If you’ve watched the famous Hollywood flick ‘RoboCop’, which features a superhuman law enforcer, then robo-advisors may conjure up images of robots handing out financial advice in synthesised voices. As futuristic as it sounds, that’s not the case.
A robo-advisor is essentially an online financial advisory firm that uses automation and algorithms to offer investment advice. It not only helps you choose the right investment but also provides the platform to complete the transaction and monitor the portfolio on an ongoing basis. Through the use of online tools these new breed of advisors also promise to lower costs.
So if you are a small investor and have found financial planners way out of your reach, can robo-advisors fill the gap?
Here’s a look at how these services work, the cost proposition and what’s on offer, to help you decide.
Robo-advisory firms in India vary in the way they offer services, but predominantly offer a basket of mutual funds you can invest in. Some operate on an advisory model and charge an advisory fee. You can then invest in mutual funds through the platform for which these platforms also charge convenience fees for facilitating the transaction. The mutual fund investments are in direct plans where the returns are typically higher by up to 1 per cent, somewhat offsetting the additional fees you pay for advisory services. Direct plans save on the commission payable to the distributor.
The second category of firms operates on a distribution model, similar to traditional advisors. They advise on funds and assets to invest in and the transaction is completed through the platform, all for free. The platforms, in turn, earn a commission from the mutual fund house. For instance, FundsIndia.com recommends funds — based on in-house research — to meet your goals. You can use the platform for free, but only to invest in regular plans. If you want to invest in direct plans, you will have to do it independently.
Finally, there are also platforms that have a mixed model. They charge you for the advice in case you opt to transact on your own. Take the case of Arthayantra. It charges an annual fee of #8377;1,000 for financial advice. And you are free to buy the units directly from the fund house. But if you choose to make the investment through its platform, they will waive the service fee and offer you free advice. This is because they facilitate investment in regular option and thereby earn a commission from the fund house.
BigDecisions, on the other hand, (not a robo-advisory in the true sense) only provides guidance through calculators on how much corpus you must build to meet various goals. To invest, it directs you to sites such as FundsIndia.com.
Robo-advisors mostly offer a portfolio made up of debt and equity mutual funds. Within this, some firms such as Scripbox only offer a limited set of funds that are pre-selected by their algorithm and in-house experts.
Others may provide a wider selection of funds and some also include a wider asset base that includes gold ETFs, bonds and tax-saving investments.
Some advisors may also provide you advice on keeping your funds in cash based on market condition and a choice of liquid funds. The aim of these platforms, in the near future, is to be a one-stop shop for all financial advice, offering insurance, loan and property, and services such as tax filing.
How it works
To get started, you have to fill out an online form in the robo-advisor’s portal. The questions capture basic information, investment goals and comfort with risk. Goals could be broad-based and long term such as retirement and children’s education or short term. Users may be classified into various buckets based on parameters such as age, time horizon, quantum of investment (either lumpsum or systematic investment), nature of household (single or dual income, dependants) and risk appetite. The platform’s algorithm tells you the amount you must invest and into what categories of funds — diversified equity, gold or debt. Within these, there may be finer sub-divisions such as blend of large, mid and small-cap mutual funds based on your risk profile. While most of the platforms focus primarily on mutual funds, some such as AdviseSure also include property and PPF in their offering.
Online platforms assess your risk profile based on your responses to questions such as how you would react to a market fall. But you are not bound by the recommendations made by the platform. You still have an option to pick a portfolio that is aggressive or passive based on your comfort level.
To make an investment, you need a common account number (CAN) — a single reference for all your mutual fund investments. If you don’t have one already, you can get one within 2-4 days, after which you can make purchases on these online platforms.
On an ongoing basis, you can view your portfolio online, get alerts on fund performance, monitor and change your investments. You can also keep a tab on your portfolio’s performance. Some services also allow you meet advisors while others only run online updates.
What it costs
For now many of the platforms are free, but this may change in the long term. ArthYanthra, for instance, lets you sign up for free and obtain an assessment of your current financial health. For a more detailed report, you need to pay a fee for personal wealth advisory service, which costs you #8377;360 annually.
Typically, platforms that operate on advisory model charge an annual fee. This covers one-time advice, ongoing portfolio alerts, analysis and enabling transactions. The fee is usually a flat fee but can be a percentage of the assets in some cases. Wixifi offers a single plan where you pay 0.5 per cent of the average daily balance as fee. ORO Wealth, for example, charges a transaction fee of #8377;50 for investments of up to #8377;1 lakh. Thereafter the fee works out to 0.1 per cent of the quantum invested. Bharosa Club, on the other hand, offers three different types of plan with fees ranging from #8377;50 per month to #8377;300 per month. Consulting with human advisors, an added feature available with some firms, may be charged additionally.
You can also maintain multiple accounts under a single family account. Unovest charges you double the fee for a family account. For Invezta, you only pay an advisory fee if the recommended funds outperform the category average.
These platforms also review their recommendations periodically. For instance, Scripbox revisits its fund recommendation every year. Bharosa Club evaluates its funds’ performance every six months.
Is it for you?
If you are a small investor or a beginner, finding a good advisor may be hard. Robo-advisory can help you get started and build a good portfolio. But, if you are a seasoned investor, you may be better off choosing the fund yourself and may want to use the platform to complete the transaction. HNIs investing in mutual funds may find the flat fee structure offered by select platforms attractive.
It goes without saying that you have to evaluate the range of asset classes these firms offer, based on your needs.
Robo-advisors claim that the fund selection is based on parameters such as performance consistency vis-à-vis benchmark, across market cycles, risk adjusted performance, fund size and fund manager’s track record.
As in the case of a traditional advisor, be sure you do the necessary due diligence before you sign up for any of these online platforms. Check out the list of services on offer and detailed fee structure. Importantly, look at their disclosures and track record.
You also need to understand the limitations of these services. For instance, you may not be able to talk with an advisor when you need to — say, when the market is volatile.
A traditional advisor will always score on personal touch and the face-to-face reassurance she can offer in times of need. Also, the services offer generalised recommendations that apply to the majority. On some of these counts, online platforms may not offer the best value for your need. Even so, given that the trend is fast catching up in India, it is a space that can see a lot of action in the near future.
How it differs in India
Automated financial advisory services are kicking up action in India now, but they have been around in the US for a few years. There are at least three ways in which robo-advisory services offered in the US and India differ. One, the service is typically fully automated in the US. For instance, funds are selected and invested automatically without requiring any effort from the user. The services in India require the user to initiate the transaction and are not on auto-pilot.
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Two, investors’ money is invested in ETFs (exchange traded funds) in the US, which are passive investments. The robo-advisory services are seen as alternatives to investing in traditional actively managed funds. In India, ETFs are still in early stages and money under robo-advisory is invested in mutual funds which are actively managed. Three, the fee structure in the US is based on assets under management (AUM). For example, Wealthfront charges 0.25 per cent of AUM annually while Betterment charges 0.15 to 0.35 per cent based on the AUM. The fee structure in India is either free or a flat fee that is charged annually plus fixed charges for transactions.
There are other differences as well. Users in the US are used to paying advisory fees, but in India, where advisors could earn commissions, it creates conflict of interest. A shift is needed to get users in India pay for advice or services when a commission-free product investment is enabled online. Also, the advisory service in the US offers a lower cost solution to existing base of investors; in India, robo-advisors hope to increase penetration with affordable advice. Likewise, tax-loss harvesting — selling loss-making investments to offset gains with the aim of reducing tax payments — is an important aspect of robo-advisory services in the US. Tax is not yet a key focus area in India.