– By Neelam Rani & Abhishek Singhal
With startups like Piggy and FinPlay, making news left and right and AI/VR almost seemingly poised to take over the world, especially with the unnaturally hyped Apple’s Vision Pro, etc. being available for the public, the world of robo-advisory holds promises both for the entrepreneurs and the public at large.
What are Robo advisers after all?
The word “Robo-Advisor” consists of two parts: “Robo” (for robotics) and ‘Advisor”. Robo stands for an automated process without the influence of a human being, utilizing mathematical algorithms to support investment decisions. “Advisor” stands for Wealth Management services, in an automated manner, using regular online or mobile channels.
How do they work?
When new clients register for robo-advisor services, they must complete a brief questionnaire containing demographic and cognitive questions. Usual questions include the client’s age, gender, income, investing goals, liabilities, current assets, and degree of risk tolerance. These data points are used for asset allocation in a portfolio and to predict how a person responds to stock market ups and downs.
Robo-advisors use an algorithm and sophisticated software to process these responses and create a diversified portfolio of exchange-traded or index funds. Typically, a financial or investment professional selects the investing options.
Once the funds are invested, the software automatically rebalances the portfolio to ensure it remains close to the target allocation.
Some robo-advisors offer live consultations or access to a licensed human financial planner who can help prioritize objectives and make suggestions for achieving them. Users can connect to their investment accounts to monitor progress, make changes, or continue pursuing their objectives.
The investment philosophy of the robo-advisors, you ask?
Today, most robo-advisors use passive indexing strategies that are optimized using some variant of modern portfolio theory (MPT). Typically, the account holder can’t choose which mutual funds or exchange-traded funds (ETFs) to invest in or purchase individual stocks or bonds in their account.
Could robo-advisory be a complement to the traditional mechanism?
A ‘cautious’ yes. Financial institutions can save money by employing virtual assistants to deal with relatively simple requests and pass on more complex requests to human advisors. Human agents often use robo-advisors to respond more quickly to customer requests.
Any limitations?
A big one, yes. Insufficient for complicated financial needs. Robo-advisors are a good starting point for people who have a small account and no prior investment knowledge. However, people looking for more advanced services such as estate planning, tax management, trust fund administration, or retirement planning might find robo-advisors insufficient for their financial needs.
The way ahead?
For starters, one may sign up with any of the robo-advisory platforms like Piggy, 5nance, etc., and gradually transition into a more sophisticated realm by either upskilling yourself and thereby making your own financial decisions or investing in a human-based advisory service.
(Neelam Rani is an associate professor and Abhishek Singhal is PGP 24 at Indian Institute of Management, Shillong.)
(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)