When it comes to investing, whether directly without advice or through an intermediary giving advice, the onus of understanding the product or service before investing lies solely with the investor. Regulations and growing investor push for transparency over the past decade have done a lot to make product structures, objectives and costs more understandable for Indian investors. And, we’re now in the midst of a similar push for transparency and ease of understanding as far as the service providers are concerned; the opening up of the debate around fees, commissions, expense ratios and fiduciary duties is effectively helping Indian investors learn about the right questions to ask when contracting a financial service provider.
Recently, robo advisory service platforms have disrupted this evolving market, delivering a mighty push to the efficiency and cost effectiveness of services delivered to the retail investor. Investors are now spoilt for choice amongst nascent robo advisory platforms offering end-to-end digital services, with no dependence on human agents or physical interaction and, a hands-off, data-driven approach to investment selection. Quite apart from the cost and speed considerations, one can see the attraction of these platforms for investors who are looking for uncomplicated financial services.
The key words in this entire scenario, however, are evolving and nascent. At their current state of maturity, how different are robo advisory platforms in India from the traditional advisory firms backed by an execution and administration platform? How should investors assess robo advisers from a service, cost and value perspective? And what are the questions investors should be asking their robo advisers to make an informed choice?
The technology layer
A robo adviser is an online platform that provides automated investment management service without human interaction, typically at a much lower cost as compared to a human adviser. What’s important to understand is that robo advisory services are actually a spectrum, with the most basic platforms simply offering a digital interface, giving investors an automated portfolio proposal created by automated fund or stock selection. Then you have algorithm-driven robo advisers that include automated execution and portfolio rebalancing services based on pre-planned investment strategies. These work like managed portfolio services, and do not allow the user to have any say in the product selection or asset allocation, as they are completely automated. The most mature robo advisers are fully intelligent, self-learning systems driven by award winning economic theories that involve almost no human intervention.
India currently has platforms within the first two categories that are, truly, more indicative of digitisation than intelligent automation. The business model and offerings remain the same, and the capabilities are not that different from that of traditional advisers who are using wealth management platforms at the back end. Basic algorithm or quantitative model driven stock/fund selectors, model portfolios for different risk profiles, digital execution and administration services – these are all features that a lot of the traditional advisory and distribution firms are capable of offering today as well.
The cost comparison between robo advisory and traditional advisory services should be made keeping the depth of services in mind. Robo advisory platforms deliver broadly fitting investment solutions for retail investors who may not want to pay for completely customised portfolios and have simple investment needs. However, aspects like holistic financial planning, tax efficient investments, planned exits or draw-downs, as well as expert guidance in times of market crises are all balanced on the traditional end of advisory.
Speaking of costs…
Robo advisory platforms in India are currently in the client acquisition stage, funded mostly by venture capitalists. Which is why we see that most players currently offer services to retail investors at no charge; even platforms that had earlier started off charging a basic investment management fee had to cut them back to stay competitive. Investors need to be aware that this is not sustainable in the long run. While some of the platforms offering free services invest in regular mutual fund plans and earn a commission, even platforms offering direct plans (zero commission) are now charging no fee, whereas their costs are probably not that different from that of a traditional advisory firm. This makes one wonder whether there is a viable business model in the long run. How these platforms will choose to monetise the acquired investor base remains to be seen – but investors should not expect the free run to continue forever.
Investors should also question how the remuneration model of the robo adviser impacts their investment approach. Basically, whether the firm offering robo advisory are distributors earning commission or advisers charging a fee; and if they’re charging a fee, whether they are registered with market regulator SEBI as Registered Investment Advisers (RIAs). Knowing how the robo adviser company is remunerated, and whether it is committed to a fiduciary standard, will help investors understand whether that remuneration structure can create a conflict of interest, how the investment process works and why certain products are recommended. Algorithms are not transparent by nature, and assuming that data-driven is the same as unbiased can be a mistake.
While we await regulations
Robo advisers are set to shape financial services in India in a big way, and in fact have the potential to truly democratise the wealth management market for service providers as well as investors. As the market for robo advisory matures in India, we should see more standardisation and transparency regarding capabilities and differentiators, which should help put in place stronger regulations. These will ultimately help investors make educated decisions about which platforms to trust. However, until then, it is important for investors to know how to evaluate and choose amongst them just as carefully as they would do with a human adviser.
(The writer is MD, iFAST Financial India Pvt Ltd)