Robo-advisors for wealth management in India - Opportunity or threat?

Ramesh, a private sector employee in his late-thirties, had been toying with the idea of making investments based on a sound financial plan. While searching for a good Chartered Financial Planner on the internet, he came across an app based financial advisory service. Having heard about this latest trend, Ramesh signed up with some skepticism. In a matter of minutes there were funds recommended to him based on his requirement and the investment could be completed in just a few more clicks. He was stunned by the speed of the process. While the entire thing seemed quite convenient, Ramesh had questions in his mind like – Am I on the right track? Should I invest through this automated channel with no human advice? How will it affect my hard-earned money? Not only Ramesh, but questions like these are on most of the investors minds too.

So, what’s the buzz? Robo-advisors are nothing but financial planning through Artificial Intelligence. There is minimal human intervention and the entire process is managed by an algorithm-driven software. So, say goodbye to traditional financial planners and welcome in Robo-advisors – the new-age mantra!

Why are robo-advisors preferred?

Investing and personal finance planning has been a confusing territory for first-timers. For some, structured financial planning was out of reach while for others it was the exorbitant fees that deterred them to approach the financial advisors. Analytics is all set to transform human lives and robo-advisory does the same for investment planning. Here are some of the reasons why robo-advisors are gaining importance:

Low Threshold: Usually, the services of a professional financial planner, were available only to high net worth individuals. However, these automated financial advisory can be easily availed by the young working class also. In fact it is more suited to first time investors. One does not need a minimum annual income of Rs 5lakhs to start their financial planning process.

Lack of experienced CFPs: According to ET, there are only 2,500 certified financial planners in India and 62 million households with annual incomes above Rs 5lakh that could avail the services of an advisor. This shows a huge talent gap and lack of expert advice in this field which has led people to opt for robo-advisors.

Lower fees: Experienced financial advisors charge a fees that is deemed unaffordable by most. Some charge an upfront fees for personalized advice, some charge a percentage based on the corpus of assets, while others charge a monthly remuneration for maintaining the portfolio. However, having a robo-advisors relieves one from this ordeal. Most of the Fin-tech start-ups are offering these services free to the clients and charging commission from mutual fund distributors which means no overhead cost like a salary of CFPs are borne by established advisories.

Accessibility: Due to minimal human intervention, robo-advisory is accessible 24×7 and the client need not wait for the financial planner or take prior appointment for the same.

Quick execution: The endless documentation, cheque collection and other formalities made investing a long drawn process and dissuaded many investors. This has been completely solved by robo-advisory where everything is just a click away.

Is the Indian financial sector ready for Robo-advisors?

India is slowly warming up to this idea and there are many robo-advisory based start-ups such as Scripbox, Bharosa Club, FundsIndia, Artha Yantra and Invezta, with a steady clientele. The services of these platforms range from automated plans, goal-based asset allocation and end-to-end advisory based on information taken from the client.

Today, not only start-ups but established financial advisory services such as Birla, Bajaj Capital, ICICI securities and Sanctum Wealth Management are also optimistic about the future of robo-advisory and are already foraying into this territory either through in-house products or through partnerships with leading fund houses.

According to Business Insider, ‘robo-advisors (with some element of automation) will manage investment products worth $1 trillion by 2020, which will go up to $4.6 trillion by 2022.’

Is it a threat to the traditional financial planners?

The trend of robo advisors is fast catching up and this might lead many to believe that it is the end of financial planners. However, this is not true. Robo-advisors have their own set of limitations and there are many elements of financial planning which requires human intervention.

  1. Robo-advisors no matter how well-programmed have limitations in accurately predicting changes in the global and domestic economy. A good financial plan always calls for far-farsightednessand this is possible only with cognitive abilities of a human and rich experience accumulated over the years.
  2. Automated plans are totally dependent on technology. Any kind of glitches on the technical front can render the entire investing experience unpleasant. Moreover, any sort of virus attack on the core software can result in flawed execution of the financial plan.
  3. Security is a big concern with robo-advisors. Cyber frauds are on the rise and many people can be wary of sharing their confidential information related to accounts and finance. People may be apprehensive about the information being stored in the system and its probable misuse by miscreants.

The changing landscape of wealth management

  • Enhancing the value proposition: The emergence of Fin-tech or technology within financial services has led to major changes in the financial advisory. To navigate through this, financial advisors are re-inventing themselves. They are embracing the technical aspects and increasing their value proposition by offering services that go way beyond basic asset-allocation.
  • Technical upgrade: With the growth of automated investment advice, financial advisors have realized that technology plays a big role these days. Thus, the traditional advisory services are upgrading their technology platform to offer better investment experience and avoid losing clients to robo-advisory start-ups.
  • Optimal pricing of services: One of the features that have pushed prospective clients away from personal financial advisors is the high fees charged. On the other hand, robo advisors offer services at a much lesser fees, sometimes even for free. This has led existing financial advisories to re-calibrate their prices. Optimal pricing will lead to a healthy competitive environment and pull more clients towards structured financial planning.
  • Hybrid model: To get the best of both worlds, established financial advisors are offering a hybrid model to the clients. The insights, experience and flexibility of the traditional financial planners are juxtaposed against the agility, accessibility and cutting-edge technology of the robo-advisors. Financial planning companies have identified the repetitive and mechanical tasks and outsourced those to robo-advisors, while the more intricate tasks of providing personalized advice and risk management based on insights, experience and direct interaction with the client has been reserved for traditional financial advisors.

Conclusion: Peaceful co-existence is the key to survival

Having said that many start-ups and established players are foraying into robo-advisory, the phenomenon is still in its infancy. The industry is undergoing a phase of transition and it is has yet to be gauged how comfortable customers are in-tune with the latest technology. From the current trend, it is evident that robo-advisors are here to stay as a part of broad range of offerings from the established financial advisory services. As for start-ups exclusively working on the automated model, they might face some competition from the hybrid model offered by established players.

The bottom-line is, robo-advisors are an alternative method of investing and not a replacement to the traditional Certified Financial Planners (CFPs). However, this is an emerging phenomenon which cannot be ignored. The existing financial advisory services have to optimally scale their operations and adjust to newer technology for surviving in changing times.