Money expert Clark Howard often recommends Vanguard Personal Advisor Services (PAS) to people who want to hire a financial advisor.
If you’re not familiar with PAS, it’s a hybrid robo-advisor that combines automated investing with access to human financial advisors.
But if you’ve heard Clark recommend PAS (or even if you haven’t), you may be wondering: What’s the difference between a hybrid robo-advisor and a full-service financial advisor? And which option is best for me?
Hybrid advisors are less expensive. But financial advisors offer more personalized attention. In this article, I’ll explain all the differences between the two models.
Table of Contents
- What Is a Financial Advisor?
- What Is a Hybrid Robo-Advisor?
- Full-Service Advisor vs. Hybrid Robo-Advisor: Costs
- Full-Service Advisor vs. Hybrid Robo-Advisor: Financial Advice
- Who Should Use a Full-Service Financial Advisor?
- Who Should Use a Hybrid Robo-Advisor?
What Is a Financial Advisor?
A financial advisor is a human who can give you advice on almost any financial topic.
Good financial advisors go well beyond investing. They get to know your long-term goals and make sure that your entire financial picture is pointed toward meeting those goals.
Often you can have a decades-long relationship with this person. You can continue working with them even after you’re retired. They typically charge a 1% annual fee or slightly less, based on the size of the investment portfolio that they’re managing for you.
They provide guidance in many areas including tax planning, insurance strategy, retirement income, estate planning and college savings.
What Is a Hybrid Robo-Advisor?
A hybrid robo-advisor gives its customers two things:
- Automated investing through a robo-advisor.
- Access to full-service financial advisors on an as-needed basis.
Investing via a Robo-Advisor
Investing with a robo-advisor involves making automated contributions to a pre-built portfolio that’s been matched to your goals and risk tolerance.
Most of the time, an algorithm determines which of those pre-built portfolios is right for you, although the options usually aren’t complicated. And you can usually reject the algorithm’s recommendation in favor of a different portfolio option.
Robo-advisor portfolios are typically well diversified and include plenty of ETFs and bonds.
Because the investment component of a hybrid robo-advisor is automated, companies can offer cheaper expense ratios: typically between 0.30% and 0.89%. And for the most part, hybrid robo-advisors require lower minimum investments than full-service advisors.
Advice via Financial Advisors
Some companies assign an advisor to you if you’re using their hybrid service, but often you’re talking to the advisor “on duty” during the time you request to chat.
Usually you’re limited to getting coaching and advice on a specific topic rather than having a holistic financial planning session. You’ll likely meet with the advisor on the phone or through a video call. You also get access to digital financial planning tools that incorporate your investments and goals.
Example of a hybrid robo-advisor: Vanguard Personal Advisor Services.
Full-Service Advisor vs. Hybrid Robo-Advisor: Costs
Financial advisors will have their time to soak up accolades in this article soon.
But if you’re judging human advisors against the hybrid model based on fees, the hybrid model wins.
It’s difficult to find published annual fee rates on a financial advisor’s website. According to Advisory HQ, the average financial advisor fee for clients with $1 million is 1.02% per year. On average, those fees decrease the more money a client gives to a financial advisor to manage.
The hybrid robo-advisors I’ve reviewed range from 0.30% to 0.89% per year, generally requiring a minimum investment between $25,000 and $100,000. Here’s a look at the costs associated with the robo-advisor models at Vanguard, Schwab and Fidelity.
|Company/Product||Advisory Fees||Weighted Average Expense Ratio||Minimum Deposit||4-Year Annualized Return|
|Vanguard Personal Advisor Services||0.30%||0.07%*||$50,000||9.00%*|
|Schwab Intelligent Portfolios Premium||$300 up front + $30/month||0.18%*||$25,000||8.69%*|
|Fidelity Personalized Planning & Advice||0.50%||0.00%||$25,000||10.08%*|
*Based on Backend Benchmarking’s Fourth Quarter 2020 Robo Report. Robo-advisors recommend different portfolios to different clients. Your actual results will vary based on the portfolio option you select as well as future market performance.
How Much Do Fees Matter
The difference between, say, the 0.50% annual fee for Fidelity’s hybrid model and the 1.02% average annual fee for financial advisor clients may seem small on paper.
But Clark says that the fees you pay for your investments are the most important factor in determining your future wealth.
