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Robo Advisors - Are they here to stay?

These days, the much talked about buzz is on Robo Advisors. Who are they? They sound like species from outer space, but they are not. Robo advisory is nothing but a new form of advice that has emerged through the use of automated processes and complex algorithms, which run at the back end of these advisors.

Mimi Partha Sarathy | June 7, 2016 | Updated 16:47 IST

Mimi Partha Sarathy
These days, the much talked about buzz is on Robo Advisors. Who are they? They sound like species from outer space, but they are not. Robo advisory is nothing but a new form of advice that has emerged through the use of automated processes and complex algorithms, which run at the back end of these advisors.

You can think of them as online financial planners and investment advisors, who take details from you, analyse the data and then advise you on your investments. The Robo builds and manages your portfolio. The only thing is that there is no human intervention. It is a system that is working for you.

There are a few advantages to this. Robo advisors are really cost efficient. Most of them are either free or charge a very minimal upfront fee from their users. Their major source of revenue is the commissions that they earn from distributors. And they give a real-time view of almost everything, be it your current investments, your portfolio allocation, or the current situation of your planned goals - be it for buying a house, your child's education goal or your retirement goal. Since they are real time, portfolio rebalancing becomes an easy task for Robo advisors, and they can advise you if you are lacking on this front.

But, are these Robo advisors good for all? Each individual is different and will face different circumstances and events through his life. These events can be good or bad, sudden or planned. And therefore financial planning needs to be handled in a unique manner.

Robo advisors will work best for people who are new to the world of savings and investing, have just started settling in their personal and professional lives, and are internet savvy. For somebody who already has a sizeable investment portfolio and needs a human advisory interface, this product will not work. And for services like estate planning where each and every situation needs to be tackled in a different manner, these automated services will not work either.

Moreover, as one grows in his or her field of employment, having a financial planner at your side makes more sense. He/she will be able to listen to your end of the story and then implement the plan according to your needs, and it makes passing on the assets also easier, as you can make this as a family exercise and enrol your family and children in this from the very beginning, hence enabling them to be prudent investors on their own.

Let's understand it by an example:

Now, who do you think will need help of a financial planner to manage his assets well? The answer is obvious - since Mohit Bansal has a bigger portfolio, he will be better equipped if he goes with the services of a financial planner instead of doing it all himself through Robo advisors. On the other end, since Sanchit Ahuja has just started his wealth accumulation phase, it will be good for him to start with a Robo advisor and by doing this he will also gain by understanding the basics of investing and where to invest.

Only time can tell if people will stick to their Robo advisors or not. But using a Robo advisor is a great way to start your financial planning life!

The author is Managing Director, Sinhasi Consultants

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