Robo-Advisors: Brand New Way To Invest

India is one of the fastest-growing economies in the world. However, when it comes to the country’s automation potential, it has only 85 industrial robots per 10,000 employees. According to a report published by the International Federation of Robotics, as of 2017, this figure is indeed very low robo-density figure compared to other Asian countries.

However, despite such abysmal figures, India’s wealth management industry has a different story to narrate. Of late, the industry has substantially shifted from traditional human-advisor-based firms towards software platforms that offer fully automated investment services, also known  as robo-advisories.

According to Statista, currently assets under management (AUM) within the robo-advisors segment in India amounts to US$ 42 million (as of 2019). Further, the AUM are expected to show a compound annual growth rate (CAGR 2019-2023) of 36.2 per cent resulting in total amount of US$ 145 million by 2023. As compared to robo-advisors globally, where companies like Wealthfront, Betterment, Nutmeg and Vanguard have already crossed over US$30-40 billion of AUM, we are still at a nascent stage. Despite the fast-paced growth of this industry where the needs of Indian consumers are diverse, the question remains how much robo-advisory can add value and make life simple?

But before we find an answer to it, first we need to understand the concept of robo-advisory. While robo-advisory refers to platforms offering automated investment services, robo-advisors are wealth management companies, which offer automated investment advice without any human intervention. They work with a predefined algorithm and analytics and generate the best return plans for investors according to their goals. The services provided, ranges from investment advice, portfolio rebalancing or tax saving. The platforms are so structured, that, they take specified data as inputs and automatically generate output based on certain rules. The inputs may be questions related to financial goals, period of investment, risk profiling or stages of life cycle. Based on the input data, a specific financial plan is generated. Commenting on the functioning of such platforms, Abhijit Bhave, CEO, Karvy Private Wealth, said, “Using pre-selected asset allocation models based on the risk profile of the investors, where underlying investments are ETFs or mutual funds, with periodic re-balancing, is the base model for majority of robo-advisory platforms. The platform may earn its income from the distribution of the products or by charging an advisory fee.”

India being a growing market for advisory, there is room for different types of advisory propositions to meet the needs investors. Robo-advisory firms comes under the ambit of Sebi (Investment Advisors) Regulations, 2013. In October 2016, Sebi came out with a consultation paper with regards to compliance requirements for the same. It noted that the risk profiling of the investor is mandatory and all investments on which investment advice is provided shall be appropriate to the risk profile of the client.

Further, the robust systems and controls should be in place to ensure that any advice made using such automated tools is in the best interest of the client. Srikanth Subramanian, Senior Executive Director, Kotak Wealth Management, said, “Indians are used to physical support in their service expectations and thus we believe that a ‘Phygital approach – (Physical + Digital)’ model suits the demands of Indians. Robo-advisory should appeal to new-age investors who are comfortable with technology-based solutions for all their needs.”

Currently, though adoption of robo-advisors is in its nascent stage, it is rapidly gaining momentum with lots of experiments. Several business models are operational when it comes to robo-advisors. “Robo-advisory has become a commoditised play and at the last count there were more than 250 players in the Indian market offering some variant of this proposition,” confirmed Prateek Pant, Head of Products and Solutions, Sanctum Wealth Management. Few companies dealing in robo-advisory in India include ArthaYantra, Scripbox, FundsIndia, Invezta, Upwardly, Expowealth, Orowealth, 5nance  and Sqrrl.

The model that finds the maximum acceptance in the market will win and will see other vendors embracing it as well. Commenting on the same, Rahul Jain, Head, Personal Wealth Advisory, Edelweiss wealth management, said, “Most robo-advisory firms in India currently run on a B2C model whereby the platform also tries to acquire interested customers. However, the cost of acquisition makes it challenging to run such a model in the long run. Although robo-advisors are growing, they still comprise a small fraction of the US$ 80 trillion of global assets under management.”

When it comes to the fee structure of such firms, it spans across various forms. Some are flat-fee based, some are AUM-percentage based while some are free. It also depends upon the level and depth of services offered and whether they are stand-alone or if they complement a broader range of services. In terms of charges, they cover a spectrum–there are services that offer skeletal advisory that charge zero fees (and use these services as gateway to cross-sell high-margin products).

“There are services that charge either a flat fee or a percentage of AUM on an annual basis. These charges range from 0.2 per cent per year to more than 1 per cent per year. Finally, there are full-service providers that offer robo advisory and human assistance as a package and provide them either using regular (trail fee-based) plans or charge upwards of 1.5 per cent to use no-fee funds,” explained Srikanth Meenakshi, Founder and COO, FundsIndia.com.

