All about Robo Advisory!
Created on 10 Feb 2021
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Do you believe your investment manager has some prejudices while handling your portfolio? Are you not satisfied with the financial advice you're currently getting?
Then maybe Robo Advisory is the option for you.
Robo Advisory is currently being considered to be the next massive thing in the fintech industry. Robo Advisors are an online platform which provides financial services with the help of algorithms.
The concept of Robo Advisory is not extraordinarily complex, but new investors usually hesitate to give their investment responsibility to software algorithms.
Let's discuss the Robo advisory in details.
What is Robo Advisor?
A Robo Advisor is the online platform which provides financial services with the help of algorithms, without any human intervention.
Normally, Robo advisors collect information from clients about their financial position and their future goal plans, and after analyzing this information, gives financial advice to the clients, or invests on its own based on the given information.
Robo advisors are generally inexpensive and allow investments with small capital as well.
It also considers the risk aversion of the clients. Generally, investors can be divided into three types based on the degree of risk aversion:
Risk-neutral (nor risky or safe)
Risk-seeking (considerable risk)
Causes of Evolution & Growth of Robo Advisories
- Initially, the role of the first Robo advisor, Betterment, which was launched during 2008's great depression was to give investors a way to rebalance their portfolio through an online platform.
- The new generation of investors was more technology-driven who wanted to use digital and machine programmed advice for their investment rather than just human advice.
- These online Robo advisors need small capital for investment, which also attracted small investors; this majorly attracted youngsters.
- Robo advisors were charging an exceedingly small fee as compared to traditional investment advisory firms.
- Investors realized that human decisions were often more subject to inaccuracies and inconsistencies as compared to their digital counterparts who were usually more accurate. They saw that many times the future predictions made by these Robo advisors were mostly unsuccessful. For this reason, Robo advisors gradually gained more trust of the investors.
Types of Robo Advisors in India
In the Indian context, Robo advisory segment can be distributed in three categories:
Fund-Based Robo Advisory
Fund Based Robo advisors are the platforms which give recommendations to the clients based on their risk and financial goal. Investment can be made in funds only (not in other assets). These advisors charge almost nothing from their clients, and their revenue generation depends on the commission from funds distributions.
They are right for inexperienced investors and newcomers who need guidance for their portfolio mix and don't want to directly participate in the stock market.
Some famous fund based Robo advisors are Scripbox, Fisdom, and Kuvera.
Equity-based Robo Advisory
Equity-based Robo advisors are platforms which focus mainly on equity portfolio. They provide fund execution through various brokers. They also provide portfolio mix for investments based on a specific industry or investment pattern.
The fees charged by these platforms are generally fixed; they take it as an annual charge or charge on per transactions. These advisors are right for investors who have a decent knowledge of the equity market and can take the moderate or elevated risk, with the assistance and expertise of market experts to optimize their portfolio.
Some famous equity-based Robo advisors are Smallcase, Marketmojo and Tauro Wealth.
Comprehensive Wealth Advisory
Comprehensive Wealth advisors are the platforms which provide complete wealth management services. They combine the client's combined financial worth and understand the risk-averseness of the clients.
The charge is mainly fee-based for a complete combination of services. These platforms provide services on both individual and household level. They provide portfolio recommendations, portfolio management services, financial planning, human, financial counseling, as well as real estate planning.
Some famous comprehensive wealth advisors are CUBE Wealth, INDWealth and Arthayantra.
Benefits of Robo Advisors
- Robo advisors can be a great option for new investors who haven't yet developed the financial knowledge needed to make informed investing decisions.
- These platforms will give cheap solutions to such beginners, considering their risk appetite and would also assist them in proper financial planning.
- These platforms are largely beneficial for working professionals who have time constraints and can't actively manage their investment portfolio. They can put Robo advisors on automatic mode, and these platforms will manage their portfolio on behalf of them. This way, such professionals won't need to do anything unless they want to withdraw money.
- These platforms don't follow complex investment strategies. Their investment strategy is quite easy to understand. For instance, a portfolio with 70% in stocks and 30% in bonds. One can understand the performance of the holding in just a quick glance.
Limitations of Robo Advisors
- Robo Advisors interact entirely on the web. However, they offer live assistance with an extra fee.
- Robo Advisors are not very useful for active investors. If one investor has an idea to invest in specific stocks, it's extremely hard to do so. The options in these platforms are extremely general like "What is your risk-averse?", Which does not satisfy every investor's need.
- Investors can't personalize their portfolio on these platforms. Robo advisors mainly follow a predefined model based on the instructions like risk tolerance, investment goals, which don't always fulfill the investors' personal needs.
More than a decade has passed since the start of the first Robo advisor. Despite the initial buzz, the adaptation of these platforms in the last decade is vague.
In 2016 it was forecasted that Robo advisory AUM (Asset Under Management) worldwide would reach $ 2.2 trillion in 2020 and $ 4.1 trillion in 2022, but as of 2020, the AUM has reached $ 1.4 trillion, with few platforms like Betterment AUA (Asset Under Advisory) of $ 21 billion, Personal Capital AUA $ 14billion and Wealthfront AUA $ 13.6 billion being the market leaders worldwide.
In India, some of the leading Robo advisors are Kuvera (AUA Rs 14,500 crore); Orowealth (AUA Rs 3000 crore); Scripbox (AUA Rs 1,500 crore).
Robo advisories have not yet performed as per the expectations and have not revolutionized the investment sectors. Yet, the number of advisory platforms in India is increasing day by day, on account of the increasing tech-driven youth in the market.
Growing income, increasing internet penetration and increasing number of investors is making India a healthy ground for the growth of these platforms.
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