Should You Invest Through A Robo Advisor?

Robo Advisors offering ‘automated investment advice’ are all the rage. Many have attracted venture capital, instantly catapulting them into the headlines. Should you invest through one? Let’s explore the pros and cons of investing through a Robo advisor.  

The Good: Convenience 

Let’s start with the no-brainer; Robo platforms are undoubtedly convenient. A very large chunk of the capital being raised by these companies is spent towards enhancing their technology platforms; thereby creating a seamless, ‘click through’ experience for investors. You can use the services of a Robo advisor from the convenience of your home, in your pyjamas. There’s no need to schedule meetings with an Advisor or sign mountains of paperwork – a number of these platforms are making a serious attempt to create a 100% paperless experience for their investors (although, in my opinion, we’re still a fair distance from 100% paperless).

The Bad: Oversimplification & Incompleteness

In their noble effort to simplify the end user's investing experience through technology, a number of Robo advisors have migrated to the opposite end of the spectrum – creating a situation where oversimplification can actually end up hurting client interest. In fact, a large number of these platforms have been set up by technocrats with no past experience in financial advisory. Many, of course, have brought on board seasoned investment professionals to man their ships. But is such a marriage possible in the long run, is the question?

Most so called Robo Advisors in our country are really nothing but “supermarkets” masquerading as “Advisors”. You probably won’t find a pure Robo platform that really offers a holistic, financial planning led, 360-degree solution that covers all bases (protecting, saving, investing & monitoring) – the reason is obvious; a great Financial Plan involves a great conversation. With a real person!

The Bad: Sustainability

Pretty much all Robo Advisors are functioning with negative unit economics, where the average cost of onboarding and serving a client far exceeds the revenues being earned from the same client. They offer “free” services in the hope that they will be able to onboard millions of users and “figure out the revenue bit later”.  This doesn’t pose a problem as long as the funding taps stay turned on. However, what if funding dries up and the mood turns risk averse? What if a global market fall reduces the demand for market-linked investment products? How many of these Robo Advisors will be able to survive with their high tech, high digital spend oriented, low to negative unit economics business models? Will they be able to adapt their advice quickly enough? While the questions hang in the air, don’t be surprised if your Robo gets short-circuited in the hard times.

The bad – no management of investment behaviour

Let’s consider one of the top performing, bellwether large cap mutual funds in India - Franklin India Bluechip Fund. On paper, it has delivered an extraordinary annualized return of 19.45% since its launch in 1994, 28 years ago. What this essentially means is that if you had invested Rs. 5 Lakhs in its NFO (then “IPO”) in 1993, the fund value would have grown to a staggering 7+ Crores in 2022! 

And yet, how many people do you know who really turned Rs. 5 lakhs into 7 Crores by investing in this fund? Probably none. This is known as the ‘behavioural gap’ between published returns and real returns. Over the long term, this can add up to a monstrous figure!

For instance, how did Robo Advisors deal with this ‘behavioural gap’ when the markets capitulated during the early days of COVID-19? Poorly, because clients need to be handheld by an Advisor through the down times, as rationality and long-term thinking go out of the window once they see their hard-earned savings slipping deep into the red.

While noting the obvious challenges pertaining to non-traditional Advisory models, there’s no denying that the older, cost-intensive, sluggish and top-heavy Advisory platforms will need to evolve over the next decade in order to survive. Perhaps, the future belongs to Advisors who can closely hand hold their clients while leveraging technology to create a great investment experience (“bionic” advisors), rather than those who turn the steering wheel over completely to their clients. Only time will tell.