The advent of Robo Advisory is not just about convenience and cost reduction. While, it may have been at the start, today with the integration of big data dynamics the scope is much wider. Robo Advisors fill in where humans may not be able to accomplish all in terms of capability, capacity and cost. For instance, How does investment advisory adjust itself from asset class to sectors to products, if there is rupee depreciation or interest rate cut or crude prices increase or global sectoral turmoil or in any socio-economic crisis? That’s the future of Robo advisory and today we see that happening even sooner than later.
Robo Financial Advisors as the definition suggests are a class of advisers that provide financial advice online with moderate to minimal human intervention. Today it has a much wider impact than anyone can conceive, right from overall financial planning to risk assessment to goal selection and then product selection. All of this is done based on mathematical rules or algorithms. Algorithms help automate allocation, management with the end objective of optimizing a clients’ assets.
Are Robo Advisors an ideal choice?
There are three best cases as to why Robo Advisors can be trusted. First, Robo advisors are unbiased and proven while humans tend to make biased decisions. For instance, a tax advisor is an expert in his field but he may not essentially be an expert in recommending what mutual funds to buy although he may have his ARN code. His interest is tax and the other is just another way for him to meet his financial requirements. Robo advisors are not product biased. With the support of data and analytics, they have a much deeper investment case than humans.
Second, cost-effectiveness. Robo Advisory is more cost-effective than any human advisory service. Hence, the cost advantage is passed back to the investors and even a 1% saving in cost over a period of time is big. Well, just the cost-saving is sometimes bigger than investment returns in many developed countries.
Third, all financial advisory systems worldwide are designed to be best suited for HNIs and Ultra HNIs. First-time investors and investors with less than 1 crore often don’t get the best brains to advise them. This is when Robo Advisors are best suited for investors who are looking for the best services when they start or when they are in the early stages of wealth creation.
Can we depend on Robo advisors?
Robo Advisory works best when there are more data points. Holistic financial planning requires a lot of important information to be shared with advisors, like income details, bank balances, spending habits, loans, investments, and other family details and aspirations and goals. Without all of this Robo Advisors can merely provide suggestions on financial products leaving out what is best suited specifically for you. With higher data points, Robo advisory works better for any kind of machine learning and predictive analysis if compared to humans.
Robo advisors today render advice on equities, mutual funds, bonds, loans, insurance, fixed deposits, banking products, tax advisory and more. The only difference is today the number of Robo Product advisors is much more in comparison with investment service advisors. For instance, if one is looking to invest Rs. 1 lakh today; while it may seem like a simple task, the solution really isn’t. A Robo advisor that also acts as an investment advisor will need to take into account numerous information including income levels, need assessment, risk assessment, and goal mapping.
Robo advisory today is gaining momentum considering its unbiasedness and its capability of predictive analysis for effective financial planning. However, as humans, we are habitually more trusting with a face to face interface rather than letting a machine do it for us. From industrial development to self-driven cars, human habitual inertia can be seen. Today, this is the biggest fallacy of Robo advisory. Considering, there is no human interface there is no visible trust. Given the proven track record of Robo advisors, it is only a matter of time when investors will turn towards Robo advisors for unbiased advice for wealth creation.
By, Mohit Batra, Founder, and CEO, MarketsMojo.com