Investment : What is Robo Advisory?

Investment : What is Robo Advisory?

When you use the service of a financial adviser or / distributor, he / she sits with you, understands your goals & requirements and then suggests a financial plan.

A robo adviser does all of that, but instead of a human being, you deal with a computer based algorithm or / programme.

Typically, you fill up a form that asks for your details. The robot then analyses it & suggests a financial plan for you that includes investments or asset classes where you ought to be allocating money.

Then, just like a human adviser, the robot, too, reviews your progress periodically & may suggest changes.

As per a Citi Research report dated 7 September, 2015 robo advisers are set to grow to nearly $ 5 trillion in terms of assets that they manage by 2025, up from about $ 14 billion that they managed till the end of 2014.

According to an A.T. Kearney report dated June 2015, robo advisers in the US could manage about 5.6% of the total investible assets in 2020, up from about 0.5% of the assets that they are expected to manage by the end of 2015.

In the US, there are popular robo advisers such as Betterment Inc. and Wealthfront Inc. that manage billions (about $2.5 billion and $2 billion, respectively).

Robo advisers like these channelise their clients’ monies into low-cost index funds and exchange-traded funds (ETFs). Due to the minimal human interface, the fee is low. And since their underlying schemes’ fees are also low (passive funds have among the lowest fees in equity funds), you tend to incur low costs when dealing with robo advisers.

In India, we have n0t yet seen a proliferation of true blood robo advisers nor do we have a wide bouquet of index funds and ETFs that robo advisers can offer as a means to lower costs.

Chennai based FundsIndia.com, an online platform that offers MFs, has four portfolios, called smart solutions, targeted towards four goals; child’s education, child’s marriage, retirement & one aimed at a first-time investor.

Based on the number of years to go before you reach your goal & a monthly sum you are prepared to invest, it suggests some schemes, which it has curated based on its methodology. Portfolio is reviewed regularly and rebalancing suggested, as we approach the goal.

BigDecisions.com is more of a research platform that tries to answer your very first questions when you start planning - how much do I need to plan for, how much do I need to save to reach there, and others.

There’s a bunch of smart calculators that aim to give you solutions about your retirement, child’s education, amount of life insurance and health insurance needed and so on. It doesn’t offer you products; for that, it directs you to transaction partners; for example, FundsIndia.com, if you need to invest in Mutual Funds.

Scripbox is a portfolio in a ‘basket’. It offers three portfolios of MF schemes of equity, debt & income tax saving, which are curated using an in-house research process. Once a year, it reviews its portfolios and suggests changes, if any.

ZipSIP is an investment tool that allows you to invest in a basket of MFs through systematic investment plans (SIP), based on your risk profile and investment capicity. It’s a part of MyUniverse, a platform offered by Aditya Birla Customer Services Pvt. Ltd. It allows you to link your bank accounts, demat accounts, MF investments made online through fund websites, and credit and debit card websites so that you can get an aggregate and real-time view of your personal finance life.

Then there is ArthaYantra; probably one of the truest forms of robo advisories in India. Once you sign up, you fill in a lengthy questionnaire that asks for details such as goals, income, expenses, liabilities and so on. You then get a customised financial plan followed by a call by one of its advisers to explain the advice.

You can choose to execute the transaction on the platform. Portfolios are reviewed and rebalanced half-yearly.

Cost varies. For example, Scripbox and FundsIndia are free; Arthayantra charges Rs. 1,000 for a financial plan but ongoing monitoring is free. BigDecisions is free; it has a revenue sharing agreement with transaction partner such as FundsIndia.com.

Be it an adviser who charges fees to his / her clients or / a distributor who only executes client’s transactions, experts believe that if they can demonstrate value to their customer, they will survive.

Some distributors feel that there is enough space for robots, fee-based advisers and transaction-only distributors.

Technology and robo advisory platforms are the way to go. We are yet to see which model of robo advisory would add the most value to the investor, but their rise will bring in another revolution in the Indian distribution space, which will result in more transparency, better services and lower costs.

From BS

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