One of the main stressors in life is saving and financial planning. Most of us postpone and never start financial planning or we invest randomly. There are people who let their money lie idle in the bank because they are confused by the terms and choices. Another class is too risk averse to invest anywhere. Another class has just started earning and is eager to invest but is clueless where to start. Many of us are worried and simply unprepared
In the US, according to Expectations & Experiences, a quarterly consumer trends survey sponsored by Fiserv, people unsurprisingly said they were challenged by managing their finances and sticking to long-term plans. Millennials reported that they want advice from a financial professional and they’re not getting it today and managing their personal finance was a major pain point for them.
Most HNIs have access to wealth planners who manage and grow their wealth. But for the rest of us we just need to get started with our investments. We want basic investment advice and simple, secure, trackable tools to execute the advice. We don’t need the complexity of a traditional wealth manager. Atleast the money lying idle in the bank needs to grow. Robo-advisors are designed to cater to such segments which are usually confused and underserved by traditional wealth managers.
Sneek peek into the world of Robo-advisors:
A robo-advisor is an online wealth management service that provides automated, algorithm-based portfolio management. In India, most robo-advisors stick to just Mutual funds. In terms of transparency, returns and accessibility, mutual funds are sufficient to address goal-based asset allocation needs for retail investors.
Most robo-advisors offer you only advice or advice plus a platform to execute the advice. They mostly offer a portfolio made up of debt and equity mutual funds. Some offer a limited set of funds while some include a wider asset base that includes gold ETFs, bonds and tax-saving investments.
Most robo-advisors don’t get into other areas like estate planning, insurance or managing your cashflows, etc which a financial advisor would look into.
By hosting the services online (cloud – low cost and scales well for millions of clients), by distributing the financial products online (which scales well) and by using sophisticated algorithmic techniques to construct portfolios, robo-advisors eliminate the need for significant human time and effort thereby reducing the cost of the service, increasing scalability efficiency and better performance.
For the young and financially independent, this is where the huge appeal lies. They are finally getting financial advisory for low ticket transactions and not feeling left out of the game. Also it is a fill-it, shut-it, forget-it process that works for the millennial lifestyle. Once the risk portfolio is established, there is very little they have to do and also saves them the trouble of regularly monitoring and panicking at every market movement.
Inside the Robo-advisor:
The Modern Portfolio Theory is the set of algorithms that most robo-advisors currently use. Some others may base their automated investment guidance on Efficient Market Hypothesis (EMH). The robo-advisor would get your basic information, age, current assets and liabilities, investment goals, saving and spending pattern, time horizon to reach goals, mode of investment and a series of questions to determine your risk profile.
One of the algorithms would kick in and bucket you into a certain portfolio allocation. The platform’s algorithm tells you the amount you must invest and into what categories of funds — diversified equity, gold or debt the investment should be made. Within these, there may be finer sub-divisions such as blend of large, mid and small-cap mutual funds based on your risk profile. Some platforms may include gold and real estate in your portfolio allocation but will get you invested in those asset classes through gold and real estate mutual funds.
To get started on a robo-advisory platform, you will have to create an account, add bank details, Permanent Account Number (PAN) and know-your-client (KYC) details. Choose a systematic investment plan or invest a lump sum and enter the amount. Most services are paperless and pretty hassle free nowadays.
Fundexpert Robo-advisor –a powerful partner:
The more complex of the robo-advisors like the one at FundExpert use sophisticated data analytics that combine advanced trading data with behavioral and predictive algorithms and that too real-time basis inputs from the market. The algorithms would run for each user, tracking his portfolio, tracking each of his investment end dates and make necessary changes to safeguard him as he approaches his goal end dates. This way, let’s say a user who’s reaching the end of his 10 year goal, would be protected from market crashes that may happen towards the end of his goal end date. Many people who stay invested in SIPs for more than 10 years still face dismal returns because the markets crashed around the time their goals were due. Just staying invested for long time and doing a SIP is no longer sufficient to ensure good returns. You need to rebalance your portfolio and protect your money from volatility. Fundexpert’s rebalancing and market volatility tracking algorithms protect your investments and help gain higher returns (0.5 – 2% compounded annually).
The use of such robo-advisors means that the scales aren’t tilted towards HNIs employing top notch wealth managers and big institutions with fancy tools. It’s a known fact that wealth happens when your money works even while you sleep. Millennials and small investors aren’t the only ones using robo-advisers; wealthy clients too flirt with robo-advisers. In fact, many of the HNIs abroad have shifted part of their assets to Robo-advisors, which has scared even the big banks, making them justify their high fee. The robo-advisors have democratised wealth creation by providing access to world-class wealth creation tools that only the big guys had access to and now even the big guys are lapping it up because why pay a high fee when such services are available at low cost.
Another advantage in engaging with a robo-advisor is, it removes any human biases that will naturally creep in from you or your financial advisor. A financial advisor could give you advice based on some sort of conflict of interest but an algorithm can’t do that because the conflict of interest would have to be coded into the software, which is illegal and traceable. By letting the algorithms execute your portfolio and manage it, you mitigate losses due to emotional biases. The algorithms run 24*7 and keep an eye on the market and shift you to safe investments during market volatility, something most humans cannot track and do on a daily basis.
Robo-advisors have the power to address the financial advisory needs of large groups of people like the millennial and gen-X investors, currently ignored by traditional systems. Because of their digital nature and low fees, robo-advisors have made advisory services accessible to people with even a few thousands to spare. Use of high technology, speed, simplicity and personalization make most of the services very appealing to millenials who are digital natives and don’t like poring over finances every day. They can look to make their money start working for them with minimal effort and stress and let the robo-advisor take care of the rest.
On the investor front, every market has to evolve to a stage where the investor is comfortable dealing with an automated tool for certain investment services. Typically the robo-advisor would be your starting point towards investing and helps you develop an investing discipline. Later on you could graduate to become a DIY investor or employ a dedicated financial planner for 360 degree overview of your finances. Right now, in the US market the young earners and mass affluent delegators are flocking to Robo-advisors, while there is sufficient interest even from HNIs.
On the Robo-advisory capability front in the next decade, cognitive computing and AI will power major advances in robo-advisory capabilities. New features will get unleashed. Automated advisor assistants would evolve that provides complex advice, and will allow clients to interact with the assistant in a sophisticated manner, that would feel like a human interaction. A lot of these financial assistants may come bundled with your phone software (like Siri) and this will help to serve clients even more effectively. Many companies are also turning to gamification to reduce the complexity of financial advice. Games could replace “laborious” client processes like filling out risk appetite questionnaires. Many Robo-advisors may provide free wealth management gaming apps to improve financial knowledge in a fun way so investing doesn’t feel like hard work. The services may become as ubiquitious as Google maps one day. So, this is just the beginning and the best is yet to come.
So, come start your journey with India’s premiere robo-advisory!