Amit Kumar, 36, is a salaried professional working in Bengaluru. He wants to open a fixed deposit (FD) to save for his child's education but keeps delaying it. The reason: Last time he was at his bank to seek advice on saving/investment options to buy a house, he was sold a high-cost insurance policy. "I was told it works just like an FD. But when I wanted to withdraw the money, I came to know there was a lock-in period and I could not draw it immediately. I do not trust them with my finances now."
Much like Kumar, most of us made have made at least one investment that we regret later. It is especially true if you are young and uninitiated - without much knowledge of the increasingly complex world of savings and investment and without access to top-grade financial advice, which comes at a premium. Be it your neighbourhood broker or the corner bank, portfolio managers or sales folks, not many in India do a need-based analysis before offering a financial product. And questions are rarely asked about risk profile, the purpose of the investment, time horizon, ongoing schemes or future goals. Usually, products that earn maximum commission are pushed.
Kumar has since opted for robo-advisory. All that he does is log in to an automated investment platform and key in his preferences. It then leverages the algorithms in place to select a plan that best suits his needs. He is not alone. Due to rising demand, financial service providers across the globe and even high-street banks are now building automated and algorithm-based portfolio management services to bring 'affordable' wealth management to the tech-savvy. In this case, all 'face-to-face' human interaction is replaced with system-driven advice, based on in-depth data analysis. In brief, robo-advisors can turn sustainable investing into a simple exercise by using algorithms and enable you to self-manage investments.
A Different Game
Robo-advisory made its debut in the US in early 2000 and has flourished since. Given the low minimum investment, easy access to services and low fees, these automated investment advisory platforms have appealed to many who did not have access to traditional financial advisors due to high fees and the small size of their portfolios. A KPMG report estimates that by 2020, the assets to be managed with the support of robo-advisory services in the US market may reach $2.2 trillion, a growth rate of 68 per cent, driven by both existing and newly invested assets.
Commenting on the growth, Mohit Gang, founder of Mumbai-based robo-advisory firm moneyfront, says, "Globally, the robo-advisory business is at a nascent stage. However, things have changed dramatically at the lower end over the past five years. The retail segment is now making a dent in the system as the cost of a [human] financial planner is exorbitant."
Dinesh Rohira, founder and Chief Executive of 5nance.com, a platform that provides access to both analytics and execution, is also confident. "We currently have 40,000 users on our platform and are registering 100 per cent month-on-month growth," he says.
In spite of the recent spurt, the robo-advisory business seems to lack clarity in India. Till date, it remains a vast arena with many participants, most of them focusing on mutual funds, especially equity schemes.
Going by the current practice, there are three types of players in the market. First, there are companies that provide basic services such as suggesting best-performing mutual funds, based on their research. Here you get recommendations but no risk analysis. The second category does asset allocation based on investors' risk appetite. Under this model, unique risk rating and personality traits are taken into account. Finally, there are goal-based or full-service advisories - those who offer detailed goal-based financial planning. This method is comprehensive and considers one's existing investments as well as future goals. The plans recommended by them are either regular or direct plans.
At present, 40-50 robo-advisory companies are operating in the country, including Tract & Act from ICICI Securities, MyUniverse from Aditya Birla Money, FundsIndia, moneyfront, 5nance and Scripbox, among others. There are around seven companies such as Bharosa Club and Invezta that offer low-cost direct plans. The numbers are few as they need a client base of 15,000-20,000 to stay viable.
Market regulator Securities and Exchange Board of India (SEBI) approved direct plans in the mutual fund space in 2013, allowing people to invest directly and doing away with the commissions. These are do-it-yourself options and come with a lower expense ratio.
On the face of it, adopting robo-advisory will help you take sound decisions without the necessary market knowledge. The investment data provided by you is processed through various model portfolios, and a customised, actionable portfolio is created. There are hundreds of simulations that the data has to go through before a unique path is created for the client.
Abhishake Mathur, Head of Investment Advisory Services, ICICI Securities, says, "Your yearly investments for every goal can take a different path depending on the type of the goal and the horizon. For every goal, we choose the best path from over 2.5 million simulations."
At the core of ICICI Direct's financial and retirement planning approach is an asset allocation strategy that fits a client's risk profile, criticality of goals, time horizon, cash flows, existing assets and capital market expectations. This methodology discounts a lot of information into the plan, making it accurate and consistent.
Srikanth Meenakshi, co-founder and Chief Operating Officer at FundsIndia, elaborates further. "Based on different parameters, a score is created for every individual. It is then matched with the matrix which is developed separately. All this is done with the help of algorithms, developed in a financially prudent manner."
Cost & Customisation
A key reason behind the growing popularity of robo advice is cost-effectiveness, even though the fees vary widely. Some companies charge users a fee while others earn commissions from financial products companies. For instance, FundsIndia only recommends mutual funds based on a customer's risk profile. It does not charge any fee but earns a commission on any investment made on the platform. In contrast, ICICI Direct provides comprehensive, goal-based financial advice and has a fee-based model in place, charging between `6,000 and `17,500 a year. While moneyfront charges `1,200 per annum, 5nance.com provides free financial planning but earns commission on each investment.
A third group earns both commission and fee. These companies erect an invincible wall between the two divisions - one charging advisory fee and the other earning commission on investments made on their platforms. They manage to do so because according to existing SEBI norms, distributors can sell products and also provide advice to their clients.
Surprisingly, SEBI did a sharp u-turn from the existing norms and came out with a paper last year stating that "Mutual fund distributors shall not be allowed to provide incidental or basic investment advice in respect of mutual fund products. If they want to engage in incidental or basic investment advisory services, they need to register themselves as investment advisors under the Investment Advisers Regulations." Till the final guidelines are out, such complexities are likely to exist.
In spite of data efficiency, operational ease and cost benefits, critics are not impressed with these large-scale, mass-market solutions. Many think that process customisation must be improved as it is often said that no two individuals' financial planning will be similar even if they have similar backgrounds. Also, financial advisory goes much beyond data crunching. Globally, industry specialists are already talking about a hybrid model - part human intervention and part automated services - but does it mean the technology wizardry is waning too soon?
"For these issues, we need to create a unique solution for every customer," says Gang of moneyfront. "We are now segmenting customers into buckets based on risk profiles. But the experience should be similar to being handheld by a relationship manager who understands the customer's specific requirements. We need to have more artificial intelligence-drawn analogues and bot-based advising."
Santosh Navlani, Senior Vice President of DSP BlackRock Mutual Fund, says, "While we cannot forecast the proportion of business that robo-advisors may ultimately contribute, we are seeing that digital transactions for the industry as a whole are growing at a rapid pace and they will continue to do so in the future, for a long time to come." ~