australians see themselves as financially secure, according to AMP's latest Financial Wellness report. Taking control of your future by investing for tomorrow matters.  

Regardless of whether you choose a traditional adviser or the more modern version of robo advice, the support you receive can go a long way to helping you get more from your money and achieve personal goals.