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What are Robo Advisors and How Do They Help in Financial Planning?

Editor's Note: This is Part One of a two-part series on robo advisors in India. This article explains the basics about robo advisors - What are robo advisors? What are they used for? How do they help in financial planning and support investing decisions on mutual funds, equity or commodity assets? What are their pros and cons? For an in-depth review of the most popular robo advisors in India, head to Part Two of the series by clicking here.

 

In the age of the internet, the world lives online. And if the business of movies, television, commerce, and education can be conducted without human contact in a frictionless and customisable manner, why not financial planning services and investment advice?

 

 

What is a Robo Advisor?

 

A robo advisor is a digital platform that provides financial planning advice or investment management services online with moderate to minimal human intervention.

 

A robo advisor can be a software or application that collects certain data points from a consumer and, based on the data inputted and using pre-defined algorithms, provides suggestions or advice on various investment-related queries.

 

There is minimal human involvement in the robo advisory process. The bulk of the human element is in the algorithm – which was written and is routinely updated by humans. Besides this, everything else is automated.

 

What are Robo Advisors and How Do They Work?

 

Some Data Points: Globally, according to Statista, the robo advisory market – comprising companies like Betterment, Ellevest, Vanguard, SoFi Invest, Schwab and Wealthfront – has over $980,000m of assets under management (AUM). In the US alone, AUM for this sector amounts to $749,703m.

 

Robo advisors in India include names like Upwardly, 5Paisa, Goalwise, Groww and Sqrrl. AUM currently within this segment in the country stands at $42m, reflecting how this industry is still in nascency. Expected to grow at a compound annual growth rate (CAGR) of 36.2%, AUM is forecasted increase to $145m by 2023.


 

Pros and Cons of Robo Advisors

What Works

Pros of Using A Robo Advisor: There are many merits to using robo advisors. For one, they are easily accessible and widely available. All you need is a smartphone/laptop and an internet connection, and you’re all set.

 

Plus, it is much easier to compare and select services on an App Store going through reviews by other users than zeroing in on a human wealth manager, where the onus of searching and assessing quality is on the user. This feature comes with an added benefit – consulting a website or an App at your leisure and convenience saves you time as compared to tracking human advisors, setting up meetings, and matching (or trying to!) schedules.

 

Second, robo advisors are relatively affordable. They reduce the cost of investing. An internet connection plus a small subscription fee to use the App (unless its free) is invariably less expensive than hiring a human advisor.

 

Bonus Tip: Financial advisors, in general, operate differently but they broadly follow one of two business models – they are either paid a commission by the product manufacturers they recommend (i.e. banks, AMCs etc.) or they charge you an advisory fee for their services. The advisory fee model is rarer to find, albeit much preferred due to no conflict of interest. Hence it is recommended you check in which category your robo advisor or human advisor sits.  

 

Robo advisors are automated and internet-based, requiring little to no minimums, and have low overheads. Depending on the service you choose, your annual fees could be anywhere between 0%-0.5% of your portfolio assets. For human financial advisors, an unofficial industry benchmark is about 1%-2% of invested assets. Caveat: These figures are based on American benchmarks hence may not be applicable to the Indian context.

 

Moreover, a robo advisor eliminates human errors and, when compared with conventional advisory, it is less likely to be biased in favour of some products or companies (as per research by the Wharton School and the University of Pennsylvania Law School).

 

What are Robo Advisors and How Do They Work?

 

What Doesn't

Cons of Using A Robo Advisor: There are demerits, too. One drawback is the lack of “bespoke” services . No matter how ingeniously crafted a robo advisor application’s algorithms may be, it can’t recreate the proverbial “human touch”.

 

To understand this, think of a human advisor as a personal tailor. He makes suits and dresses specifically for you, keeping your dimensions and needs in mind. This is “bespoke” service. A robo advisor, on the other hand, is like a made-to-measure shop, which has standardised patterns for different body structures and tweaks the clothing to suit you – but the design isn’t made specifically for you. This is personalised and customisable – but only to an extent.

 

And because algorithms can vary between different robo advisory firms, if you’re using more than one such service, you could get different results for the same data points. This could create needless confusion and doubt. (But a point to note: robo advisors’ algorithms are divergent because their human programmers are divergent. The obvious sequitur from this is that human wealth advisors will be as divergent in their opinions, if not more.)


 

Who Uses Robo Advisors?

 

By now, it should be clear that two aspects that define a robo advisor (besides the “robo” aspect of it) are accessibility and affordability. Robo advisors are relatively cheaper and, thanks to the internet, easily available.

 

What are Robo Advisors and How Do They Work?

 

This means the typical crowd lining up for robo advice mainly comprises Millennials. This is obvious because this generation is famously tech-savvy and fintech and Millennialism go hand-in-hand. No wonder they are two times more likely to enlist the help of a robo advisor than older generations.

 

But robo advisory is not limited by age or demography. Any kind of investor can avail their benefits as and when it suits them.


 

Top 5 Robo Advisors in India

 

Given the number of options in the rapidly growing robo advisory market and the importance of choosing the right option that works for you, foraying into this sector might seem intimidating.

 

To ease you in and let you know who the major players are and what factors you might want to keep in mind while selecting a robo advisor for financial planning advice, here’s a list of five of the top robo advisory services in India:

  1. 5Paisa.com
  2. ET Money
  3. FundsIndia
  4. ORO Wealth
  5. Scripbox

 

For a deep-dive into the services these platforms offer, the rates they charge, the reviews they received, their pros, their cons, and the proverbial “X Factor” they possess, you can read the next article in this series here.

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