Robo-Advisory,The Way Forward

Few years back, a lot of fintech companies appeared on the Indian financial landscape. Many of them were robo-advisory firms that wanted to automate the entire investing process for an investor. The promotions of these firms were common in both electronic as well as print media. There were expectations that new investors, especially those who are internet-savvy and have higher earnings and savings, would flock to these firms, attracted by low fees and the promise of solid returns and customised portfolio. These companies would automate their client’s investment process of selecting right fund, rebalancing of portfolio and tax-loss harvesting process to keep an investor’s portfolio on track. 

Before these robo-advisors came into the picture, the financial advisory was largely manual. Financial advisors use to assess the risk profile of the investors, and based on that, they would recommend a portfolio. After that, advisors would also help the investors with their transactions. Although everything was smooth, it had all the drawback that a manual system could possibly have. It was painfully slow process, there were inconsistencies in advice and, most importantly, it was not scalable. Hence, only a select few could afford the services. Then, sometime in the year 2012-13 came the fintech companies, who promised panacea from all these drawbacks by offering robo-advisory services. The robo-advisors primarily capture the basic details of the customers, and based on that information, determine an appropriate asset allocation along with suitable MF schemes, and then automate the entire rebalancing, tax harvesting, billing and reporting functions. It was supposed to democratise the investment management market. The services that were accessible only to those with deep pockets was now available to everyone interested in financial planning. 

Five years down the line, things have not shaped the way they were expected to. Many of the start-ups in the field found their enthusiasm misplaced and pressing the reset button was not easier. Hence, many of them are changing their strategy to survive and thrive.
 

This can easily be seen from the latest report released by the AMFI on commission distributed by fund houses to mutual fund distributors. The list is dominated by banks and few other corporates that have human interface rather than only digital.

What went wrong? 

The reason for failure of these earlier robo-advisory firms may be attributed to idiosyncratic nature of the financial planning service. Earlier, the start-ups thought that technology alone can be used to fulfil every need of the investor. But algorithm do have their own limitations and cannot completely fulfil the essentials of a comprehensive financial planning. The human element is as much required as technology, which can only improve the efficiency of human being. Earlier avatar of the robo-advisory was offering products that were suitable to you, but it lacked the fiduciary advice which not only offers a suitable advice to you, but also offers that which is in your best interest. Besides, the operating cost of these firms were also very high. On an average, they spent around Rs 2500 to acquire a client. Even if we assume revenue of 1.5 per cent of assets under management, a back of the envelope calculation shows that every client needs to come with an asset of Rs 1,60,000 to break-even the acquisition cost. At the end of June 2018 on an average, the retail investor had AUM of around Rs 1.4 lakh, which is way below the required level to break-even. Initially most of the robo-advisory firms were eager to acquire more clients rather than client’s assets, which resulted into poor performance. Larger number of clients with lower assets under management was not helping them. 

The Future 

Now most of the robo-advisory firms have realised that the road to profitability as standalone business-to-consumer (B2C) is long and uncertain. Therefore, they are changing their course of action and want to break into the world of intermediation by partnering with some established investment services players. Having only digital presence will take them nowhere. The delivery of service requires a human touch. The trend is visible internationally also where, Betterment, which originally launched as a pure robo-advisory, but has since added human interface to its offerings. In addition to this, they need to rationalise their cost of client acquisition and servicing them.

Robo-advisory is still evolving and trying to find the right path. Nevertheless, you should not mistake it as yet another fad. In its right avatar, it is going to be an important part of the financial planning ecosystem, but it would happen over the long-term. It is suitable for you if you are cost-conscious and do not want to pay higher charges for advice. Although, these charges are expressed in percentage and may look minuscule to you, over time, it will help you to save an immense amount of money.
 

Another important criterion is that you can start with a small amount of investment as you do not need hefty bank balance before going for robo-advisors. There is no mandatory minimum investment amount required from the investors. 

One of the benefits of opting for robo-advisors is that they do not suffer from any behavioural biases. They are expected to offer you a rational advice. In the case of human advisors or if you do it yourself, there are chances that you may take decisions influenced by your behavioural biases. 

Going ahead, robo-advisors are going to be a big thing and will experience exponential growth in their assets under management. According to a Business Insider Intelligence forecast, robo-advisors, including those with semi-automated set-up, will manage investment products worth USD 1 trillion by 2020, which will go up to USD 4.6 trillion by as early as 2022. Moreover, the advances in computing, machine learning and artificial intelligence will make robo-advisors more acceptable due to better customised advices.