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Is Robo-Investing The Right Choice For You? - Outside View by PersonalFN

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Is Robo-Investing The Right Choice For You?
May 3, 2017

A new dawn in technology has robots replacing humans in the workplace, and to a greater or lesser extent, this trend has been catching on across all industries.

How can financial services be an exception to this?

Globally, robo-investing is a buzzword these days.

In simple words, robo-advisory is the investment advisory managed by software-based platforms that use human-made algorithms.

Now, you must be wondering why use an auto-pilot mode when you can take the help of a financial adviser?

There are four main reasons why robo-investing is gaining popularity...

  1. Unlike financial advisers who often have discriminating policies for smaller investors, robo-investing platforms treat all investors the same.
  2. They offer a reasonable level of customisation in portfolio construction at an affordable cost.
  3. Robo-advisors construct and review portfolio taking into account one's risk appetite and time horizon to stay invested.
  4. Since the portfolio construction and review doesn't involve human intervention, there's no room for speculation.

In other words, robo-advisory platforms are created to iron out the shortcomings of the financial advisers and investment consultants. As you'll acknowledge, many times financial advisors fail to prove the value of their services. They either charge you a fat fee and offer average advice, or charge no fee but provide biased advice that earns them huge commissions. It's the investors' loss, in either case.

Long story short, robo-advisors score high on affordability and convenience; and hence, have been gaining popularity.

But you can't take anything at face-value and you should always conduct a thorough analysis. Therefore, be careful while selecting a robo-advisory platform.

Every advisory platform may offer you convenience in transacting, but you must be sure of its superiority, integrity, and longevity.

It's unfortunate that in India, the robo-advisory models are proliferating, but investors are not bothering to check their track-record. Virtually, no one is raising a question about their integrity. Longevity of the platform is not even a consideration for many investors.

What might go wrong with existing robo-investing platforms in India?

Some of the popular robo-advisory platforms focusing on mutual fund investing have no background of mutual fund research. They are either relying on the third-party research, or they are using the most basic filtration.

What's the result? Investors are likely to get inferior quality advice.

If you call into question their integrity, well, they might not be cheating you per se. But why most of them are still making you invest in regular plans of the mutual funds and offering free advice?

Here's a problem. When the business model of an advisor is commission based, he/she tends to offer you biased advice. If the same pattern is being followed in robo-advisory as well, what value, apart from convenience, will it add?

Before, relying on such robo-investing platforms you should ask yourself one question-can you compromise on the quality of your investments for the sake of affordability and convenience?

Finally, you must be assured that 20 years later, the robo-advisory platform will continue to exist. Many times it happens that, to capitalise on the business opportunities, companies adopt the "trial and error" approach. If they can't sustain their objectives and fend off competition, they have no qualms in jumping ship. If a robo-investing platform shuts down overnight for any reason, investors will suffer the most.

Now you will have a question, (somewhat valid)-why would a robo-investing platform shutdown? The answer lies in the business model they follow.

Consider this...

Don't you think, there are way too many e-commerce players running the business in an unsustainable manner? Do you know how much they spend in acquiring each customer hoping that, someday they will turn profitable?

Biased robo-investing platforms (that charge you no fees) are shelling out huge capital on acquiring clients. If they can't sustain the losses on their balance sheet, at some point, they might throw in their towel.

All worthy robo-investing platforms will have 3 things in common:

  1. They will charge you fees and justify it with their performance
  2. They will offer you direct plans-which save you a great deal of cost over the long term.
  3. And, they will have a proven track record of providing mutual fund schemes with well-researched advice

And please don't forget this...

Robo-investing platforms don't make financial advisers less competitive. If you want a high-level of customisation and need an expert-on-call, you might still solicit the services of a Certified Financial Guardian in your vicinity for superlative guidance. Remember, every investor needs a financial guardian, who is mark of trust and respect.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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