<p><em>Robo-advising is fast replacing agents and financial counsellors. Feed your future goals into your computer and it will tell you where and how to invest<br><br><strong>By Sunil Dhawan</strong></em><br><br>The young generation buys practically everything online, from grocery to gadgets. The Internet allows users to search, select and make decisions independently. Soon, buying financial products online will be no different.<br><br>Making the right investment is key to meeting financial needs of every stage in life. In the absence of somebody qualified, dedicated and professional at picking suitable financial products, most decide for themselves or take advice from friends and relatives. And in doing so, they often end up buying products that fail to meet their long-term needs such as child’s education, marriage or one’s own retirement. This happens because people invest without properly estimating the requirement, or creating separate portfolios, or reviewing and adjusting as per the changing environment. It’s all on an ad-hoc basis.<br><br>This is set to change with robo-advising. Individuals can now seek advice on all financial matters online. Today, there is a handful of robo-advisers in the market. Arthayantra, AdviceSure, ScripBox, Funds India, My Universe and BigDecisions are some of them.<br><br>Simply put, robo-advising involves letting the machine (software) know about an individual’s goals for it to create an investment portfolio using various algorithms and automated processes. It further assists with investing in recommended products, schemes and, subsequently, reviews the portfolio to suggest changes. Manish Shah, co-founder & CEO, Bigdecisions.in considers his platform to be a step-up version as it helps in providing mathematical answers to financial decisions. “Robo-advising is essentially combining data that you don’t normally have, with algorithms that you would not be able to assign yourself, by a firm less focused on end-product sales to give the power to customer to take the financial decision. The whole process — from advising to actual transaction — is automated, with minimal human intervention. “Normally, most investors are emotional, which leads them to react irrationally to market changes. The same does not happen in robo-investing.” says Sameer Aggarwal, co-founder, AdviseSure.com.<br><br><img alt="" src="http://bw-image.s3.amazonaws.com/quotes-lrg.jpg" style="width: 650px; height: 508px;"><br><br><strong>What It Entails </strong><br>When creating an investment portfolio, robo-advising factors in various elements of a client’s requirement including horizon of the goals to be met, risk profile and taxation amongst others. Specific portfolio for each goal is created taking into account asset allocation and diversification, so goals are met through a robust risk-adjusted approach. In the case of robo-advising, it’s important that processes, and especially the advice, are consistent and standardised. Aggarwal says, “Complete investing and the advisory process are system driven and based on analysis of financial data, which is back-tested by us under various market conditions and scenarios. The advice offered by these robo-advisory firms may however vary as all these firms use their propriety software. Nitin Vyakaranam, founder and CEO of ArthaYantra, India’s first robo-adviser, says, “Advice may vary as it depends on the financial prowess of the advisor putting various techniques of financial econometrics in the back-end.”<br><br><strong>Existing Model</strong><br>Most people in India still invest on the recommendation of individual agents and financial advisers or as per the market flavour. What robo-advising attempts to do is eliminate all possible anomalies that arise in the case of human advising on financial matters.<br><br>Besides, robo-advising can also come handy as the number of advisers in the market is insufficient to service the growing needs and aspirations of the investing population. Sanjiv Singhal, CEO, Scripbox says, “The way we see it, there are no advisers in India. There are less than 300 registered investment advisers with the Securities and Exchange Board of India and fewer than 2,500 certified financial planners. We believe the automated advice is going to fill this gap.” According to a Boston Analytics report, 33 per cent of individuals in tier II cities don’t not know how or where to invest in assets. “Today, we have 2-3 lakh wealth management accounts that get advice, but we have 250 million middle class people in India. Where would they get cost effective advice from,” adds Vyakaranam.<br><br><img alt="" src="http://bw-image.s3.amazonaws.com/Sanjiv-singhal-ceo-mdm-300.jpg" style="width: 200px; height: 325px; float: right; margin: 6px;">Financial products, by their inherent nature and structure, are prone to mis-selling. Plus, with thousands of schemes and products available, it becomes humanly impossible to zero-in on the right scheme. The financial advisory space too is scattered. Several agents and advisers are pushing products without proper and complete financial planning. Vyakaranam says, “Most first ask how much one wants to save and then tell where to invest; the whole structure of the industry is product centric.” On the other side, are the fee-only advisors who are not allowed to sell products. To a large extent, the fee-based advisory can curtail mis-selling, but the reach and scope to handle large number of customers could be a challenge. Aggarwal says, “An adviser can’t service a customer investing Rs 100 per month. Robo advisory can be useful to the 35 crore Internet users in India.” <br><br><strong>Robo-investing In India</strong><br>Singhal says, “Somebody who only helps in investing online is not a robo-adviser, but just a transaction platform.” Essentially, only-advisory, of which financial planning is a part, and investment advisory, where actual investment options are suggested, make a robo-adviser. According to Srikanth Meenakshi, founder and director at FundsIndia.com, “Robo-advisory is basically a service backed by system and automated processes that reduces the burden on humans to a certain extent thus enabling these services to deliver on a large scale. Calculations, portfolio, design, portfolio maintenance, rebalancing and securing assets — whichever service does these five things, it is a robo-advisory.” Most robo-advisers in India are currently catering primarily to mutual funds. Vyakaranam says, “We are a robo-advisory and we look at everything such as life goals, insurance, loans and our aim is to increase the investible surplus of the customer.”