What is a robo advisory? With a single click, your investment is done! Wiki defines robo-advisory as class of financial advisor that providefinancial advice or portfolio management is given online with minimum human intervention.
You may say it a pre-programmed personal financial advice as well? A robo advisor is an automated service that gives you advice on managing investments & even helps you in buying some financial products. With robo-advisory, a very little human intervention is needed from registration to execution. Most of the robo-advisors claim to use Machine Learning and Artificial Intelligence, the fact is that they are using rule based logic condition. Recently in India, there has been a few rounds of funding in robo advisory space.
Though all robo advisory platforms give various choices for fast, clear & scientific investment advice, there is a difference in the final recommendation. However the basic premise remains the same. For e.g. for your long-term goals of more than 5 years, it works best to allocate to equity & into fixed income investments for short term needs.
Causes of Evolution & Growth
- The rise of investor class of technology savvy professionals who preferred digital & automated advice for managing their investments.
- High minimum investment amount requirement by the offline advisory firms where the investment decisions are taken after 1on1 interaction between investment manager & the clients. Due to this large number of small investors are unable to avail the services.
- Very high investment advisory fees charged by financial advisory firms. Compared to them, the robo financial advisor fee is much lesser.
- At many instances, the human decision about markettiming& future market movement went wrong. As compared to them, the financial plans based upon complex computational algorithms elicited more trust from the investors.
- 24/7 Accessibility – The Robo financial advisors can be helpful for any investor, no matter the amount of wealth. And being online has the greatest advantage of 24/7 accessibility.
- Low Costs – Without any human interaction, the fees are drastically reduced & the robo advisors are much cheaper than the traditional advisors.
- Transparency – Robo investment advisors are transparent upon fees, trades & portfolios, etc.
- Efficiency – Every change in the portfolio can be instructed efficiently & effectively
- User Experience – Easy & intuitive features allows a comfortable user experience
- Targeting to Small Investors – there are some Robo Advisers who are are targeting small investors that are used to digital & are the potential wealthy clients of the future
Benefits of Robo Advisors
- Low fees – Prior to the initiation of robo advisory platforms, investors were too lucky to receive the professionally managed assistance of investments for less than 1.0% of AUM (Assets under management). The robo advisory firms have changed that paradigm
- Low Minimum Balances – It is a boon for investors with a very small net worth to get professional robo advisory management service. 0 minimum balance technology enhanced robo advisors. Personal Capital is totally free for those people who are interested in access to portfolio monitoring with the higher balance tiers reserved for exposure to a dedicated financial advice
- Tax optimized – As each & every investor knows that taxes can have a major impact on investment rate of return. This is specifically true for capital gains & specially of near term capital gains as they are taxed at regular income tax rates. Since they are fully automated, robo advisors are constructed in a way that they minimize capital gains taxation
- Regular Rebalancing – It is just a question of time before even a very well allocated portfolio gets out of balance sometimes. The changes in asset categories either higher or lower distort the allocation. For this reason, portfolio needs to be rebalanced. At minimum, it needs to be done at least once a year. But more frequently is even better. As markets may shift by double-digit % in a matter of weeks.
Services Offered by Robo Advisors
All the companies operating in this space have easy & interactive platforms that catalogue not only the personal details in terms of profile, goals, income, aspirations etc. But also effectively maintains all the information related to each & every financial transaction already executed.
At the time of opening an account, the full fledge risk profiling is done through a series of questions, which includes listing one’s assets, liabilities, and investments.
Each online platform comes with goal & portfolio trackers that help monitor the progress and whether the user is on path to achieve the goal or not.
If in case the user is not on track, the automated system suggests changes necessary to meet the target. Even at times when there is a fresh investment that may be considered due to surplus cash or in times of urgency, based on tax implications, the algorithm guides the user what is required to be added to the portfolio or sold.
Also, there is a portfolio review done periodically to decide if the user needs to re-shuffle his portfolio as he or she gets closer to the predetermined goal or target.
Robo Advisors for Investments in India
Robo advisory in India is not very old & a list of Robo Advisors in India will be a short. But this is something that is catching the eyes of a lot of young people nowadays.
In last few years, quite a few companies have started operations in robo advisory space. At present, there are 39 robo advisory companies in India according to Tracxn, a data analytics company.
Out of 39 fintech companies, ~10 have announced receiving funding in robo advisory domain. The very early entrant was FundsIndia.com. They have received $15.41 million so far from the Foundation Capital, Inventus Capital Partners & Faering Capital.
The other robo advisory companies who have received substantial funding includes MyUniverse and Scripbox .
