The Rise of Robo Advisors- Business News
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The Rise of Robo Advisors

Robots play with numbers and not emotions, unlike humans. So, can you trust machines over your financial advisor to manage your money?

 Jinsy Mathew   
  • December 30, 2015  
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Technological disruptions in the world of finance, especially in India, have been few and far between since the time online banking revolutionised the way we banked. Now, the advisory business is at the cross section of a tech revolution as well.

Globally, especially in advanced countries such as the US and the UK, this technological shift is more pronounced and has become the talking point at several investor conferences and summits - how the advent of robo-advisory is proving to be a direct threat to the traditional business. Simply put, machines are taking over the managerial and advisory rolls of humans.

To start with, robo-advisory made its debut in the US in early 2000. Given the low initial minimum investment, almost negligible management fees and easy access,robo-advisory caught the fancy of many tech-savvy small investors, who otherwise did not have access to established financial advisors. The idea of robo-advisory became a hot cake in the US start-up space because the development of wealth management software was the only big investment required. Very soon, many companies offering proprietary wealth management software cropped up, but very few managed to thrive. Last year alone, venture capitalists collectively poured in $300 million in various companies operating in this space.

Betterment, WealthFront, Personal Capital, Future Advisor and SigFig are some of the names which are ruling the roost in the online advisory space, globally. Thanks to their popularity and given the pace at which assets under-management ballooned, robo-advisors were soon perceived to give traditional advisors a run for their money. Identifying the vast opportunity, many from corporate America, such as Vanguard and Charles Schwab, too, joined the party. According to global consulting firm A.T. Kearney, robo-advisors are expected to become a $2 trillion industry by 2020, up from around $20 billion till May 2015.

WHAT IS ROBO-ADVISORY?

Robo-advisory is an automated investment advice platform that provides algorithm-based advice at a very nominal cost, devoid of human intervention. The advice provided through this medium is solely based on client information provided to the system, which leads to the generation of automated portfolio allocation and investment recommendations.

The whole premise of this technology is based on the aspect that algorithms can provide sound and logical financial advice at a fraction of a cost of what human advisors charge, without any bias. At present, this form of advisory is relatively new in India with FundsIndia, Arthayantra, ScripBox, BigDecisions, MyUniverse from Aditya Birla Money, Tract & Act from ICICI Securities and 5nance from Innovage Fintech, being the only players.

SERVICES OFFERED

All companies operating in this space have easy and interactive platforms that catalogue not only our personal details in terms of profile, income, goals, aspirations, etc., but also effectively maintains all the information related to any fi nancial transaction already executed. At the time of opening an account, complete risk profi ling is done through a series of questions, which includes listing ones assets and liabilities and existing assets and investments.

Each online platform comes with goal-and-portfolio trackers that help monitor the progress and whether the user is on path to achieve the goal or not. In case the user is not on track, the system suggests changes required to meet the target. Even at a time when there is fresh investment to be considered due to surplus cash or in times of emergency, based on tax implications, the algorithm guides the user as to what needs to be added to the portfolio or sold. Also, there is a portfolio review done periodically to decide if the user needs to reshuffl e his portfolio as he gets closer to the pre-determined goal, or target.

WHAT WORKS FOR ROBO-ADVISORS

Low cost. This is one of the key reasons for the success of robo-advisors overseas and it is likely to do well in India, too. Personal advisors charge a minimum annual fee of Rs 20,000 or a certain per cent of the assets under management, whichever is higher. For someone whose invest-able surplus is very low, this fee looks intimidating. According to Srikanth Meenakshi, Co-Founder and COO, FundsIndia, the primary factor that attracts people to robo-advisory is that it is not biased, but research-based, and provides high-standard advisory services regardless of how much they invest. With the help of robo-advisors, professional advice is just a few clicks away and is absolutely free.

Zero paperwork. One can initiate an investment on the go without getting worried about the paperwork. Before the first transaction is made, the platform will check if you are KYC compliant. In case you do not have a KYC, as is the case with fi rst time users, the applicant will be asked to fi ll the application form online, upload scanned copies of supporting documents and get their e-KYC done. Thereafter, with great ease one can swiftly buy or sell any financial product offered on the platform without worrying about recurring paperwork. Says Ajay Arjit Singh, Founder Director, 5nanace.com: "Generation Z is too busy to fi ll forms and then submit it at respective offices. The adoption rate is sure to be higher if an online option is available."

