Experts believe that Robo advisors can’t deal with people’s emotions which is a critical part of financial planning process to achieve goals.
Just like the technological advances taking shape in the e-commerce space, financial services industry is also undergoing a transformation.
After the advent of online platforms like Fundsindia, Fundsupermart, BSE and NSE platforms, a new breed of advisors is slowly making inroads in the financial distribution landscape.
Platforms which use algorithms and model portfolios to construct a client’s portfolio, better known as Robo advisors, have already made an entry in India.
Such advisors are making headlines overseas. Wealthfront, Betterment and FutureAdvisor are some of the largest Robo Advisor firms abroad. These firms have been able to raise huge sums from venture capital firms who are betting on the next wave of change in investor’s behavior. Some of them have been hugely successful. For instance, Wealthfront, a Robo advisor, which was launched in December 2011, today manages assets of over $1.5 billion or Rs. 9,000 crore.
Robo advisors are steadily amassing AUM. According to research and consulting firm Corporate Insight Robo advisors AUM has increased from $11.5 billion in April 2014 to $15.7 billion in July 2014, a 37% increase in just three months.
One of the main advantages such firms provide to their clients is low cost investing. “Wealthfront eliminates all commissions and other account maintenance fees for clients. Instead, clients pay an annual advisory fee of 0.25% of invested assets above $10,000. Other financial advisors/ investment managers typically charge annual fees that exceed 1% of assets,” claims Wealfront’s website.
In India, scripbox and Arthyantra follow Robo advisory model. Started in January 2012, Bangalore based firm scripbox uses indexing approach to recommend mutual funds. It has developed a proprietary model called IBIS (Index Based Investment Solutions) to recommend mutual funds.
Founded in 2006, Hyderabad based firm Arthyantra is another firm which uses proprietary model to make financial plans for its clients. Their website claims that the firm has over 53,000 users on its platform.
While there aren’t many Robo advisors in India, is it something traditional advisors need to worry about? Let’s evaluate.
Investors have to fill up their details and goals based on which these advisors recommend a plan or a list of schemes to invest in. While these firms do suggest annual rebalancing, the absence of human involvement like in the case of traditional advisors is conspicuous.
Unlike traditional advisory firms, Robo advisors can’t customise financial planning services based on a client’s requirements.
In a market like India where investors need handholding, will Robo advisors gain acceptance among investors? “This largely depends on the type of investor and his temperament. Someone looking for a simple disciplined approach to long term wealth creation and someone looking to simplify his life will definitely shift over. Those who have been burnt in the past by wrong advice will move to the Robo model. But someone looking for optimizing short term returns, or more comfortable dealing with a trusted human, or seeking high involvement in his portfolio, would not accept the Robo advisor model that easily,” observes Sanjiv Singhal, Chief Executive Officer, scripbox.
Going ahead, Sanjiv believes that the tech savvy younger generation will prefer to invest through Robo advisors. “The future of Robo advisors in India is very promising and evolving. There is a large market that is untapped because they do not fit into the requirements of typical financial advisors. The younger Indian investors want online convenience, transparency, ability to start with small money and good returns with low risk. They are not interested in strategic risk taking opportunities. In all these cases, a Robo advisor serves them much better.”
Vishal Dhawan of Plan Ahead Advisors seconds Sanjiv’s views. “People in the age group of 20-30 are more prone to moving to Robo advisors. Robo advisors in some way do pose a threat to traditional advisors,” says Vishal.
While Robo advisors may compete with traditional advisors on pricing (for those who charge fee), it is not known how they’ll be able to handhold investors during a market crash. Also, critics say that providing online access to clients may induce them to redeem (if investors make profit) which can derail investors from achieving their long term goals. “Robo advisors can only offer a limited set of services. They can be helpful to clients who are merely looking at execution services. Financial planning involves dealing with client’s fears and greed. Financial planners are better placed to help deal with such emotions and help clients achieve their financial goals,” says Vishal.
So how should traditional advisors brace themselves to be relevant to investors? “Traditional advisors should ascertain as to which services they offer which can’t be offered by Robo advisors and start focusing on such services,” suggests Vishal.
Experts believe that Robo advisors have a long way to go in India. Chandrashekhar of Fundsindia says “It will take some time for investors to accept Robo advisors. Investors have started investing online only recently,” says Chandrashekhar.
Do you think Robo advisors will the change the way people invest in India? Let us know your views.
