The word ‘Robo Financial Advisor’ has increasingly started getting heard in the Indian personal finance space in recent times. In our minds, it visually conveys the image of a robot, something like the C-3PO or R2-D2 characters of ‘Star Wars’ fame, whirring and buzzing to provide you financial solutions. But actually, robo advisory merely means an automated investment advice platform that provides algorithm-based advice, 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.
In the normal course, when you use the services of a financial adviser or distributor, you interact with a physical person who listens to you, takes down notes as you both discuss your personal and financial life, comes down to the financial challenges and opportunities that you face, culls out your future goals and requirements, looks at what you have done so far and then proceeds to make a financial plan for you and your family. A robo adviser does similar work, but instead of a human being, you deal with a computer–based program. Typically, you fill up a form that asks for details of your family, earnings and expenses, current investments and upcoming requirements. The algorithm then analyses these inputs and suggests a financial plan that includes investments or asset classes where you ought to be allocating money. Then, just like a human adviser, the robo advisor, too, reviews your progress periodically and may suggest changes.
The whole premise of this technology is based on the aspect that algorithms can provide sound and logical financial advice at much lower cost than what human advisors charge, without any bias. At present, this form of advisory is relatively new in India, with FundsIndia, Arthayantra, ScripBox, BigDecisions, MyUniverse, Tract & Act from ICICI Securities, and 5nance being the most visible players. It is felt that robo advisories would be ideally suited for investors who are very comfortable dealing with automated solutions, who are looking for low-cost solutions to their investment problems, or for first-time investors who wish to test the waters before committing their money to costlier options. This type of advisory also seems to be a good fit for young investors who are more comfortable with things online or have only a small capital to invest on a bulk and/ or regular basis.
In a manner, if such automated models succeed in a diverse and vast country like India, it may provide a great opportunity to get first-time investors who otherwise may never have looked at such services, into a financial planning model. Thus, this not only has the capacity to expand the market tremendously, given that almost everybody today has some sort of an electronic device (remember the ubiquitous mobile phone), but also may change the mindset of common investors from an investment view point to a long-term planning point of view.
A question does arise as to whether it is possible for the robo advisors to fully replace the human advisors at all. Do the human advisors merely calculate, take stock of current financial situations and then churn out a financial plan and investment portfolio? If it were so, probably they would be very easily replaceable with technology. However, ask a real, human advisor and one discovers that she provides much more than a mere financial connect to the clients.
The human advisor is a person who advises on car purchase, best supermarkets around, solutions to common office politics problems, a good mentor to her children or to give advice on adolescent issues, psychological support, job advisor, even a matrimonial advisor and much more. Financially, apart from the money management part, they also ensure that clients maintain financial discipline, provides re-assurance when markets are down, holds the client back when they are about to be taken in by market frenzy, and provide a flesh-and-blood comfort of ‘main hoon na’, which a robo platform might find difficult to replicate.
Somewhere in the various comparisons, the traditional and robo advisors are being projected as competitors, or rather adversaries, fighting for a small piece of cake. This may be more an illusionary ‘fight’ than a reality since the penetration of informed investment advisory services is very low in India. There is a vast potential and low-cost efficient platforms will vastly help in increasing awareness of knowledge-based planning and investments. For example, the younger generation is likely to take on more readily to automated advisory, as it has grown up doing everything online. Investing is just the next thing they do in that manner. But time goes by and things change. As younger investors grow older, and the lower net worth crowd starts to build up their portfolios, both groups will naturally start seeking advice in areas such as estate planning and retirement saving options. Since online-only platforms aren’t built for such higher-order functions, these investors will likely turn to traditional advisors for their nuanced understanding and human touch. Hence, in a matter of time, both the robo and the traditional advisors will find and settle down in their respective operating spaces. After all, the Nanos, compacts, sedans and the luxury cars have their own niches in the vast Indian car market.
The decision of whether to go with a traditional or newer variety robo advisor is a personal one. If you want the personal touch and trust the skills and competencies of the financial advisor, you may prefer the traditional variety of financial help. If you are a techie or do-it-yourself type who wants a bit of assistance, the robo advisory may be for you. On the other hand, if you want a combination of both, there are traditional financial advisors who use a technology-assisted platform. Similarly, several technology assisted platforms also offer access to financial advisors. So, the lines of both types of advisors are blurred between service models, fee structures, and investment options.
Each of these platforms offers a different approach for the investor. Yet, both the technology algorithm and human investment advisors look at the past to project future financial asset performance. No financial advising system is perfect and there is no assurance that past performance is an accurate predictor of the future. As with all financial decisions, consult your trusted advisors, do your research and decide which financial solutions are right for you.
The author Col Sanjeev Govila (retd), CFPCM is CEO, Hum Fauji Initiatives, and a SEBI registered investment advisor.