Robo-Advisor vs. Discount Broker (How to Decide)

By Charles Joseph | Editor

If you’re looking to start investing, you’ve got a big choice ahead of you: should you use a traditional brokerage like Charles Schwab or Fidelity, or should you try a new robo-advisor like Betterment or Wealthfront?

Both options offer the potential to build a strong investment portfolio and grow your money. But the best choice for you will depend on your investment goals, risk tolerance, and desire to be hands-on with your portfolio.

Read on to learn the difference between robo-advisors and traditional brokers, then find out which one is right for you.

Robo-Advisors: Automated Investing for All

What Are Robo-Advisors?

Robo-advisors are automated investing platforms that use advanced algorithms to read the market and execute trades at optimal times.

They purport to remove the emotional element from investing — and thus make the most rational, lucrative trades. This low-risk strategy typically revolves around index funds and ETFs, which are generally very safe, diverse investments.

With a robo-advisor, all you need to do is decide how much money to invest, then let the algorithm handle the rest. You don’t need to read the market or obsessively keep watch over your portfolio — the robo-advisor does all of that for you.

Pros of Robo-Advisors

Low Barrier to Entry

Many robo-advisors let you get started with little-to-no money in your account. If you’re just starting out and don’t have a lot of money for your first investments, a robo-advisor can be a great way to get your foot in the door.

What’s more, you don’t need much prerequisite knowledge to get started with a robo-advisor. Since it does all the trading for you, you can just set it and forget it until you’re ready to cash out.

Mathematically-Backed Strategies

If you’re making your own investing decisions, excitement and panic can cause you to make poor trades — and lose a lot of money in the process.

But robo-advisors don’t feel emotions. They rely solely on math and proven investment theories to manage portfolios, so they’re able to consistently make the lowest-risk, highest-return trades.

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Lower Fees than Full-Service Brokers

Robo-advisors generally take around 0.25%-0.3% of your holdings in fees per year. This is considerably lower than the 1% or higher fees charged by full-service brokers.

Cons of Robo-Advisors

No Personalized Investing Advice

Most robo-advisors don’t offer one-on-one investing advice, so if you have any questions, you’re on your own. And those that do offer personalized help may charge you for the convenience — and the advice they give may not be as detailed or accurate as you’d like.

Little Flexibility When Choosing Investments

A typical robo-advisor invests in index funds, ETFs and/or mutual funds, but if you want to invest in other types of assets, you may be out of luck. You’ll hold the same portfolio as all of the robo-advisor’s other “clients”, with little ability to customize your holdings.

Potentially Higher Fees than a Discount Broker

Robo-advisors may be cheaper than full-service brokers, but they’re often more expensive than true DIY online brokers. You pay a premium to use the robo-advisor’s algorithm in lieu of managing your portfolio on your own.

Robo-Advisor vs Human Financial Advisor (Video)

Traditional Brokers: For the Hands-On Investor

What Are Traditional Brokers?

You’re probably familiar with the names of some of the biggest traditional brokers: Vanguard, Charles Schwab, Fidelity, E*TRADE and TD Ameritrade.

These brokers offer investment accounts, which allow you to buy and sell stocks, bonds, index funds, mutual funds and many other types of investments. They act as middlemen between you and the market, providing a safe place to store your investment money and keep track of your portfolio.

With traditional brokers, you ultimately call the shots: it’s up to you what you invest in, when you sell it and how you manage your holdings. There isn’t an algorithm behind the scenes to make decisions for you, which gives you a lot of freedom — and a lot of responsibility.

Full-Service Brokers vs. Discount Brokers

Traditional brokers fall into two categories: full-service brokers and discount/online brokers.

If you opt for a full-service broker, you’ll have access to advisors and market experts who can give you personalized, one-on-one investing advice. They can show you how to analyze the market, help you figure out your tax obligations, and even provide broader financial planning services.

Of course, this all comes at a cost: full-service brokers often charge hefty fees for each consultation, on top of taking an annual cut of your assets or commissions from your trades.

Discount brokers, on the other hand, leave you to make your own decisions without any input from a professional advisor. They’re often called online brokers because your only interactions with them are over the internet: you use their website or app to invest without ever talking to a real person.

But that’s where the “discount” comes in. Because they don’t have to pay their employees to give you advice, the fees they charge you are much lower than those charged by full-service brokers.

Pros of Traditional Brokers

Full Flexibility When Selecting Investments

Unlike robo-advisors, traditional brokers let you pick and choose what to buy and sell — and when to do it. Additionally, traditional brokers typically allow you to invest in a more diverse array of asset classes.

Potentially Lower Fees than Robo-Advisors

If you use a discount broker, you may cut your investment fees down to nearly nothing. Many discount brokers no longer charge commissions, maintenance fees or other fees, so you can make more from your investments.

Personalized, On-Demand Advice

Full-service brokers can answer any questions you have about investing and finances in general, using their specialized education and extensive experience to help you make the best calls.

And though many discount brokers leave all of your investing decisions up to you, some offer personalized financial advice for a small fee.

Cons of Traditional Brokers

Higher Barrier to Entry than Robo-Advisors

Many traditional brokers require a higher initial investment than robo-advisors do. This amount could be anywhere from a few hundred dollars (for discount brokers) to upwards of $100,000 (for full-service brokers).

More Time-Intensive and Hands-On than Robo-Advisors

If you use a traditional broker, you’ll need to do your own legwork: watch the market, research stocks, select your assets and time your trades.

Many people find this fun and rewarding — but if you don’t, it’ll seem like a tedious, mentally-taxing chore. And there’s a definite learning curve that new investors may not be ready to commit to yet.

Robo-Advisors Vs. Traditional Brokers: The Final Verdict

Choose a Robo-Advisor If…

…you’re looking for a low-stress, low-cost, low-risk, hands-off investing platform that you can simply set and forget.

…you’re a new investor without a lot of money to get started with — or a lot of knowledge regarding the world of investing.

…you’re comfortable entrusting your investment capital (and all the responsibility that comes with it) to a sophisticated computer algorithm.

Choose a Traditional Broker If…

…you like having the freedom to pick and choose which assets you own, or want a portfolio that includes many different types of assets.

…you want to maximize your returns by paying minimal fees to a discount broker… or don’t mind paying a premium for a full-service broker’s expertise.

…you’re interested in actively learning about investing, managing your portfolio, and potentially claiming higher rewards for your efforts.

Robo-Advisors: Betterment vs Wealthfront vs Vanguard vs Schwab (Video)

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