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Taking Investment Advice from Robo-Advisors? Read This!
Oct 1, 2015

From manual gears to automatic transmission in cars, semi-automatic washing machines to fully automatic ones, from physical branch banking to e-Banking... the world has changed and thanks to the continuous technological innovation happening around. Technology has literally transfigured many industries. Those who had envisaged this change are placed pretty comfortably, while those who disregarded the scope for technological development have paid the price. For instance, typewriters were out of business after computers stemmed. The way business is being carried out today is a far cry from what it was a few decades ago.

In the financial services industry as well, robo-advisors are replacing human advisors. Technology has brought in a sea change in the way many seek investment advice. It's just the beginning and will go a long way.

Robo-advisors are digital advisors that provide portfolio management and financial planning services online, without any human intervention. These types of advisors are usually more affordable than human advisors to all classes (of investors). There is no emotional bias in the advice, but there could be few limitations to the way information is sought without human intervention.

However, not all robo-advisors are alike. They may differ from one another in many aspects-right from their scope of work to the impact of advice on your finances. Few provide a roadmap of a financial plan with a bouquet of recommended products (which could range from mutual funds to fixed income instruments); while some stick to only a single product line, say mutual funds.

What about the quality of advice?

As mentioned earlier, there's no emotional bias while processing information due to the lack of human intervention. So asking relevant questions and challenging the output could be tough. Quality of advice would solely depend on quality of input.

So as precaution, you ought to reveal a lot of personal information to robo-advisors. But considering the rise of phishing and cyber-attack cases, you need to be extra careful, by ensuring that the platform you are using has stringent cyber-safety measures for your data. Though, a robo-advisor may help you plan for your goals, you still need to realign your financial goals, and this may pose a challenge.

Nevertheless, robo-advisors do offer some merit over traditional human advisors...

  • Reach: If you have a high-speed internet connection and mid-range computer/laptop, you are halfway there. All you need is to share the correct information to get customised advice, and you can always access it at any time. Popularity of robo-advisors in developed markets such as the U.S. is on the rise, but the trend is catching on fast in India with Arthayantra, BigDecisions, FundsIndia, Scripbox, and a few more.
  • Speed: Robo-advisors are likely to deliver plans, solutions faster as they use algorithm-based platforms. Traditional advisors may be efficient in dealing with the dynamics of real-world complexities and can design multi-pronged strategies for you.
  • Costs: Traditional advisors are likely to charge you more for services. This is one of the main areas where robo-advisors outpace human advisors by far.
  • Execution and performance: Ideally, human advisors are expected to have an apathetic approach to avoid behavioural biases but no matter how hard one may try, it is quite possible that human advisors are biased and undisciplined. On the other hand, robo-advisors would act consistently based on the information/inputs you provide. They could suggest to you an asset allocation to follow, with some even recommending weightage to instruments within a respective asset class.

Robo-advisors are most suited for...

It may be appropriate for those investors who are tech savvy. Those who prefer going "the green way", abhor keeping records in the paper form, and prefer to keep almost everything in electronic form may appreciate the robo-advisories even more

The future of robo-advisors...

As the world is moving into the online space with its ease and conveniences, it is quite likely that robo-advisors will replace human advisors. Nevertheless, some amount of convergence may also be seen if there's intent to serve investors better.

Advisors who have been serving investors the traditional way, may start investing in technology platforms to serve clients more efficiently and with data processing accuracy. As an advisor, you ought to handle your client's money with as much care as how you would go about handling your own. But the underlying fact remains that wealth management has always worked on trust, which is based on the foundation of integrity. As far as their performance track record goes, there is little or inadequate evidence to support a conclusion. The jury is still out!

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

Disclaimer:

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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