Easy interface. Financial planning for most beginners is a worrisome proposition and, as a result, they shy away from investments early on in their earning lives. However, robo-advisory platforms can come to their rescue. Armed with an easy-to-understand interface and sophisticated algorithms, which lay out the path to attain ones aspiration, financial planning all of a sudden looks easy and appealing. Given that the investment options are automatically populated based on one's risk profile, the user can be rest assured that no extra in-depth research is required at this stage. Also, there is help available at every stage of execution. Says Rahul Parikh, Head, Aditya Birla Money MyUniverse: "We intend to simplify the process of investing in conjugation with the customers making knowledgeable choices based on their individual criteria."

No room for bias. Humans cannot be free from bias. Sometimes, a colleague's bitter experience with, say, stock market investment, can leave you with a bias against equity-related instruments. When it comes to robo-advisors, there is no room for emotion-based decisions. The algorithm-based asset allocation plan is purely devised on the basis of the user's goals and the numbers provided to the system. As a result, one's portfolio will be free of the in-vogue sector fund that makes a splash for a brief period of time.

Money in safe hands. Even though the user has the option of buying multiple financial products from the platform, roboadvisory companies have no access to your funds. When a mutual fund is purchased on any of the platform, the transaction is between the fund house and your bank account. As a result, even if a company that operates the platform were to go belly-up, your investments would be in safe hands.

WHAT WORKS AGAINST ROBO-ADVISORS

Limitation in customisation. It is often said that no two individual's financial planning will be similar even if they have similar backgrounds. Nonetheless, in case of roboadvisory, two different individuals with the same risk profile may end up getting a similar portfolio or asset allocation advice. At this stage, the computer will not take into account the number of dependents on your earnings and other family background, which may impact your savings pattern.

Rigidity in plans. A plan drawn by robo-advisors will not be in a position to address any sudden monetary change in the life of the user. For instance, in case of child birth or job loss, the plan drawn cannot be altered with. However, a financial advisor can make some alterations in line with your requirements without causing much change to your portfolio.

It's definitely too early to say if retail customers have warmed up to the idea of mechanised financial planning. Abhishake Mathur, Head Investment Advisory Services, ICICI Securities is of the view that the transition in advisory will be akin to the changes seen in the banking system. "It's all online now - ATM, online or mobile banking. Hardly anyone visits a bank branch now." Curiosity is another factor that will drive the fi rst leg of growth, says industry players. "Customers are curious about robo-advisory services, but it is among the first time customers that the adoption is the highest," says Meenaksi of FundsIndia.

Acceptance for the product is across the board thus far. Manish Shah, Co-founder and CEO, BigDecisions. com, notes that the client base from tier II and tier III cities is growing at a steady 25 per cent every year, while the rest comes from the top eight cities in India. Another interesting observation is from Dinesh Rohira, Founder and Chief Executive Offi cer of 5nance.com. "One of the startling observations during our research process before the launch of the product was the high acceptance of an online money management from tier III cities, and beyond. Here everything is on mobile and not on desktop," he notes.

FINAL CALL

So, should retail investors opt for the latest form of advisory available in market? Says Financial planner Gajendra Kothari of Etica Wealth Management: "Robo advisory is great for a person at the beginner level because professional advisors will be reluctant to bring on board very small size investors. In such a scenario, this platform is the best as it provides rational advice at no cost."

Given that robots rank high on transparency and consistency, the user can be sure that there will be no seasonal hot cakes recommended. At the same time, one has to bear in mind, barring customer support, there is no human connect in any of the decision taken or executed.

As the invest-able surplus amount gets bigger, trust factor is another issue to be considered. For many trusting a human advisor with their hard earned money comes more easily than trusting computers. At this stage, tax optimisation is another aspect which needs to be seriously considered where robo-advisory is not on a par with a human advisor.

For the time being, it appears that robo-advisors have filled in a void for small-ticket investors with quality advice.