The concept of robo-advisory has undergone major changes from being a basic fund offering services to algorithm-based portfolio management with value-added services to touch large unserved population. Since a core fundamental of robo-advisory is a combination of detail research, algorithm-based decision model, user interactive and so on, it scores over traditional tools on multiple fronts, thus making it advisable to use for investment.
Let's understand what is robo-advisory. It is a software-driven system with an automated process, which replaces the human element in managing customers. Just like a financial advisor defines the objective for a client in exchange of fees, similarly, the robo-advisory process starts from identifying the relationship with clients, basic profiling, assessment of risk and construction of portfolio which is completely automated. It also has a capability to periodically rebalance the portfolio and reorganise until the achievement of goals. Although there are about 35 companies offering robo-advisory platforms in India, services differ on multiple fronts from being a direct plan-based model, goal-based advisory to full pledge services. Let's understand why robo-advisory is good for MF investments
Goal-based planning – Robo-advisory supports customers to plan various financial goals with suitable schemes that are selected on the basis of risk assessment, a value in terms of rupee, and also tenure of the goal. It also periodically reviews and rebalances portfolio without attaching any biases over schemes. The software keeps the track until the goal is achieved.
Accurate decision – Robo-advisory is designed with a different set of algorithms on a board level. It is a combination and permutation of a variable set of quantitative and qualitative data addressing a larger segment of customer, and therefore, eliminating the risk of error or bias decision.
Flexible and convenient – The advent of robo-advisory has offered a user-friendly interface which is convenient to use across any geography, and flexible to manage MF investment from a mobile application. Further, all documentation process like Know Your Customer (KYC) is done through an automated process without having to travel.
Lower cost – Many MF investors tend to ignore costs that seems small and insignificant in percentage terms, but over a longer period account for a big amount and reduce the net value of investment. Further, traditional financial advisors charge a substantial fee, making it expensive for small retail investors.
Exit advisory – The key element of robo-advisory is to give direction to exit from investment either if a scheme is underperforming or when a particular objective is achieved. This decision is routed through logical reasoning which is currently missing in human advisor due to biases towards schemes that offer higher commissions or due to inactive attitude.
While robo-advisory is suitable for MF investment, with more than 35 companies offering robo-advisory platforms in India, it is imperative for customer to identify suitable platform that offers holistic aspect of robo-advisory.
The writer is founder and CEO, 5nance.com