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The Robo Investment Advice

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Most of them are copycats of the US models

By Krishna Kumar Mishra

When FundsIndia.com announced operations in Robo advisory space people laughed at them. The firm had received huge funding from the Foundation Capital and others. But within a very short span of time there are around 40 companies in India who are offering this service. Being an internet based service; it is catching the eyes of a lot of young people. The objective is to reach out to the young and first-time investors. From registration to execution, little human intervention is needed.

The Robo advisors provide online advice for investments to their clients based upon automated proprietary algorithms where an investor has to register and provide the answers to the questions which decide their risk profile. Robo- financial advisors have strong algorithms at the backend where they create a desired portfolio based on certain parameters like risk profile, performance consistency vis-à-vis benchmark, investible surplus etc.

Based on all this, algorithms generate a Robo investment advice incorporating asset allocation and mostly offer a portfolio made up of debt and equity mutual funds. The securities as advised can be the direct equities or the passive investment tools like index funds, exchange traded funds (ETFs), or mutual funds. All the interactions are digital and around financial goals such as tax planning, saving, regular investment and retirement. Some Robo-advisors primarily offer only mutual funds in terms of transparency, returns and accessibility; these are found to be most appropriate to address goal-based asset allocation needs for retail investors. Some offer insurance and deposits also.

Broadly, the Robo-advisory platform can be categorized into four—automated investments, direct plans, goal-based advisory and full service advisory. In auto-pilot mode, investors select among the offered packages as per their need, and the time they think they will stay invested. The goal-based advisory is structured on asset allocation, which means the fund selection is a result of the information you provide. Some firms operate on a distribution model, as similar to traditional advisors. They advise on funds and assets to invest in and the transaction is completed through the platform, all for free. The platforms, in re-turn, earn a commission from the mutual fund corporation house. Some operate on an advisory model and charge an advisory fee.

Each online platform comes with goal and portfolio trackers that help monitor the progress and whether the user is on the path to achieve the goal or not. In case the user is not on track, the system suggests changes necessary to meet the target. Also, there is a portfolio review done periodically to decide if the user needs to re-shuffle his portfolio.

However, at present it’s good for tech savvy small investors as they can build a good portfolio with low cost compared to the traditional financial advisors; but not at all good for a seasoned investor with a high investible surplus. If one is well-versed with investment products, Robo-advisors can help him make quick, easy and cost-effective transactions. For them these platforms work well in their ease to use. For do-it-yourself investors, it is ultimately about costs. As the sector evolves, more innovation beyond simple selling is expected. An investor who wants to start with a systematic investment plan of a small amount can look towards Robo-advisory platforms as they are easy to access and offer elementary planning for free.

The continuous rising number of an investor class of tech savvy professionals has given wings to this service as they prefer digital advice for managing their investments. Secondly, and the basic reason, in fact, is the high minimum investment amount requirement by the established offline advisory firms. It makes difficult for small investors to avail their services. Not to forget another important fact that investors don’t feel happy being grilled by advisors in person and lately a kind of lack of trust too has cropped in. They feel more relaxed and have started showing more faith in a complex computational algorithms.

The three models

In the US, there are three models – Standalone, Hybrid and Advanced. The most popular U.S. Robo-advisor Betterment, a Standalone company, uses algorithms to recommend stocks and manage portfolios. Hybrid Robo-advisors combine computerized recommendations with on-demand advice from a human being. And advanced standalone companies leverage more complex algorithms to create and actively manage portfolios.

Research firm MyPrivateBanking estimates that hybrid Robo services will by 2020 grow to a size of USD 3,700 billion assets worldwide; by 2025 the total market size will further increase to USD 16,300 billion. This number constitutes just over 10% of the total investable wealth in 2025. By comparison,“pure” Robo advisors (completely automated without personal service added on) will have a market share of 1.6% of the total global wealth at that stage.

SEC’s list of potential risks to investors

The U.S. Securities and Exchange Commission (SEC) has included Robo-advisors on its list of potential risks to retail investors for the first time, and said that it would examine these players more closely. It emphasizes that this advice is designed to help investors take advantage of the benefits Robo-advisors can confer, indicating that despite its cautious approach, the SEC approves of the technology as a whole. The SEC’s biggest concern appears to be public education. SEC has decided to take action based on insights from two initiatives, in the form of two new documents –

  • The SEC stressed that Robo-advisors must abide by the Advisers Act traditional investment advisers are subject to, and to achieve compliance, must take steps to address regulatory challenges their specific technology might bring up. These include: ensuring disclosures are in a format and language the average consumer can easily understand; ensuring that questionnaires used to construct a portfolio are extensive enough to take individuals’ needs into account; and employing a dedicated compliance officer who understands how existing rules apply to the new technology.
  • Advice for individual investors: Here it outlines the important factors, individual investors should consider before choosing a Robo-advisor. These include: the level of human support a specific advisor provides, and whether it suits the individual’s needs; whether an advisor’s questionnaire takes enough of an individual’s circumstance into account to accurately recommend a portfolio; whether an advisor’s investment strategy is one they’re comfortable with; and the fees and charges involved.

The Road ahead

The current scenario states that Robo-investment advisors are actually unable to solve the real time problems of the users as most of them are nothing but copy cats of the international firms, follow mostly US models. Indian investors have different priorities like child education or daughter’s marriage or parent’s old-age requirements. The economical condition is quite different since there is absolutely no social security provision which makes an Indian tense about various unforeseen situations. They need a customized advice.

The best thing is Robo-investment advisors are transparent on fees, portfolios, trades, etc. Robo-financial advisors has the advantage of being online with 24/7 accessibility. Comparatively, Robo advisors are supposed to be much cheaper than the traditional advisors. All the companies having the Robo Advisory services are targeting small investors that are used to digital and are the potential wealthy clients of the future.

Although online investment advisory business in India is in a nascent stage but all said and done the limitations of the Robo advisers must be taken into account. Suppose the markets are volatile and you need immediate advice, what you’ll do?

 

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SOURCEKrishna Kumar Mishra
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