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Robo Advisors – Future Or Fad?

Are you considering investing through such a platform? Here are a few pros and cons of Robo Advisors for you to consider.

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Robo Advisors offering ‘automated investment advice’ are making headlines these days. The widespread promulgation of direct plans has definitely helped their cause. Are you considering investing through such a platform? Here are a few pros and cons of Robo Advisors for you to consider.

The Pros

Robo platforms are undoubtedly convenient. A very large chunk of the capital being raised by these companies is spent towards enhancing their technology platforms; thereby creating a seamless, ‘click through’ experience for investors. You can use the services of a Robo advisor from the convenience of your home. There’s no need to schedule meetings with an Advisor or sign mountains of paperwork – a number of these platforms are making a serious attempt to create a 100% paperless experience for their investors.

Strangely enough, the advice you receive from a Robo Platform is less likely to be coloured by conflicts of interest. With a higher ‘client to advisor’ ratio than traditional advisory businesses, it’s likely that Robo Advisors will be disinclined towards fattening their revenues through the sale of high commission products that may ultimately be against the interests of the client. In a nutshell, counterintuitive as this might seem; you’re more likely to receive conflict free advice from a tech-enabled Robo advisor than from a Human advisor.

The Cons

Most so called Robo Advisors in our country are really nothing but single product platforms masquerading as “Advisors”. Very few Robo Platforms really offers a holistic, financial planning led, 360-degree solution that covers all bases (protecting, saving, investing & monitoring) – the reason is obvious; a great Financial Plan involves a great conversation. With a real person! A fair bit of work still needs to go into the product side of Robo advisory businesses in India before they can create serious, multi-dimensional value for their clients.

Long term business viability is another issue. A number of Robo Advisors are functioning with negative unit economics, where the average cost of onboarding and serving a client far exceeds the revenues being earned from the same client. This doesn’t pose a problem as long as the funding taps stay turned on. However, what if funding dries up? What if a global market fall reduces the demand for market linked investment products? How many of these Robo Advisors will be able to survive with their high tech, high digital spend oriented, low to negative unit economics business models? Will they be able to adapt their business models quickly enough? While the questions hang in the air, don’t be surprised if your trusty Robo gets short circuited in the hard times.

Another critical issue is the fact that Robo Platforms are bound to be inept at managing client investment behaviours. Consider this: on paper, Franklin India Smaller Companies Fund has delivered a 10-year annualized return of 15.77% as on date. And yet, how many people do you know who have actually realised this return, considering the unsettling flip flops that small cap funds tend to make? Very few. This is known as the ‘behavioural gap’ between published returns and real returns. Over the long term, this can add up to a monstrous figure.

How well will Robo Advisors be able to deal with this ‘behavioural gap’ during volatile market cycles over the long term? It’s likely that the lack of human interfacing and ‘investment counselling’ will cost them dearly at that stage. Investors do need to be hand held through the down times, as rationality and long-term thinking go out of the window once they see their hard-earned savings slipping deep into the red.

While noting the obvious challenges pertaining to non-traditional Advisory models, there’s no denying that the older, cost intensive, sluggish and top heavy Advisory platforms will need to evolve over the next decade in order to survive. Perhaps, the future belongs to Advisors who can closely hand hold their clients while leveraging technology to create a great investment experience, rather than those who turn the steering wheel over completely to their clients. Only time will tell.


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