Read This Before You Consider Any Automated Investment Platform

Over the past year or so, artificial intelligence has sprung from a little-known corner of the tech industry to the hottest buzzword in the financial world today. (On that note, here's how to invest in AI.) Yet, as early as 2008, investing platforms like Wealthfront and Betterment were promoting a powerful AI-esque tool known as a robo-adviser, also called an automated investment adviser.

Investopedia defines a robo-adviser (robo-advisor) as "a digital platform that provides automated, algorithm-driven financial planning and investment services with little to no human supervision." As per the outlet, a robo-adviser takes a person's financial survey answers to come up with advice and invest on their behalf. The concept of an automated investment adviser begs the question of whether or not the technology can fully replace a human financial adviser. As with many things in life, the answer depends on the circumstances.

During a recent exclusive interview, Money Digest posed just such a question to CFP Lawrence Sprung, author of "Financial Planning Made Personal" and founder of Mitlin Financial. Said Sprung, "Automated investment services like Wealthfront have a place for some. Certain investors and level of net worth may be best served by a service like this. I would argue that there also comes a time where you may outgrow what they can do for you."

Honestly, we get the appeal of an automated investment adviser. By eliminating human labor, robo- adviser fees are inexpensive and accounts typically have low opening balance requirements. Those are the characteristics that make a good fit for smaller, retail investors. Regarding those fees, many robo-advisers charge a fee of approximately 0.4% of the assets under management. That's compared to a typical fee of 1% for a human adviser — or possibly more if your account is commission-based. Also keep in mind that robo-adviser accounts can be accessed and trades executed 24/7, whereas a human adviser might not always be available.

On the negative side, automated investment advisers are better suited to simple investing strategies rather than more tenuous situations such as estate planning. Indeed, Lawrence Sprung mentions that a client who was considering an automated investing service "... would be incurring a tremendous capital gain by [following its advice]."

Robo-advisers have been criticized for lacking sophistication, and perhaps equally important, for lacking empathy. You won't receive a highly personalized plan and extraordinary circumstances like illness or job loss won't be recognized, requiring you to manually adjust your contributions or asset allocations. As well, depending on which robo-adviser you engage, your investment choices may be limited to more basic options, like exchange-traded funds that track major stock market indexes. (Here's what you need to know before investing in ETFs, by the way.)

To be clear, robo-advisers can be a wonderful asset for newer investors with little experience. Many of these services use strategies based on the modern portfolio theory. For example, passive investing in index funds that track the performance of benchmark stock market indexes like the S&P 500. As well, younger investors who are accustomed to using technology and social media might appreciate the autonomy of the process.

As previously mentioned, the selection of available investments may be somewhat limited with robo-advisers. Although, quite frankly, many investors would be better served by investing in index funds that robo-advisers may recommend as opposed to riskier individual stocks. For those that do want a larger number of investing choices, that's something that's improving regularly among robo-advisers today. Wealthfront, for example, offers investors cryptocurrency, fixed-income securities, individual stocks, and even fractional shares of certain pricey stocks that may be out of reach for small investors.

However, the one thing Wealthfront doesn't offer at any cost is the unlimited ability to speak to a human adviser. Though some competing automated investment advisers do offer the human touch, usually for a significant extra fee. Note that Wealthfront does offer live customer service, though that channel isn't really intended for investment strategy and advice. In summary, using a robo-adviser can prove a great asset to new or "lazy" investors, but for more complex or personalized financial planning, like estates and specific tax strategies, engaging a traditional financial adviser is still the more prudent choice. Fortunately, we have tips for choosing the perfect financial adviser.