Investing with Robo Advisors in India – Will You do it?

Robo advisory in India is not very old and a list of Robo Advisors in India will be a short one. But this is something that is catching the fancy of a lot of young people these days. In last year or two, quite a few companies have begun operations in robo-advisory space.

As for me, I am pretty old school when it comes to money. Atleast as of today, I will not take advise from algorithms – on which robo advisors are based on. (So now you know of my biases.) 🙂

But first of all, let me tell you that I have doubts about whether its right to call these as Robo Advisors at all. I think that a better name would have been something on lines of robo-allocators. Advice is something that is very personal. The robo-advisers claim to offer customized advice but I know that customization of advice by algorithms has its own real-life limitations.

I have already written about why financial planning is important for everyone and why there is no harm in taking help of investment advisors if one does not have the time or skill to manage their money.

After all, we do go to doctors for our health problems. Isn’t it? So why cant we go to investment advisors to resolve our financial problems?

But coming back to robo-advisors, globally these companies are indeed ‘attempting’ to disrupt the financial space. In any case, a lot of things we earlier did offline have moved online. So it was only a matter of time before investment advisory too took the technology bait.

Its still too early but I feel that technology alone is not sufficient in investing. Trust has and will remain an important factor. As far as performance track record of robo-adviser goes, there is little or inadequate evidence to support a conclusion about robo-advisors being the best option for investors. Creating algorithms that prove their worth only on back-testing of past data is not a sufficient proof of superiority. But then, there are no conclusive ways to end this debate. And so, the jury is still out! You will regularly come across articles like Can Robo Advisers Replace Human Financial Advisers?

Can It Work Here in India?

You want a one word answer?

Then it is…. YES.

India is an enormously huge market with growing young and tech-savvy population. So just give one thought to the number of people who will be joining the workforce + investing for the first time in future and you will understand why this is such a lucrative space (and reason why so many tech startups are getting into money management).

No doubt technology has proven its worth in many areas of finance. Most notably in HFT (or high frequency trading) where algorithm-driven bots buy and sell stocks in nanoseconds to lock in arbitrage opportunities in different markets. Infact, many developed markets have around 80% to 90% of the daily volume being due to these bots.

But the question whether computers can help people with their personal finances is still open for debate.

Now earlier (and for all practical purposes even today), Indians have following 3 options when they want to invest/save:

1. Do-it-yourself (DIY) – This is for those who know what to buy, when to buy, how much to buy, etc. Now this is a kind of active management of wealth. But problem is that active management works, but it just doesn’t work for most people. 🙂
2. Buy what agents tell – This is the most popular option in India. Financial products are (mis)sold (and not just bought) in India. But people don’t realize that agents often steer their clients toward products that are in their own best financial interest and not that of their clients. They will push you to invest in products that give them higher commissions (real-life example). Though not all agents are like that, most still are. I feel SEBI seriously needs to do something to educate investors about understanding the issue of conflict of interest that agents might have.
3. Hire an Investment Advisor (if SEBI-registered, even better) – If the advisor is fee-only and not into distribution of products (which means he will not get any commission for sale of any particular product), then you can rest assured that he/she will give you unbiased advise to the best of his knowledge and ability. But such advisors charge fee. It can range from few thousands to even 0.5% and above of the total wealth of the client.

Now most individuals would love to take the DIY approach. After all, it’s glamorous to be able to manage your own money, make profits and be able to boast about it publicly. 🙂 But due to lack of understanding of how money works with reference to time and risk-reward spectrum, they end up losing money.

And once that happens, they become afraid of sitting on investment driver’s seat.

Many do not have the time to read up or do investment analysis or worst yet, are unable to understand what they might have read. Many have atrociously poor investing psychology and end up jumping in and out of the market at absolutely worst times (buy high and sell low).

Robo Advisors are trying to help such small investors (and ofcourse trying to make money some money too).

What exactly is Robo Advisory

Robo Advisors are kinds of online portals, apps or automated tools where one provides his/her personal and financial details and according to that, the algo-driven system will churn out an investment plan. Most robos then facilitate execution of the plan too.

But all robo-advisors are not alike.

According to this article in Mint, the robo-advisory platform can be broadly categorised into 4 types — automated investments, direct plans, goal-based advisory and full service advisory. A deeper robo advisor comparison can give you more insights about the working of these types. I suggest you do research about them if you are interested in investing through robo advisors.

There are quite a few advantages of these robo-advisors.