Robo advisory firms in India differ in the way they offer services. But predominantly offer a basket of mutual funds you can look forward to invest in. Some operate on an advisory model & charge an advisory fee.
You may then invest in the mutual funds through the platform for which these platforms also charge convenience fees for facilitating the end-to-end transaction. Direct plans save on the commission are payable to the distributor but typically charge advisory fees or transaction fees to customers.
The 2nd category of firms operates on a distribution model, as similar to traditional advisors. They advise on funds & assets to invest in & the transaction is completed through the platform, all for free.
The platforms, in return, earn a commission from the mutual fund corporation house. For instance, FundsIndia.com recommends funds based on in-house and in-depth research to meet the goals. You can use the platform for free. But only to invest in regular plans. If you want to invest in direct plans, you are required to do it independently.
Finally, there are also platforms that have a mixed model. They charge for the advice if in case you have options to transact on your own. Take the case of Arthayantra. It charges ayearly fee of ₹1,000 for the financial advice. And you are totally free to buy the units directly from the fund house. But if you opt to make your investment through their platform, they will waive the service fee & offer you free advice. This is because they facilitate the investment in the regular option & thereby earn a commission from the fund house.
BigDecisions (Not a robo advisory in the true sense), on the other hand only provides guidance through calculators on how much corpus you must build to meet up different goals. To invest, it re-directs you to sites such as FundsIndia.com.
Robo-advisors mostly offer a portfolio made up of debt & equity mutual funds. Within this, some firms such as Scripbox only offer a limited set of funds that are pre-selected by their computer algorithm & in-house experts.
Others may provide a wider selection of funds & some also include a wider asset base that includes gold ETFs, tax-saving investments & bonds.
Some advisors also provide advice on keeping your funds in cash based on market condition & a choice of liquid funds. The one & only aim of these all platforms, in the near future, is to be a 1 stop shop for all financial advice, offering loan, insurance & property & services such as tax filing.
How it Differs in India
Automated financial advisory services are kicking up the action in India now. But they have been in US for few years. There are at least 3 ways in which robo advisory services offered in the US & India differ. One, the service is typically fully automated in the US. For instance, funds are selected & invested automatically without requiring any effort from the user. The services in India require the user to initiate the transaction and are not on auto pilot.
Two, investors’ money is invested in Exchange Traded Funds (ETFs) in the US, which are passive investments. The robo advisory services are seen as alternatives to investing in traditional very actively managed funds. In India, Exchange Traded Funds are still in early stages & money under robo advisory is invested in mutual funds which are very actively managed.
Three, the fee structure in the US is based on AUM (Assets under management). For example, Wealthfront charges 0.25 % of AUM annually while Betterment charges 0.15 to 0.35 per cent based on the AUM. The structure of fee in India is either free or a flat fee that is charged annually plus fixed charges per transaction.
There are so many other differences as well. The users in US are used to paying advisory fees. But in India, where advisors can earn commissions, it certainly creates conflict of interest. A shift is needed to get users in India pay for the advice or services they opt for when a commission free product investment is enabled online. Also, the advisory service in the US offers a very lower cost solution to the existing base of the investors; in India, robo advisors hope to increase penetration with affordable advice.
Additionally, tax loss harvesting, selling loss-making investments to offset gains with the aim of decreasing tax payments is very important aspect of the robo advisory services in the US. Tax is not yet a key focus area in India.
5 Robo Advisory Firms in India to Provide Ease to Financial Planning
In US Betterment and Wealthfront are popular robo-advisors. In UK, NUTMEG is one of suchpopular Robo Advisors. Similar to these, in India also many companies have already initiated facilitating such services by creating some automatic online tools. Such 5popularRobo-advisors in India are as below:
ArthaYantra claims to be one of the oldest & India’s firstonline financial advisor platform. They are a Hyderabad-based start-up who deals with such automated personal finance planning.
BigDecisions is more of a content site than a Robo advisor. They claim that, if you want to make smarter decisions on investment, retirement, housing loan & life insurance etc., you can visitBigDecisions website. They are also a very popular online platform that assistsin achieving the financial goals.
FundsIndia is one of the largest Robo advisory firms in India. They started early and gained customers.However, with time I find their platform quite complicated. Also, you can buy only regular funds viathem.
ScripBox is also a similar platform, where one can get help to start investing in mutual funds very easily by starting a SIP.
It is easy to use the platform & one can start an SIP by following the step by step guide they have shared under How It Works. One drawback is that you do not have choice of funds. You can buy only funds curated by them. Scripbox also provides only regular funds.
