The Indian Fintech space is buzzing, and the numbers bear testimony to the fact. Research firm VCCEdge estimates that FinTech firms in India had attracted close to $186 million in funding in the first half of 2016 alone.
Over the years, the definition of FinTech or “Financial Technology” has expanded from covering companies that supplied back-end software systems to financial institutions, to encompassing a multitude of ventures that leverage technology to disrupt existing ways of executing financial transactions or managing money.
Indian FinTech firms now comprise a motley crew of lenders, equity advisors, wealth managers and financial planners. In addition, most asset management companies are peddling their direct plans on their websites.
It was a matter of time before the steadily increasing influence of FinTech and the ever-increasing ubiquity of the Internet combinedly disrupted consumption patterns for financial products and services, too. After all, our default response to decision making is to ‘Google’ it first. Why, then, should our approach to managing money or taking financial decisions be any different?
In recent times, we’ve witnessed the rise of an alternative investing methodology — “Do It Yourself” or DIY. Utilising technology, DIY platforms enable investors to assess their risk profiles and take investment decisions by themselves. The execution process typically involves little or no paperwork. The customer’s investment journey is managed using well-crafted processes that create the perception of high engagement between the platform and the end user. Some platforms even utilise market valuation indicators to periodically recommend trigger-based portfolio rebalancing.
Globally, platforms such as Betterment and Wealthfront have made significant headway in this space, garnering $5 billion and $2.6 billion in assets, respectively. Locally too, a clutch of DIY platforms is mushrooming. The question is, should you join the rapidly expanding coterie of DIY investors? As always, there are two sides to the tale.
The advantages of the DIY approach are unquestionable. The investing process is convenient, simple, and efficient. Since they rely more on the “pull” factor of quality advice and generally possess leaner cost structures, FinTech based advisory platforms are generally less inclined to fatten their wallets through the sale of high commission products — at the expense of their precious digital reputations. Ironically, you’re more likely to receive conflict free advice from a tech-enabled “Robo” advisor than from a human advisor!
On the merits of DIY platforms, Tejasvi Mohanram, Founder & CEO, RupeePower points out that they “allow you to add funds as and when you have a surplus, and invest in direct plans of mutual funds that have the potential to earn you higher returns”.
Here’s the flipside, though — all the palpable benefits of DIY notwithstanding, it can lead to severely unpleasant outcomes for some; the chief reason being that the dynamics of investing differ markedly from the dynamics of executing onetime, passive financial transactions such as taking a loan or buying term insurance. The former involves dealing with the idiosyncrasies of securities markets on an ongoing basis and entails periodic decision making.
On that note, let’s spend a moment delving into the recesses of the enigmatic human brain to obtain an elementary understanding of how decisions are made.
Interestingly, your brain comprises of two very distinct functional compartments: the “emotional brain” and the “logical brain”. Your default mode of decision making is through emotions, not logic. All the information that you’re exposed to necessarily flows through your emotional brain first, resulting in those notorious “gut calls”. Your emotional decision making processes are heavily impacted by aspects such as similarity and familiarity; implying that they will be coloured by your mental conditioning and previous experiences. Presented with a decision-making framework, your emotional brain immediately shifts into gear, quickly attempting a “ballpark” solution to a problem. Unlike your emotional brain, your “logical brain” stitches together facts systematically to arrive at conclusions.
Research in neuroscience has suggested that the logical brain evolved significantly later; hence our near-instinctive reliance on the emotional brain for making decisions.
It’s no secret that when it comes to taking investment decisions, behavioural biases, fired by the emotional brain can lead you down a path that involves much misery and financial strife. Almost all long-term investing success is contingent upon your ability to override your initial gut-calls and expose them to the litmus test of logic. This, not dime-a-dozen technical expertise, is where the services of a seasoned financial advisor can prove really useful. An experienced advisor can greatly collapse the “behavioural gap” in your portfolio returns; that is, the difference between the published long-term performance of a particular investment product, and the actual returns earned by you in the same product.
“Investing is all about what happens in our minds”, says Aashish Somaiyaa, MD & CEO, Motilal Oswal AMC. “Having all the knowledge and information about investing sometimes isn’t enough”
So, before you commit to DIY investing, it’s critically important to self-introspect. How do you typically react to losses? Are you able to ride out volatile markets? Are you able to take gutsy “contrarian stances” ? Do you tend to check your investments too frequently, or are you relatively passive?
If introspection isn’t your cup of tea, try a simple three question test called the “Cognitive Reflection Test” developed by Yale University’s Shane Frederick. It’s been proven to accurately measure your ability to bypass your emotional brain while taking investment decisions. If you find yourself easily buffeted by your emotions, you’ll be doing yourself a favour by steering clear of DIY investing and seeking out the services of an investment counsellor who has survived the rough and tumbles of at least two market cycles.
As Somaiyaa points out:“DIY investing is strictly for those who are confident that they don’t need a third party to help them watch out for their basic human instincts of greed and fear”.
