Why I Chose a Managed Investment Account Over a Robo-Advisor
Figuring out the best way to invest your money in stocks can be challenging, especially for novice investors. Many variables can affect your portfolio’s performance, and several factors are outside your control.
One thing you can control is how your money will be managed. Using a robo-advisor has advantages, as does having an actively managed account.
Ultimately, choosing which works best depends on your investment goals, appetite for risk, overall business acumen, and familiarity with public equities markets.
Review the factors below and weigh the pros and cons of each to help determine whether you should use a robo-advisor or seek the insight of a financial advisor when pursuing investment opportunities.
What Is a Robo-Advisor?
Robo-advisors are digital investment services that simplify the investing process for novices and more sophisticated investors seeking a “set-it-and-forget-it” investment approach.
Based on user input, a robo-advisor generates a portfolio of assets that align with the investor’s risk profile and investment goals.
Investors can expect a heavy mix of exchange-traded funds and little diversity among assets such as growth and blue-chip stocks.
The tradeoff: lower fees and less time spent managing your portfolio.
What Is a Managed Brokerage Account?
If you prefer handing investing duties over to a professional, you may want a managed brokerage account.
An investment firm, certified financial advisor (CFA), or registered investment advisor (RIA) will help you construct a diversified portfolio that may include a mix of public stocks, bonds, ETFs, mutual funds, real estate investment trusts, and other active and passive investment vehicles.
You’ll benefit from the more personalized tax and investment strategies, but the human interaction and added expertise come with higher fees, which are typically a small percentage based on the total value of assets under management.
Compare Brokerages
The best brokers allow you to invest in various financial products, including mutual funds, stocks, and bonds. Shop and compare online brokerages to find the lowest fees and opening balances.
Comparing Robo-Advisors and Financial Advisors: Key Differences
The comparison below highlights the main differences and can help investors choose the option that best suits their needs and preferences.
What’s Better, a Robo-Advisor or a Managed Account?
The answer to that question lies in your personal financial situation and knowledge.
When faced with this decision at the start of 2024, my wife and I decided that a managed account offered advantages over a robo-advisor for investing the final tranche of an inheritance. Here are four reasons why this was our play:
Need for Balanced Returns
The balance of the inheritance wasn’t life-changing money, but it was enough to deliver a decent monthly stipend without invading the principal balance if the account could deliver returns averaging 5-6%.
We thought a financial advisor would be nimbler and adjust investments based on changing market conditions to better meet that primary investment goal.
Diversity
When the trust was under management, assets were heavily skewed towards ETFs. This makes sense since exchange-traded funds are a basket of securities, which can make them less susceptible to broader price movements when one or two securities within the fund trend downward.
Yet the focus on ETFs always felt like the trust managers were more interested in protecting the principal balance than maximizing investment opportunities and realizing portfolio growth.
When presented with investment offerings from a robo-advisor, there was another heavy concentration of ETFs. We wanted greater diversity in public stocks.
Investment Profile
ETFs may include some blue-chip stocks, but it’s not the same as direct investment in those equities.
After redistributing assets, our asset list includes several dozen notable Fortune 500 companies in a range of industries.
Our investments exude American-made name recognition and familiarity rather than some faceless fund with an obscure name.
Professional Experience
The additional fees associated with handing investing duties off to professional money managers will likely be negated by their potential to generate greater returns and safeguard the original investment capital.
Based on our current financial situation and the need to preserve the account balance while generating some monthly income, these choices made the most sense.
A robo-advisor could have saved a few bucks and netted fair returns, but we wanted the money professionally managed, which also makes it a bit harder to access, another critical factor in our decision-making process.
However, that scenario is much different than nearly a decade earlier when the first tranche of the inheritance was delivered.
How Your Financial Situation Determines Your Investment Choices
In 2015, an initial and much larger tranche of the inheritance was delivered following the death of a family member. Investment decisions were greatly simplified by placing the inherited principal into a brokerage account that would be actively managed by the financial organization administering the remainder of the trust.
It was the private bank of a national financial institution, so the money was in capable hands—far more so than if we tried to use a robo-advisor to self-direct investment decisions without any investment experience.
Professional management was also the best option for us because of the sizable principal balance. There was too much at stake for blind or uneducated investment choices.
Although it costs more, placing the assets under professional management provided a clearer path to portfolio growth and the assurance that money was being put to work as part of a broader financial strategy.
