Key Takeaways
- Robo-advisors are automated platforms that provide financial advice or investment management, with minimal involvement of humans.
- The robo-advisors in the market today focus mainly on auto-investing, and are yet to incorporate full-fledged financial advisory.
- Robo-advisory with its low cost solutions, hassle-free enrolment and availability on digital mediums has made quality financial advice accessible to one and all.
- Robo-advisory, though in its nascent stages, is quickly picking up pace and will be integral in shaping the future of financial advisory.
- When choosing a good robo-advisor, look for credibility, transparency, security and comprehensiveness of financial advice.
Ever fancied having someone do all the hard work managing your finances while you relax, enjoy life and watch your money grow? Well, it’s no longer a dream – courtesy robo-advisors.
Robo-advisors have become fairly popular in the last decade. As the majority of the population shifts towards digital mediums, it’s inevitable that most industries will see digitization in one way or another, financial advisory being no exception. Robo-advisors are the result of such digitization in the personal finance management arena.
What exactly are robo-advisors?
Robo-advisors are automated platforms that provide financial advice or investment management, with minimal involvement of humans. Most robo-advisors require you to input certain key information on your finances, risk appetite, and financial goals. Based on the inputs, the smart algorithms churn out a suitable investment portfolio that you can invest in. Currently, most robo-advisors in the market focus on auto-investing, essentially putting you investments on auto-pilot.
Why should we use robo-advisors?
Low Cost
Since robo-advisors use algorithmic decision making and automation, the reliance on manpower is minimal, whether it be for consultation or management. This makes them inherently scalable. As such, they are able to cut costs significantly and the end consumers are able to enjoy the benefits of low cost products. What’s even better is that most robo-advisors use ETFs and direct mutual funds for portfolio creation, which are low fees investment instruments. These have revolutionised investments in the modern era by providing substitutes for more expensive financial instruments such as endowment/saving plans or traditional mutual funds.
Unbiased
Traditional financial institutions tend to have biases towards the products they are marketing, and as such, the financial advice cannot be fully trusted to be in customers’ best interests. Robo-advisors eliminate this major drawback of human advisory. Since the financial advice is generated by algorithms, robo-advisors effectively eliminate these biases and offer advice which fit the customers’ needs the best.
Some might question or argue that algorithms can be biased too, and that is indeed a possibility. The key here is that the algorithms need to be backed by concepts of personal finance and best practices derived from years of experience. A good check for this is if the so-called robo-advisor holds a SEBI RIA licence or not. SEBI RIAs are incentivised by design to work in the best interest of their clients and cannot be focused on product selling.
Accessibility
One of the major issues with traditional advisory channels is that good financial advice is only restricted to a select few who fall under the HNI (high net-worth individuals) or UHNI (ultra-high net individuals) bracket. Robo-advisory with its low cost solutions, hassle-free enrolment and availability on digital mediums has made quality financial advice accessible to one and all. As such, it’s only a matter of time before the concept is adopted by every household.
Things to look out for in a good robo-advisor
Advisory
As mentioned earlier, most of the robo-advisors today are focused on investment portfolio creation and management. The financial advisory component is missing in terms of aligning users overall financial position, not just investments, with their goals and responsibilities. It’s always recommended to opt for robo-advisory platforms that are comprehensive in nature and that provide customised and actionable advisory, taking into account your resources, financial health and goals.
Transparency
Although robo-advisors boast of low cost solutions, it is absolutely important that you do your due diligence on the fees and charges. These are usually found under disclosures. Few platforms that actually proclaim to be ‘free’, could be earning from charges embedded into the solutions, that can significantly affect your returns. They could also be monetising at the expense of your personal data. After all, there are no free lunches.
On the other hand, don’t be too hasty to dismiss fee-based financial advisory (such as SEBI RIAs) as these are less likely to be pushing for commission-based products and more likely to provide you unbiased advice that is best aligned with your needs and interests. So the small fee that you pay in advisory will serve you well in helping you meet your financial goals.
Security
In today’s age, data privacy and protection is of utmost importance with more and more personal information floating around online. Data breaches could be especially disastrous when it comes to financial platforms. As such, do ensure that the robo-advisor you are signing up for has top-level cyber security in place and takes customer privacy very seriously.
The Future
Nearly half of the Indian population today has smartphone and internet connectivity, and this trend is only going to accelerate in the post-COVID 19 world. This is also set to transform the financial services industry as more consumers look to the digital medium for these services. As a result, fintech start-ups and financial institutions are investing heavily in their digital platforms with implementation of AI and machine learning to provide customised solutions to their users. Robo-advisory is a game-changer in this trend, which is quickly picking up pace and will be integral in shaping the future of financial advisory.
Bottom Line
As people become more and more aware of the many benefits of robo-advisors – be it in terms of cost savings or accessibility – they are increasingly becoming a popular choice, especially amongst tech-savvy millennials. However, robo-advisory is still in its nascent stages. While the many investment-focused robo-advisors are addressing a key component of finance, it is important to be cognizant of the fact that investment planning is only one part of financial planning.
The true value of a robo-advisor lies in unlocking its potential to provide holistic advisory, without the biases and challenges of traditional channels. The good news is that we will soon be launching the very first robo-advisor that takes care of all your financial aspects. With customers’ needs at the forefront of our design and development process, the platform will be easy-to-use and accessible by all. Stay tuned!