Kunal Bajaj
Never heard of the term “robo-advisor”? You’re not alone. Few investors know what a robo-advisor is; and fewer still have used one. But robo-advisors, or online advisors as they are also called, are likely to become a key part of your financial future. Why, you ask?
Firstly, competent human advisors are hard to find. There are only 2,500 certified financial planners find India for the 62 million households with annual incomes over Rs 500,000 that could use one.
Secondly, the harsh truth about investment advice is that most investors intuitively don’t trust their bank relationship managers, advisors or brokers – simply because they’ve all too often been pushed or cheated into products that are too expensive or simply not right for them.
And finally, there’s the four-letter word that your traditional financial advisor doesn’t like to use – fees. When is the last time he clearly told you how much his services actually cost?
Robo-advisors can give you an automated, personalised investment plan, pick the right funds to build your portfolio and monitor your investments, all at a fraction of the cost of a human advisor. Traditional financial advisors generally charge between 1 percent and 2 percent of your assets annually in exchange for managing your money. But this is money that is already yours – that you’ve worked hard to save and paid taxes on! Why should your advisor dip into your pocket each year to recommend a ‘long-term investment?’
A good robo-advisor replaces this fat-fee with a flat-fee. How is this done? By using technology to crunch reams of financial data, by automating processes, and by eliminating the excesses – the fancy lunches, the plush offices, and the overpaid staff - that you, the investor, end up paying for without even knowing it.
Which brings us to the question uppermost on every investor’s mind. Could you actually trust a machine, or an algorithm, to manage your life savings? The answer is yes. A good robo-advisor is transparent, unconflicted and unimpeded by human biases and prejudices. When an robo-advisor tells you to invest in a particular fund, you can rest assured that it isn’t because of the hidden commissions he’s raking in. It’s based on empirical data and meticulous research. This is financial advice you can depend upon.
Robo-advisors are still uncharted territory, but in the years to come, they will win the confidence and trust of wary investors and by following the guiding principles from Isaac Asimov’s farsighted Robot Series (only slightly tweaked by us at Clearfunds):
Clearfunds’ Three Laws of Robo-advice:
- A robo-advisor shall not harm an investor’s savings, or through inaction, allow an investor’s savings to come to harm.
- A robo-advisor shall always act transparently, and in the best interest of the investor, even if it means lower fees for itself.
- A robo-advisor shall continually drive down costs – making solid investment advice accessible to everyone, including smaller, newer and younger investors.
Bill McNabb, CEO of Vanguard, the world’s largest mutual fund company, recently observed that low-cost would be the wave of the future: “I don’t think it’s going to be possible for advisers to keep an 80, 100, 120 basis point fee for providing investment advice.”
By moving to a low-cost online investment advisor, you’re taking an important step towards maximising investment returns for your family and meeting your financial goals sooner. Which means you could go off on that holiday you always planned to take, or retire five years earlier – instead of watching your advisor do so.
Author is Founder & CEO of Clearfunds.com
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