Generally, the platforms offer a very simple interface that makes it very easy to use.

Also finding these companies in not tough. Just do a Google search for ‘robo advisors in India’ and you will find all of them easily.

Another very important benefit is that they provide investment services at incredibly low cost. So atleast for small investors who want access to quality financial advice but are not interested in paying fees for hiring full fledged investment advisors, this can be a good option.

But people need to understand that in investment advise, there is no one size that fits all. Companies will tell you that they customize their plans according to your risk profile and needs. But there is a limit to the customization that can take place.

As for the present crop of robo-advisors, I feel that only the needs of those investors can be met by robo advisors who have uncomplicated financial portfolios. I will come back to this point in a bit.

Now I am not saying that robo-advisors don’t add any value. But what can be achieved is not earth shattering. There is a limit to what algos can achieve. Atleast for now and till people like Elon Musk are not entering this space in India. 😉

As far as the importance of human investment advisors is concerned, this is what Joshua Brown, founder of a robo advisory firm Liftoff had to say:

The traditional wealth management customer, however, benefits greatly from having a trusted advisor whom they can count on and can go to with concerns and questions. This customer does fear large losses of value and market crashes – and this fear is quite rational. When you’re wealthier and older, you have more to lose and less time to make it back. You have a higher cost of living and much more complication in your life – dependents, debts, estate issues, health problems etc. I do not believe an automated solution will ever replace the need for personalized, customized advice and a great human relationship for this client. (source)

Sounds sensible to me. And if you are among those asking the question…. ‘Should I use a robo adviser’, then these words coming from someone who is quite respectable in global robo-advisory space should be given the due importance.

Can Robo-Advisory work for everyone?

That is an important question to ask.

It can surely work for those who have no investment strategy at all till now. These are people who randomly invest here and there without understanding key concepts, their own risk appetites or even their financial goals. So even though what is being offered by robo-advisors might not be perfect, it surely beats what these individuals have – which is nothing.

For such small investors, finding a good investment advisor may be hard and costly. And taking help of agents (who are compensated by commissions) is not an advisable approach. So in such cases, Robo-advisory can help get them started and slowly take steps to build something like a decent portfolio.

But robo advising won’t fit every situation.

Investors having complex income sources and investments, business or tax circumstances may benefit more from the highly customized guidance of a traditional investment adviser. As for the seasoned investor, DIY is the best option if they have the time and (real) skill.

But as this article mentions, people need to understand the limitations of [robo advisory] services. For instance, you may not be able to talk with an advisor when you need to — say, when the market is volatile.

A traditional advisor will always score on personal touch and the face-to-face reassurance she can offer in times of need. Also, the services offer generalized recommendations that apply to the majority. On some of these counts, online platforms may not offer the best value for your need. 

Can Robo Advisory handle every scenario?

One word answer is No. For obvious reasons and atleast for now.

As already mentioned, the customization on offer is limited. Though most robo-advisers claim to provide tailor-made solutions based on risk profile, needs, etc., the fact is that they typically have a limited number of risk profiles that are used to categorize clients. So these may not be perfectly suited to a client’s situation.

An article in New York Times mentioned about Massachusetts Securities Division bluntly stating that it was tough for an algorithm alone to be serve a client fully. This is what the article had to say:

I am not sure that many investors, in many cases, can be adequately taken care of by answering questions,” said William F. Galvin, Massachusetts’s secretary of the commonwealth, who likened the services to driverless cars. “You need a human that is responding to them.

They are not able to provide the kind of personalized advice that a customer can get from a human on the phone or sitting across the desk, where the customer can say: ‘Oh, I have a new wrinkle. I might be inheriting assets in the next 12 months,’” he said. “Or: ‘I may need to care for a sick parent. How will that impact the cash I need?’

Falling Bear Market Risks for Robo Advisors

Now if you observe carefully, the rise of robo advisory firms in developed markets and India has largely coincided with a bull run in stocks. So to be honest, nobody knows how the clients or the platforms will react in times of crisis.

So the industry could face a big test if markets were to turn around.

Clients are not sophisticated enough to understand that buying in bear markets make sense. They will do the opposite. So support and hand-holding will be required when markets go down. Behaviour plays a bigger role when it comes to delivering good returns. Ofcourse the platforms can send proactive messages about how volatility is normal (and helpful) and remind the clients that when markets do rebound, he would have missed by selling into previous down markets and parking money in cash.

