Here’s a comparison of what Robo advisors vis-à-vis human advisors have to offer to their clients.
Robo advisors provide online investment management services to their clients based on automated proprietary algorithms, without any human intervention. To avail the services, the investor has to register with the relevant website and provide the information as sought in a prescribed form. Based on the programmed analysis of such information, the website generates a financial plan incorporating asset allocation and security selection advice. The securities as advised by them are usually passive investment tools like exchange traded funds (ETFs) and index funds. The charges for the services differ from one Robo advisory firm to another.
Financial advisory business in India is in a nascent stage. There are many big and small financial advisory and wealth management firms which provide customized financial planning and wealth management services to their clients. They also use technology in varying degrees in terms of financial planning and wealth management software to improve their advisory practices. But their penetration level in terms of total AUM compared to total cash in current, savings, and term deposits of banks is very low. So, it will take some time before the concept of Robo advisors finds some takers in India as found in developed economies.
In India, one firm which provides online financial planning services which include providing a financial plan, helping in execution, and monitoring the performance, is Artha Yantra. However, unlike the Robo advisors, it is a purely advisory firm with no direct AUM.
Robo Advisors vs. Human Advisors
- Robo advisors prescribe computational algorithm based investment plans based on risk-return preferences of the investors. So, any two investors falling into same risk-return category would get similar investment plans from Robo advisors. However, the human advisors would give tailor-made advice to each of their clients which would include factors beyond their risk-return profiles. So, their advice is not of the type “one size fits all” for the same risk-return category.
- Robo advisors are not flexible towards the new needs arising within the investment horizon of the investors. Their portfolio can only be rebalanced at pre-specified dates. If any changes are needed between two rebalancing dates, they might come at substantive cost to the portfolio value. However, the human advisors are usually flexible enough to accommodate the new needs or change in goals of their costs comparatively easily.
- Technology driven tools eliminate the chance of subjectivity in decision-making for Robo advisors. So, their plans are rational and technically robust. On the other hand, the human advisors are susceptible to presumptions and biases entrenched in their thought processes due to various factors during their professional careers, thus bringing the element of subjectivity to their decision-making. This can only be eliminated through use of technology driven financial planning tools.
Challenges ahead
- The Robo advisors usually invest their clients money in passive investment tools like index funds and ETFs. Therefore, the return on investment is low compared to the conventional wealth managers which use active wealth management techniques to generate higher returns. So, Robo investors would attract usually conservative investors who want to invest in low risk securities with steady low returns.
- ·When it comes to investing big money, people usually prefer higher management fees charged by flesh-and-blood financial advisors as a trade-off for safety and accountability of their investment over the faceless Robo advisors doing that job mechanically for lower management fees. So, it is difficult to attract the big investors without ensuring accountability for their investment.
- As the asset allocation and security selection by Robo advisors is based on the online automated surveys, the outcome would be affected by emotional responses of the investors. For example, an Indian investor in early 2008 would come out to be more risk tolerant in his responses when the market was doing well. So, the allocation would have been higher in equity-oriented ETFs, which would have lost value following the massive drubbing in the coming months. Even the periodic re-balancing might not be enough to make-up for that loss.
- There is big question mark over the financial viability of the Robo advisors over the long term. As they charge very low fees compared to the conventional financial advisors, their revenue stream is not sufficient for them to sustain on their own. Their survival till now has mostly been dependent upon venture capital and private equity funding. So, in the long run, they might have to either increase their fees or introduce some human interface for big clients to charge them more than others.
- The Robo advisors usually only perform investment management services. They do not look after other aspects of the wealth management like tax management, estate planning, etc. which form big chunk of the wealth management needs of big clients. So, given their non-human, technology driven service delivery mechanism, it is really hard to incorporate solutions for tax management, estate planning etc.
Swarn Saurabh is a research analyst at Pulse Labs Research and Technology Solutions.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.