When it comes to business revenue, the robo-advisor earns either a commission from the mutual fund houses, or an advisory fee based on the AUM it manages, or a subscription fee charged monthly for the advice, or a combination of all three. When asked about business revenue, Vaibhav Agrawal, Head of Research, Angel Broking, said, “The business model for robo-advisors largely focuses on a need-based approach, which will help in reducing cost and improving efficiency in the long run.”

Who are the best-suited investors? Well, it can be said that robo-advisory could work well for most investors who are looking at low involvement goal-based investing.  However, there are also many tech-savvy millennials who are experimenting with smaller pools of capital. They are looking out for a simple user interface, online convenience, transparency and integrity of the platform. This would also be suitable for retail investors who lack investment experience and have a simple portfolio. Peeush Jain, Head, Retail Banking, Lakshmi Vilas Bank, said, “Robo-advisory is bound to flourish in alignment with increased awareness for the need of advisory, digital penetration and the imminent largest inter-generational transfer of wealth to millennials in the coming years. For example, digital channels are expected to contribute upwards of ~15 per cent to the total mutual fund AUM in FY19 and ~21 per cent for equities. This share is expected to accelerate exponentially in the next couple  of years.

As there are two sides to the coin, the benefits range from lower fees as compared to traditional advisors, menu-based multiple investment options to minimal human intervention and rule-based investment decision could help in avoiding typical biases. When enquired after the pros and cons of robo advisory firms, Ashok Kumar E R, CEO and Co-Founder, Scripbox said,  “In a robo-advisory model, the human error or human biases can be removed. That makes robo-advisory more objective. Further, bias is something we all carry, and when removed, it is the biggest advantage towards more sound decision-making.”

However, on the flip side, experts are of the opinion that, robo advisory firms may not be effective for advanced services like tax and estate planning, real estate investment plans or multiple stage retirement planning. Further, a do-it-yourself (DIY) nature of robo-advisory may induce investors to book profits at short intervals or panic at the time when markets fall steeply or are very volatile which can derail them from achieving their long-term goals. Commenting on the same, Pant said, “One of the biggest areas of behavioural finance in investing deals with investor psychology during unexpected crisis or extraordinary situations like the Great Financial crisis of 2008. Robo-advisors might be very ineffective in such situations.”

Robo or no robo, there are definite segments of the society who still prefer a human advisory model and work the traditional way.  “One should account the fact that there is more to client needs than just numerical inputs to the system and this is where the human angle comes to the fore. Advisors in this case can understand the mindset of the client and ensure that they are kept pacified and take the right decisions after due consultation,” confirmed Arun Chaudhry, Head, Online Business and Product Development, Broking and Distribution, Motilal Oswal Financial Services.

According to a report titled Top of the Pyramid, published by Kotak Wealth Management in 2017, Indian ultra high net worth individuals  (UHNIs) still prefer traditional wealth management services, which allow them to interact with their wealth managers. Findings suggest, while 34 per cent UHNIs said that they were aware of robo advisory services, most of them had not actually availed these services. Out of those who had, about a quarter said ‘saving time’ was the key driver.

Having said that, when it comes to traditional brokerage business, it is quite different as they provide personal attention and consultation, specific insights, have a larger base of instruments and offer customised advice. “These factors make Institutional Investors and HNIs more likely to favour traditional brokerages over robo-advisory. Advisory is just one part of the business, the softer aspects like personal touch are also relevant in this business, which the traditional brokerage houses are better equipped to provide,” said Sandip Raichura, Head of Retail at Prabhudas Lilladher.

Experts believe that, going ahead, traditional brokerage businesses will evolve their service proposition to robo-advisory and will work more in collaboration with leading robo-advisory businesses. When it comes to making a quality advice, free of any biases, robo-advisory holds a promise at the great leveller to the new-age investors. Although the future is bright, but considering the market is still in its infancy stage, it will need some time to mature. Vijay Kuppa, Co-founder, Orowealth feels that,  “Robo advisory has huge prospects in India with not only fintech startups and apps like us, but also in big banks and large pioneering startups like Paytm.”

Adapting to a such kind of technology would take time. However, to start with, experts suggest that companies should combine robo-advisory with a personal touch of a wealth manager. Once it gains the trust of investors and investors are comfortable with the experience, it can scale-up with much hybrid version, which provides automated suggestions coupled with capability of human advisory support. On a final note it can be said that, compared to other developed countries, the robo-advisory market in India is relatively small; however, given its growth potential, it can be said that the robo-advisory market in India will defnitely thrive in times to come.

himali@outlookindia.com