But as of now, there is no way to know how clients will react to such communications and whether they will change their behavior just because of such communications. After all as Josh Brown says,

Human behavior is going to be human behavior.

So in words of this article in Bloomberg,

A bear market would represent a challenge that the ranks of robo-advisers haven’t encountered yet, and it would be the ultimate test of just how crucial, or irrelevant, working with actual humans is to good, long-term investing.

Now when we are talking of hand-holding of clients (electronically by robo-advisors or actually by human advisors), fact is that it won’t work if someone is obsessed over volatility and determined to be sh** scared due to market crashes. Advisors can only do so much and the rest is up to the person whose money it is. You can send all the communications and educate and try to make people understand the benefits of buying more in down markets. But beyond an extent, nobody can rewire people’s brains. There will always be a percentage of people who sell their investments for the wrong reason and at perfectly wrong times.

Opportunities in Robo Advisory Space

Given the scale of opportunity, the number of actual and ‘almost’ robo advisory startups launching their operations is increasing by the day. Some are mere online MF distribution portals with some intelligence built into the background. Others are far intelligent goal-based assists for investors. So as does happen in any high potential space, private equity and angel investors are chasing these companies to participate in future growth.

According to a report Fintech in India: A global growth story, the market for fin-tech software in India as also the total transaction value for the segment will likely double over the next four years (source). This growth will be driven by rising customer expectations, the e-commerce boom and increasing usage of smartphones.

So with more and more tech-savvy people coming into the workforce, robo advisory firms do indeed have a long runway in front of them. And with a stable government at the center, which is mostly pro-business and making all the right moves, the founders of many startups have never had it this good. For those looking to be their own boss, there are a lot of initiatives being taken by the government through campaigns like Start-up India, Standup India. So it is indeed a good time for starting up in the Fintech space, given the growth potential of the market, better-than-earlier government and improving business environment. I am sure as days progress and (if) markets continue to do well in near future, more and more startups will mushroom in this space.

Last Words

I am no expert on robo-advisory so its wrong to call the following words as last words. These are infact my views (which can be biased because of reasons mentioned later on).

Robo-advisory is not doubt a great business opportunity and actually, is doing the noble job of bringing personal financial management to the masses.

But talking from the perspective of investors (clients), there exist problems that are bigger than ‘Robo advisor vs human advisor’ debate.

Most people don’t even realize that there is a need for investment advisory. The next big problem is that they don’t understand how agents are compensated (commission based) and how it can be detrimental to their own interests and wealth.

Good investment advisors can add tremendous value with their customized guidance, which I personally feel that algorithms can never do.

In reality, most robo-advisory firms are technology companies that offer financial management. So for investors contemplating using robo-advisers instead of human advisors, perhaps the most important point is to fully understand the limits of robos.

They can construct your financial plans and help you implement it. But how efficiently they can take into account sudden changes in circumstances in investor’s life is something to think about seriously. An advisors main job is to control the client and not only his portfolio. I doubt how an algorithm can do that effectively. Its possible that I may be ignorant of few facts that would be known only to people working in robo-advisory space. But nevertheless, this is what I feel.

An article I read says,

Simply construction of a financial plan will not help you to meet your goals. Any changes in your personal or financial life such as addition / deletion of a family member, loss of job, windfall gains etc. also need to be imbibed in your plan as per the situation for prudent planning. A human planner will not only be able to inculcate such changes into your plan, but also tailor the plan around your specific needs.

Moreover, you can discuss your specific circumstances and situations easily with a person. It is not necessary that all digital advisors will be designed to take into account all the conditions and circumstances of every client.

…While robo-advisors might help you for planning at a rudimentary level and there is nothing wrong with them in general, they might not be able to factor in complex information while drawing a financial plan for you.

So within the space of robo advisors too, one needs to be careful which ones to invest with.

But I have no doubt whatsoever that if the proposed growth plans of Robo-Advisors in India do come true, then it will lead to democratization of personal financial management in India – a dream come true.

As for me, I am in any case an old-school guy. I prefer to manage my own money. I do have advisor friends but they are at best, my friends. 😉 You can imagine my old-schoolness by the fact that even when I was in my early 20s, I was more attracted towards safe dividend stocks than more glamorous growth stocks! I still prefer reading physical books and scribbling instead of using my kindle. So I have a bias for old things and ways. So what I have written in this article should be read in the light of my bias. 🙂

I am 100% sure that in India, Robo-advisory has a huge potential. But it might not be suitable for each and everyone.