People inheriting large sums of money often turn to financial planners to help create a financial plan tailored to their new financial situation and investment goals and to help better understand any financial ramifications they may be facing through capital gains taxes.
By taking a deep dive into your current financial situation, a financial advisor gains the knowledge necessary to help you create a comprehensive game plan for financial security.
Capital Gains Considerations
Something important that came up when we were deciding whether to use a robo-advisor or engage a financial advisor was the potential impact of unrealized capital gains.
In both instances, the threat of paying capital gains taxes (0, 10, or 15% on long-term gains earned on assets held a year or longer) surfaced but wasn’t realized due to income levels that were under the 10% taxation threshold.
Moving from a self-directed brokerage account to active account management meant liquidating all current positions so the capital could be reallocated according to plan. Selling those positions triggered more than $60,000 in unrealized long-term capital gains, which could have created a taxable event of $6,000 or more if joint income was in the 10% threshold.
The decision to engage a financial management firm would have been much more complicated in the face of that significant tax bill—it might have been more financially prudent to simply leave the account as a basket of ETFs and draw a stipend as necessary rather than have it change hands to professional management.
Advantages and Disadvantages of a Robo-Advisor Versus Active Money Management
As noted, the decision to use a robo-advisor or consult a financial advisor mainly depends on the amount of money to be invested, your investment goals, and your familiarity with public equities markets.
Tax implications and investment strategies are also factors in the decision.
Pros and Cons of Using a Robo-Advisor
Robo-advisors first came about in 2010. By 2025, upwards of $16 trillion of personal wealth is expected to be under management by robo-advisors, Deloitte reports.
Pros
- Lower costs: Robo-advisors typically charge lower fees compared to traditional financial advisors. This makes them a cost-effective option for investors looking to minimize expenses.
- Ease of use: Most robo-advisors have user-friendly interfaces that simplify the investment process. This can be particularly beneficial for novice investors who might find traditional investing methods intimidating.
- Regular rebalancing: Robo-advisors regularly rebalance portfolios to maintain the desired asset allocation. This helps keep the portfolio aligned with the investor’s risk tolerance and investment objectives.
Cons
- Limited personalization: While robo-advisors can tailor portfolios based on general risk tolerance and goals, they lack the nuanced understanding of individual circumstances that a human advisor can provide. This might not be ideal for investors with complex financial situations or specific needs.
- Lack of human interaction: For investors who value personal interaction and guidance, the absence of a human advisor can be a significant downside. Some situations require personalized advice and a nuanced understanding that automated systems may not offer.
- Limited services: Robo-advisors primarily focus on investment management and might not provide comprehensive financial planning services, such as estate planning, tax advice, or detailed retirement planning, which a full-service human advisor might offer.
Ironically, financial advisors often use robo-advisors to access additional financial technology and resources to enhance customer service offerings.
A robo-advisor may be a good choice for investors seeking a straightforward investment approach that requires little personal oversight, but if you need expert advice, you’ll want to discuss your finances with a financial advisor.
Pros and Cons of Using a Financial Advisor
According to the Investment Advisor Association, nearly 62 million clients had more than $114 trillion under professional management in 2023.
Investors who let financial experts manage their money may realize many benefits that aren’t available from a robo-advisor.
Pros
- Training and expertise: Financial advisors may earn the certified financial planner designation, demonstrating financial competency and adherence to the code of ethics
- Broader reach: Financial planners at money management firms can access financial modeling tools to create personalized investment and estate planning strategies. They can also draw on a wider pool of knowledge from groups of trained specialists.
- Stronger commitment to a plan: Often, a financial advisor is part of a larger team of experts executing your investment strategy. Their success is intertwined with your success, and they can help you stay the course whenever the waters become choppy.
Cons
- Cost: Financial advisors are often compensated between 0.8 and 1.2% of the value of assets under management. Robo-advisors, meanwhile, may cost between 0.5 and .25%. Alternatively, you could choose a fee-only advisor if your needs are limited.
- Synching personalities: You’ll likely find that you bond better with some financial advisors than others. It’s essential to get this relationship right since it’s based on trust and involves your financial well-being.
Putting It All Together
Using a robo-advisor can be tremendously useful for people with modest sums of money to invest and who don’t want to spend much time managing their investments.
Novice investors with larger sums of money may benefit from the insight of a financial advisor who can create a personalized investment plan that adheres to their appetite for risk and financial goals.
A managed account can provide greater diversification in asset classes, customized interaction and strategizing, and additional account oversight that can help ensure investment goals always remain sharply in focus.
