Robo Advisor: Definition, Features and Benefits

What do we mean by robo-advisory? With a single click, your investment is done! The Internet defines robo-advisory as financial advisors providing financial advice or portfolio management online with minimum human intervention. 

You may say it is already a programmed personal financial advisor for you. A robo advisor is an automated pre-programmed service that gives you advice on managing your investments and even helps you buy some financial products. Hence, with robo-advisory, little human intervention is needed from registration to execution. Many robo-advisors claim to use machine learning and artificial intelligence, but the fact is that they are using rule-based logic conditions. Recently, there have been a few rounds of funding in the robo-advisory space in India. 

Though all robo-advisory platforms give various choices for clear, fast, and scientific investment advice, the final recommendation differs. However, the basic premise remains the same. For example, for your long-term goals of more than five years, it works best to allocate to equity and into fixed-income investments for short-term needs.

Emergence of robo advisors 

1. The rise of the technology-savvy investor class of professionals who preferred digital and automated investment management advice.
2. High minimum investment amount requirement by the offline advisory firms where the investment decisions are taken after 1on1 interaction between investment manager & the clients. Due to this, many small investors cannot avail of the services.
3. Very high investment advisory fees are charged by financial advisory firms. Compared to them, the robo-financial advisor fee is much less.
4. Human decisions about market timing and future market movement often go wrong. Compared to them, the financial plans based on computational algorithms attracted more trust from the investors.

Features of robo advisors

• 24*7 Accessibility: Robo-advisors are useful for any type of investor, irrespective of the amount of wealth. And being online offers the greatest advantage of 24/7 accessibility.
• Low Costs: Without human interaction, the fees are drastically reduced, and robo-advisors are much cheaper than traditional advisors.
• Transparency: Robo investment advisors are transparent about trades, fees, portfolios, and other aspects of investments. 
• Efficiency: Every portfolio change can be instructed efficiently and effectively
• User Experience: Easy and intuitive features allow a positive user experience.
• Small Investors: There are some Robo Advisers who are targeting small investors who are used to digital and are the potential wealthy clients of the future

Advantages of Robo Advisors

1. Low fees: Before the initiation of robo-advisory platforms, investors were too lucky to receive professionally managed assistance with investments for an expense ratio of less than 1% of AUM (Assets under management). The robo advisors have changed that narrative due to their low-cost nature. 
2. Low Minimum Balances: It is challenging for investors with a small net worth to get professional robo-advisory management services. Zero minimum balance technology enhanced robo advisors. 
3. Tax optimisation: As you might know, taxes can significantly impact the investment rate of return. This is specifically true for capital gains, especially for near-term ones, as they are taxed at regular income tax rates. Since they are fully automated, robo-advisors are constructed in a way that minimises capital gains taxation.
4. Rebalancing: It is just a question of time before even a very well-allocated portfolio sometimes gets out of target allocations. The changes in allocation, either higher or lower, distort the portfolio. For this reason, the portfolio needs to be rebalanced. Robo-advisors also help rebalance the portfolio, thus keeping the target allocation intact. 

Services Offered by Robo Advisors

All the companies operating in the robo-advisory space have easy and interactive platforms that include not only personal details in terms of goals, profile, income, aspirations, etc. But these platforms also effectively maintain the information related to each and every financial transaction executed.

When opening an account, full-fledged risk profiling is done through a set of questions, including listing one’s liabilities, assets, and investments.

Each online platform has a goal and portfolio tracker that helps you monitor the progress and path to achieve the investment goal.

If an investor is not on track, the automated system suggests steps necessary to meet the target. Even when a fresh investment can be considered due to excess cash or in times of urgency, based on tax implications, the algorithm guides the user on what must be added to the portfolio or sold.

Also, a portfolio review is done periodically to decide if you need to reshuffle your portfolio as you get closer to the predetermined goal or target.

Indian Scenario 

Robo Advisory in India is not very old, so a list of Robo Advisors in India is short. But this is something that is catching the eyes of a lot of young people nowadays. In recent years, quite a few companies have started operations in the robo-advisory space. 

Different Models of Robo Advisory

Robo advisory firms in India differ based on the services they offer. But predominantly, they offer a basket of mutual funds you can look forward to investing in. Some operate on an advisory model and thus charge an advisory fee.

You can then invest in the mutual funds through their platform, for which these platforms also charge convenience fees to facilitate the transaction. Direct plans save on the commission are payable to the distributor but typically charge customers advisory or transaction fees.

The second category of robo-advisory firms operates on a distribution model similar to traditional advisors. Under this model, they advise on assets and funds to invest in and the transaction is completed through the platform (can be completely free). 

The platforms, in exchange, earn a commission from the mutual fund houses. For example, FundsIndia.com recommends funds based on in-house and in-depth research to meet the goals. You can only use their platform for free to invest in regular plans. However, If you want to invest in direct plans, you must do it independently.

