The Good And Bad Of Robo

Robo Advisors offering 'automated investment advice' are all the rage. A few of them have attracted high ticket VC and PE investments recently, instantly catapulting them into the headlines in today's age of the Unicorn. Although the full extent of the impact of technology on investment advice is impossible to capture in a brief article, I will attempt to highlight a few pros and cons of investing through a so called robo advisor (without taking specific names), post which you'll be able to make a much more informed decision on whether or not to opt for one.

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 Good - Reduced Conflicts of Interest
Without a doubt, Human Capital (and the acquisition, training and management of the same) represents the single biggest input cost for any traditional Advisory business. Since Robo Advisors are typically tech intensive and not people intensive, they tend to operate their Advisory functions in a low cost manner. (Note that I stress on 'Advisory function's, because digital spends being made by some of the new age Robo Advisors are staggering!)

With a higher 'client to advisor' ratio than traditional advisory businesses, it's likely that Robo Advisors will be disinclined towards fattening their revenues through the sale of high commission products that may ultimately be against the interests of the client. In a nutshell, you're more likely to receive conflict free advice from a tech-enabled Robo advisor than from a Human advisor.

The Bad - Oversimplification & Incompleteness
In their noble effort to simplify the end-user's investing experience through technology, I find 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?

Most so called Robo Advisors in our country are really nothing but single product platforms masquerading as "Advisors". I am yet to come across a Robo Advisor 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 recently proposed SEBI IA regulations propose to bring the 'algorithms' being used by Robo's under the scanner. SEBI may be surprised at the overly simplified techniques being employed by many of these Advisors to spout 'customized recommendations' within 2 minutes, Maggi noodles style.

A fair bit of work still needs to go into the product side of Robo advisory businesses in India before they can create serious, multi-dimensional value for their clients.

The Bad - Sustainability
A number of 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. This doesn't pose a problem as long as the funding taps stay turned on (or in cases where the Robo is really nothing but a pretty looking 'front' for a more robust, sustainable & profit making Advisory business).

However, what if funding dries up? 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 trusty Robo gets short circuited in the hard times.

The Ugly - yet to come
On paper, Franklin India Bluechip Fund has delivered an annualized return of 21.89% since its launch in 1993. What this essentially means is that if a smart 35-year-old retirement saver had invested Rs. 10 Lac in its NFO (then "IPO") in 1993, the fund value would have grown to approximately 9.5 Crores as on date (did I hear you gasp?)
And yet, how many people do I know who have realised an annualized return of 23.89% from Franklin India Bluechip Fund? 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.

Let's face it - we've seen relatively 'still waters', markets-wise for the past five years. The Nifty has essentially risen from 4500-odd levels at the end of 2011 to nearly 8700 as on date - a near 100% growth (with a short scare between March-15 and March-16).

How well will Robo Advisors be able to deal with this 'behavioural gap' when the markets fall inevitably into the clutches of the bears at some time in the not so distant future? It's likely that the lack of human interfacing and 'investment counselling' will cost them dearly at that stage. In my experience, clients need to be hand held 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.