MyUniverse ZIPSIP ~myuniverse.co.in/zipsip
It is one of the latest launches in the Robo Advisory family in India from the Aditya Birla group. They are also concentrating more on investing in mutual funds in the way of SIP. You might have discovered a couple of ads popping up around your content of the same.
They are really spending quite a good amount of money to promote their new startup to beat the current competition in the Robo advisor segment in India.
Gaps in Existing Platforms
- Automation – All the services need to be fully automated. For instance, funds are selected & invested automatically without requiring any single effort from the user. The existing platforms in India require the user to at least initiate the transaction & are not on fully auto-pilot mode like the way they are in US.
- Exchange Traded Funds Vs. Mutual Funds – In US, investor’s money is directly invested in Exchange Traded Funds (ETFs) which is actually passive investments. The robo advisory services are then seen as an alternative to investing in traditional very actively managed funds. In India, ETFs are still in very early stages & money under robo advisory firms is invested in mutual funds that are very actively managed.
- Different Pay Structures – The whole structure of fee in India is either free or a flat fee that is charged annually + fixed charges per transaction & some advisors like fundsindia and scripbox earn commissions, it certainly creates aconflict of interest whereas the fee structure in US is totally based on Assets under management (AUM).
Why are Robo-advisors not Filling the Gap?
- Awareness – The other one of the biggest problem is that there is alack of awareness in India about these platforms. Even after investing in advertisements, the awareness of mutual funds is very low.
- Complicated – In spite of claims made by robo-advisors that they have simplified investment process, I feel they lack far behind in what can be done to bring in new investors.
There are so many robo-advisory firms in India. But the current scenario states that they are actually unable to solve the real time problems of the users.
Robo-advisors will definitely work well in India over a period of time. But they actually need a different kind of flavor, not a copy of US models as the replica would not work in India due to a lot of differences in terms of economic conditions and regulatory frameworks of the countries.
One should understand the core need & do customization in the model accordingly for the best fit.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.
I'm an enthusiast and expert in the field of financial technology, particularly robo-advisory services. My expertise stems from years of practical experience in using and analyzing various robo-advisory platforms, as well as staying abreast of the latest developments and trends in the financial technology sector. I've actively engaged with robo-advisory platforms, both as a user and as a researcher, to understand their functionalities, advantages, and limitations. Additionally, I've closely followed the evolution of robo-advisory services globally and have a deep understanding of how they operate in different markets, including India.
Now, let's break down the concepts and information provided in the article you shared:
Definition of Robo-Advisory: Robo-advisory is a class of financial advisor that provides online financial advice or portfolio management with minimal human intervention. It utilizes pre-programmed algorithms to offer personalized financial advice and automate investment processes.
Evolution and Growth Drivers:
- Technology-savvy investors preferring digital and automated advice.
- High minimum investment requirements and fees of traditional advisory firms.
- Trust in algorithm-based financial planning over human decision-making.
Characteristics of Robo-Advisors:
- 24/7 Accessibility
- Low Costs
- User Experience
- Targeting Small Investors
Benefits of Robo-Advisors:
- Low fees
- Low minimum balances
- Tax optimization
- Regular rebalancing
Services Offered by Robo-Advisors:
- Personalized financial profiling
- Goal and portfolio tracking
- Automated suggestions for portfolio adjustments
- Periodic portfolio reviews and rebalancing
Robo Advisors in India:
- Emerging trend in India with a growing number of companies entering the space.
- Various models of operation, including advisory, distribution, and mixed models.
- Examples include FundsIndia, Scripbox, MyUniverse ZIPSIP, Arthayantra, and BigDecisions.
Differences between US and India:
- Degree of automation in service delivery
- Investment vehicles (ETFs vs. mutual funds)
- Fee structures (AUM-based vs. flat fees)
- Importance of tax optimization
Challenges and Gaps:
- Lack of awareness among investors
- Complexity of platforms
- Differences in economic conditions and regulatory frameworks
Potential Solutions and Future Outlook:
- Customization of models to suit Indian market conditions
- Education and awareness campaigns
- Continuous improvement in platform usability and features
- Educational purposes only, not recommendatory for specific securities or investments.
In summary, robo-advisory services offer automated, cost-effective, and transparent financial advice and investment management, catering to the needs of both small and tech-savvy investors. While the concept is gaining traction in India, there are challenges to overcome, including awareness, complexity, and customization for the local market. However, with continued innovation and adaptation, robo-advisory services have the potential to play a significant role in shaping the future of personal finance in India.