Finally, some platforms have a hybrid model. They charge for the advice if you have options to transact on your own. For example, take the case of Arthayantra. They charge a yearly fee of ₹1,000 for their financial advice services. Then, you can buy the units directly from the fund house. But if you invest using their platform, they will waive the previously charged service fee and offer you free advisory services. This is because they facilitate the investment in the regular plan and earn a commission from the fund house.

Robo-advisors mostly offer a portfolio consisting of both debt and equity funds. Within this, some firms, such as Scripbox, offer a limited set of funds pre-selected by their computer algorithm and in-house team.

Other robo-advisors provide a wider selection of funds. Some also include a wider asset base that includes gold ETFs, tax-saving investments and bonds.

Some advisors also advise keeping your funds in cash based on market conditions and a choice of liquid funds. The only aim of these platforms, in the near future, is to be a one-stop shop for all financial advice, offering loans, insurance, property and other services like tax filing.

How Robo Advisors Differ in India

Automated financial advisory services are gearing up for action in India now. But they have been in the US for a while now. There are three ways in which robo-advisory services offered in India and the US differ: 

• The service is typically fully automated in the US. For example, funds are selected and invested automatically without requiring extra effort from the investor. However, the services in India require the investor to initiate the transaction and are not on autopilot.
• In the US, the Investor's investment amount is invested in Exchange Traded Funds (ETFs), which are passive instruments. Thus, robo-advisory services are considered alternatives to investing in traditional, actively managed funds. However, In India, ETFs are still in the early stages, and money under robo-advisory is invested in mutual funds that are actively managed.
• The fee structure in the US is based on the percentage of assets under management (AUM). For example, Betterment charges 0.15% - 0.35% based on the AUM, and Wealthfront charges 0.25 % of AUM annually. The structure of fees in India is either flat fee or free. A flat fee and other fixed charges per transaction are usually charged annually.

There exist other differences as well. The users in the US are used to paying advisory fees. In contrast to India, where advisors can earn commissions, it creates a conflict of interest. Thus, A shift is needed to get users in India to pay for the advice or services they opt for when a commission-free product investment is enabled online. Apart from this, the advisory service in the US offers a very low-cost solution to the existing base of investors; in India, robo advisors aim to increase penetration with affordable advice.

Additionally, tax loss harvesting and selling loss-making investments to offset gains to decrease tax payments are crucial aspects of robo advisory services in the US. However, in India, Tax is not yet a key focus area. 

Robo Advisory Firms in India

In the US, Betterment and Wealthfront are popular robo-advisors. In the UK, NUTMEG is one of the most popular Robo Advisors. Similar to these, many companies in India have also initiated facilitating such services by creating some automatic online tools. Such five popular Robo-advisors in India are as follows:

1. Arthayantra ~ www.arthayantra.com

1. BigDecisions ~ www.bigdecisions.com

1. FundsIndia ~ www.fundsindia.com

1. Scripbox ~ scripbox.com

1. MyUniverse ZIPSIP ~ myuniverse.co.in/zipsip

Gaps in Existing Robo Advisory Platforms

• Automation: Entire services need to be fully automated. For example, funds are selected and invested automatically without requiring any effort from the investor. However, the existing platforms in India require the user to at least initiate the transaction and are not on a fully auto-pilot mode like they are in the US.
• Exchange Traded Funds Vs. Mutual Funds: As discussed earlier, in the US, investors' money is invested in exchange-traded funds (ETFs), which are passive investments. The robo-advisory services are an alternative to investing in traditional, actively managed funds. In India, ETFs are still in the very early stages, and money under robo-advisory firms is invested in mutual funds that are actively managed.
• Different Pay Structures: The whole structure of fees in India is either free or a flat fee that is usually charged annually plus fixed charges per transaction, and advisors like Funds India and Scrip Box earn commissions, creating a conflict of interest. Meanwhile, the fee structure in the US is based on the percentage of assets under management (AUM).

Why are Robo-advisors not Filling the Gap?

• Awareness: The other one of the biggest problems is a lack of awareness about these platforms in India. Even after investing in advertisements and other paid marketing tactics, the awareness of mutual funds is very low.
• Complicated: Despite claims made by robo-advisors that they have simplified investment processes, they are far behind in what can be done to attract new investors.

Conclusion

There are many robo-advisory firms in India. However, the current scenario states they cannot solve the investor's real-time problems.

Robo-advisors will work well in India over a period of time. But they need a different kind of flavour, not a copy of US models, as the replica would not work in India due to many differences in economic conditions and regulatory frameworks of the countries.

One should understand the core need and customise the model for the best fit. You can explore numerous mutual funds for your investments at Angel One for a hassle-free process.