The Pros and Cons of Robo Advisors
Robo Advisors offering ‘automated investment advice’ are attracting quite a bit of attention of late. A few of them have attracted high ticket VC and PE investments recently, instantly catapulting them into the headlines in today’s age of the Unicorn. In case you’re wondering whether a robo advisor is the right path for you to take, here’s a quick synopsis of their pros and cons.
Pros
The biggest plus point of Robo Platforms is the convenience that they offer. You may use the services of a Robo advisor from the convenience of your home, in your pyjamas. There’s no need to schedule meetings with an Advisor or sign mountains of paperwork – a number of these platforms are almost paperless.
There’s another indirect benefit of investing through Robo Advisors. Since Robo Advisors do not employ feet on street “sales people” of financial products who have “revenue targets” you’re in fact more likely to receive “conflict free advice” from a tech-enabled Robo advisor than from a Human advisor. This might sound strange, but it rings true!
Cons
A large number of Robo platforms available today have been set up by technocrats with no past experience in financial advisory. Many, of course, have brought on board seasoned investment professionals to man their ships. But is such a marriage possible?
Most so called Robo Advisors in our country are really nothing but single product platforms masquerading as “Advisors”. It’s rare to come across a Robo Advisor that really offers a holistic, financial planning led, 360-degree solution – the reason is obvious; a great Financial Plan involves a great conversation - with an actual Advisor!
The recently proposed SEBI IA regulations propose to bring the ‘algorithms’ being used by Robo’s under the scanner. SEBI may be surprised at the overly simplified techniques being employed by many of these so called Robo “Advisors” to spout ‘customized recommendations’ within 2 minutes, Maggi noodles style!
In short, pure Robo Platforms still have a long way to go before they can create serious, multi-dimensional value for their clients.
Can Robo Advisors address the “behaviour gap”?
Here’s a staggering statistic: Franklin India Bluechip Fund (a popular Mutual Fund scheme) has delivered an annualized return exceeding 20% since its launch in 1993. What this essentially means is that if you’d invested Rs. 10 Lac in its NFO (then “IPO”) in 1993, the fund value would have grown to approximately 9.5 Crores as on date!
And yet, how many people do you know who have realised an annualized return of 20% plus, annualised, from their investment in Franklin India Bluechip Fundover 25 years? None. 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.
Let’s face it – we’ve seen relatively ‘still waters’, markets-wise for the past five years. The Nifty has essentially risen from 4500-odd levels at the end of 2011 to nearly 11,000 as on date – more than a 100% point to point growth, while assets like gold have frozen in place and real estate has sunk deeper and deeper into a quicksand of its own creation.
How well will Robo Advisors be able to deal with this ‘behavioural gap’ when the markets fall? It’s likely that the lack of human interfacing and ‘investment counselling’ will cost them dearly at that stage, as they won’t be able to counsel and handhold their clients when they need to the most.
While noting the obvious challenges pertaining to non-traditional Advisory models, there’s no denying that the older, cost intensive, sluggish and top heavy “feet on street” Financial Advisors will need to evolve to survive. At FinEdge, we aim to combine the best of both worlds, by closely hand holding our clients while leveraging technology to create a highly efficient and seamless investment experience for them.