How big of an impact can fees make? Let’s create a quick hypothetical:
- $100,000 investment
- 30 years to grow
- 10% annualized return
Here’s how much money that $100,000 would become at different fee levels:
|Annual Fee||Portfolio After 30 Years||Difference|
Again, this chart assumes that the average annual return will be the same for every company, which will never be the case.
But if you isolate fees, small differences can become hundreds of thousands of dollars over decades of investing.
For the most part, hybrid robo-advisors charge an annual advisory fee equal to a percentage of the money you invest with them.
Schwab Intelligent Portfolios Premium is a notable exception, as it charges an initial $300 planning fee and then $30 per month thereafter.
However, there are all types of business models for financial advisors. Financial advisors can get paid in these ways:
- Hourly rate
- Annual fee based on assets under management (AUM)
- Flat rate per service (example: $1,500 to create a financial roadmap)
- Commissions from third parties
When you hire a financial advisor, you want a fee-only fiduciary.
“Fee-only” means that the financial advisor doesn’t earn any commissions for selling you specific investments. “Fiduciary” means the financial advisor has a legal obligation to do what’s best for you financially even if it’s not what’s best for them.
The Garrett Planning Network is an excellent resource for finding fee-only fiduciaries you can hire on an hourly basis for consulting. The National Association of Personal Financial Advisors (NAPFA) is great for finding fee-only fiduciary advisors for more long-term relationships.
You want to avoid hiring brokers. They get paid to execute transactions for you, earn a large part of their compensation from commissions and are not bound by fiduciary duty.
If you do the math, the simplicity of the hybrid robo-advisor’s annual fees scores a big win over full-service financial advisors when it comes to cost. In my opinion, finding and vetting fee-only fiduciary financial advisors is more complicated than it should be.
Full-Service Advisor vs. Hybrid Robo-Advisor: Financial Advice
The hybrid robo-advisor model got its ticker-tape parade earlier.
Financial advisors get to tilt the scales back in their direction by offering more customized advice based on personal long-term relationships.
It’s up to you to determine which way the scales tip for you. The answer depends on your circumstances.
Clark says you’re not going to get the level of personal attention from a hybrid advisor that you will likely get in return for paying 1% annually to a financial advisor.
Financial Advisors Discourage Panic Selling
One of the biggest benefits of working with a financial advisor is that they can serve as an armchair psychologist, an emotional coach and an accountability partner when the market goes through its inevitable swings.
Selling during a downturn can be devastating to your portfolio long-term, because the majority of stock market gains are concentrated within a very small number of days, often on the heels of a downturn.
A good financial advisor will be there to remind you of your long-term retirement investment strategy and talk you off of a cliff if seeing your nest egg shrinking makes you feel less than rational (a perfectly normal reaction).
“The hand-holding when the chips are down becomes a very valuable thing for a certain segment of people who would panic sell,” Clark says.
“When there’s tumult in the market, you’re not going to be able to easily reach somebody and get that kind of advice and guidance [with the hybrid models] when you might be most in a mode to panic.”
Long-Term Relationships With Hybrid Robo-Advisors Don’t Exist
As I mentioned earlier, the value of a good full-service financial advisor goes beyond simply handling your investments. You can pay a good robo-advisor 0.25% per year to do that.
Financial advisors theoretically build relationships with clients over many years. They should take time to understand your family, your career, your goals and your timeline. That way they can make sure all of your financial levers are aligned toward reaching your goals.
That includes your tax strategy, your estate plan, covering long-term healthcare costs, setting up Medicare, when and how to draw from your investment portfolio once you retire, saving for a child’s college education, buying an appropriate life insurance policy and more.
You may be able to get a “dedicated advisor” through a hybrid model. For example, Vanguard’s PAS will assign you an individual advisor to talk to every time once you’ve invested $500,000.
However, your chances of keeping the same advisor for decades with the hybrid model are “0%,” according to Clark.
Personal Relationships Can Make for Better Financial Advice
A strong personal understanding of your goals, financial habits and your family — the types of things that are difficult to learn through one 30-minute phone call — are important.
That’s especially true when it comes to nuanced services beyond investing. In those cases, you can compare the advice a financial advisor can provide to advice from a hybrid robo-advisor as you’d compare getting a custom-made suit vs. buying one off the rack.