<br><br>Before subscribing to the services of a robo-adviser, it is important for an investor to understand what products the firm is dealing in. Presently, such firms rely heavily on mutual funds and thus earn from them mostly as trail-commissions. For some, it could be different. “Our model covers those products too where advisors don’t make any commission,” says Aggarwal. The model is set to mature in time to come. Aggarwal says, “Presently, there are only two-three robo advisers in India in the true sense. All of them together have not more than 1 lakh active customers and the expected asset under management of $100 million maximum.”<br> </p><table style="width: 550px;" align="center" border="1" cellpadding="1" cellspacing="1"><tbody><tr><td style="text-align: center;"><strong>ALL ABOUT ROBO-ADVISING </strong></td></tr><tr><td><br>• Online service for advice on financial and investing needs of investor<br>• System-driven analysis and creation of portfolio for each goal through automated processes<br>• Offers an online platform for estimating the requirement for goals through calculations<br>• Automated design, maintenance and rebalancing of investor portfolio • Provides a transaction platform for investing across asset classes<br>• Uses the concept of artificial intelligence in building a financial plan<br>• Provides an unbiased and robust solution minus the emotional quotient<br>• Takes into account investor’s requirement including horizon of the goals to be met, risk profile and taxation</td></tr></tbody></table><p><br><br><strong>Robo-investing Abroad</strong><br>In developed nations, robo-advisory firms are more customer-centric. Therefore, instead of actively managed mutual funds where the scope to curtail costs in favour of investor is less, their offerings include ETFs to a large extent. Indian firms may charge a low annual fee, but by not investing in low-cost ETFs, investors do not stand to gain much. A mix of ETFs and actively traded funds can be a solution. Singhal informs, “In the US, the market is different, and so the advice is also different. So, if we don’t have REITs here and ETFs don’t make sense, we at Scripbox recommend active funds as in India they still beat market by 3-4 per cent over time even after expenses. But as market matures and ETF becomes more important and a better product, even we will recommend those products. Scope for products will evolve as market evolves, but what we are doing now is filling in the gap for advisory.” Also, regulations are different in the US when it comes to making changes in portfolio. Meenakshi says, “In the US, regulations allow robo-advisers to take mandate from customers and do rebalancing on behalf of customers, but in India it’s only the PMS (portfolio management service) which is allowed to do so.”<br><br><strong>Limitations</strong><br>Preparing towards a goal may not be very simple. There could be extraordinary events related to spouse leaving job, parent’s property to be accounted for, a second career option. Will robo-advisory be able to address all that? Rajiv Jamkhedkar, founder and chief executive officer, The AZAD Programme, a financial advisory firm says, “Robo-advisory is helpful for someone with no planning at all. When there is multiplicity of goals and a detailed plan is to be made taking into account full details of clients, then you need an offline process.”<br><br><strong>Restoring Trust</strong><br>The disruption we are witnessing in the online shopping space is spreading to other domains as well. The e-commerce wave has struck financial services too and could bring a change in the way people invest for their goals. Its early days and robo-advising is yet to see the downturn in markets. Will it be able to bridge the human-trust deficiency?<br> </p><table style="width: 550px;" align="center" border="1" cellpadding="1" cellspacing="1"><tbody><tr><td><img alt="" src="http://bw-image.s3.amazonaws.com/shutterstock_2-lrg.jpg" style="width: 550px; height: 325px;"><br><strong>FIRM APPROACH<br><span style="color:#696969;">To be a smart robo-investor, it is very important to know about the company’s overall approach and philosophy. Here is how you should be running a check on<br>the service provider…</span></strong></td></tr><tr><td><strong>1 CHOOSE A ROBO-ADVISORY</strong> firm that provides comprehensive services and not just a platform to invest<br><strong>2 AT THE VERY OUTSET,</strong> find out about the services and the modalities from the firm<br><strong>3 GET A FIX OF HUMAN </strong>intervention to the entire process and how much of it is automated<br><strong>4 BASIC UNDERSTANDING OF THE BACK-END</strong> processes employed by the firm including various models that they employ<br><strong>5 LOOK AT COST-EFFECTIVENESS</strong> taking into account the products that the firm deals in<br><strong>6 SERVICES DIFFER </strong>as per the amount of investment. Understand how the firm differs in offering services<br><strong>7 MAKE SURE </strong>the online platform takes into account your taxation status while creating and suggesting portfolios<br><strong>8 UNDERSTAND HOW MUCH</strong> of changes can be done by you as an investor and what all investment decisions will the firm undertake on your behalf<br><strong>9 GET TO KNOW</strong> the review process — how and when that will happen</td></tr></tbody></table><p><br> <br>sunil@businessworld.in <br>@dhawansunil<br><br>(This story was published in BW | Businessworld Issue Dated 02-11-2015)</p>