A financial advisor can design a whole menu around your unique circumstances, says CERTIFIED FINANCIAL PLANNER™ Wes Moss, a managing partner with Capital Investment Advisors in Atlanta, Georgia.
“It’s hard for you to be a new advisor with somebody and have the depth of knowledge [you need about someone] to try to bring in all those other pieces,” Moss says.
“Those are usually for more long-term relationships. Financial situations for families are as unique as people’s fingerprints. Everybody is different.”
What Level of Service Can I Expect From a Hybrid Robo-Advisor?
I’ve talked a lot about the financial advice you can expect to get from a good traditional, full-service advisor.
On the hybrid robo-advisor side, the level of service you get can vary greatly. For example, Fidelity offers 30-minute coaching sessions on specific topics. Its advisors are fiduciaries, but given the time and topic limitations, the level of depth probably won’t be the same as you’d get from a traditional full-service advisor.
However, if you give them enough money to unlock all the features, Vanguard’s Personal Advisor Services and Personal Capital each offer a depth and personalization of service that probably comes close to what you’d get from a traditional advisor.
Who Should Use a Full-Service Financial Advisor?
Here are some of the reasons to work with a full-service financial advisor rather than a hybrid robo-advisor:
- You feel especially flustered when the market crashes. We’re all born with a “fight or flight” instinct. We may not need to sprint from dangerous wild animals frequently, but there are situations when stress is helpful. Managing your investments is not one of them. If you’re prone to emotional swings when the market goes down, you may need a steady hand to prevent you from making poor decisions.
- Your finances are complicated. If your financial life is complex, you may need the extra level of service you get from a traditional advisor. Complex finances usually stem from one of two things (or a combination of both): You have a substantial amount of money or you have a family. If you have just a spouse or partner, perhaps there won’t be many extra wrinkles to consider. But if your family includes multiple children and grandchildren or you have a blended family, things can get complicated.
- You prefer someone you know and trust. Perhaps you’re much more comfortable working through financial advice and guidance with a person you can meet with face-to-face, get to know long-term and talk to whenever you need something. For some people, that’s going to be more comfortable than dealing with phone calls with a rotating cast of advisors.
Who Should Use a Hybrid Robo-Advisor?
Here are some of the reasons to work with a hybrid robo-advisor rather than a financial advisor:
- You’re OK being more independent. You won’t be totally on your own with a hybrid robo-advisor. But you also won’t get quite as much personal guidance as a full-service advisor offers. If you’re comfortable handling some of your finances yourself, it may not be worth it to you to pay extra for help.
- You have a modest amount of money to invest. The less investable money you have, the less complex your financial decisions probably are. If this is the case for you, the help that financial advisors provide beyond investing may not be as valuable. You probably don’t need estate planning right now, for example, if you have $50,000 to invest for your retirement.
- Lower fees are important to you. If your eyes are open to the long-term impact of fees on your investment portfolio, you may want to hold off on paying 1% to a financial advisor until and unless you really need one. Also keep in mind that a 1% fee is going to equate to more dollars the more money you invest. But a 1% fee may be more consequential to your lifestyle the less money you have.
- You’re comfortable with digital financial planning tools. Hybrid robo-advisors often include excellent digital planning tools. The tools can give you automated advice about your investment portfolio, how much money you need to save every month and your percentage chances of meeting your retirement goal. That’s at least going to get you some of what you’d get from a financial advisor.
Choosing between a hybrid robo-advisor and a full-service financial advisor can be confusing.
The hybrid model is fairly new. Technology has closed the gap between what kinds of companies offer which services, so the differences between models are somewhat subtle.
And there aren’t a lot of people writing or talking about the hybrid model vs. the full-service model. So I hope this article has been helpful to you.
Clark loves Vanguard’s PAS hybrid robo-advisor. It’s usually his first recommendation for anyone looking for financial advice. Whether it’s through Vanguard or another company, the hybrid model is a wonderful lower-cost solution that will work for most people.
It’s important to understand your financial goals, needs and personality before making a decision on which model to use. Although fees are a massively important factor, they aren’t the only factor you should consider. Clark fully endorses hiring good fee-only fiduciaries as well.
If you think the full-service, 1% model is right for you, go for it. Just make sure you take the time to research the person you’re hiring.