If an individual advisor or firm writes on Robo Advisor vs Individual Advisor you will feel he is biased. Well… yes, we are individual advisors & financial planners, but what I am going to tell today is all based on my personal experience. Yes, I will be fair or try to be fair and will also write where Robo Advisors have an advantage over individuals and where they lack?
But Robo Advisors are an upcoming trend and they are competing as far as personal finance advisory space is concerned.
Do you know what is a Robo Advisor?
Robo stands for Robotic Technology. Like any other field, robots or programs are used in advisory business. We (individual advisors) too use programs & software but the ultimate interpretation and the final outcome are manual. But a Robo Advisor, there is no human touch.
Mostly these are websites which offer and user-friendly platform to input data and see the outcome. Analysis/calculation is done back end using the algorithms and programmed calculators.
These are offered by many advisors (yes individual advisors run robo advisors) and financial institutions.
So a Robo Advisor is sort of a front end where it collects data from you. And based on the data it recommends you alternatives. It recommends the best way of action and also implements that suggestion or strategy. No human involvement here and it’s the program which collects data, analyzes data, communicates a course of action & finally invests for you.
Robo Advisors in India
There are many online portals in form of Robo Advisors. They offer your portfolio check and they also advise on new investments. Globally, Robos is a big industry and many institutional advisors have a platform for both individual advice and robo advice.
Robos are very common in developed countries like US, European countries, and Australia. This is because of internet penetration and advice being costly. Unlike our country where formal advisory business is still making inroads, these countries have a matured market where investor decides what kind of advisory they want and what money they are ready to pay for it.
Charles Schwabs, Wealthfornt, Betterment are leading Robo Advisors in the US.
See the fees comparison in the US by Robo & individual Advisors
How does Robo Advisor work?
I give you an example. Suppose you got a bonus income and you are thinking of investing this for your car upgrade in next 3 years. You decide to use a Robo Advisor.
Robo Advisor will first register you through its website. It will take your personal details like age, income and family details.
Some Robo advisors will ask your equity/debt choice. The other will ask some questions related to risk assessment and will give you an asset allocation model.
Then it will ask you few question like how much to invest, what duration you wish to invest etc.. Based on your answer it recommends you some funds. If you accept you can fill applications online and make payment using net banking or transfer. Done.
Typically it is a solution finding platform. You want to invest it gives you a solution where and how to invest.
What is wrong here? Robo Advisor Vs Individual Advisor
- The robo advisor has not made this investment as a part of your financial plan or developed a financial plan. Some robo-advisors do goals planning but the comprehensiveness is missing. For eg Robo will not advise on your monthly budgeting or forthcoming insurance needs.
- The robo advisor offers no flexibility. Suppose you are not sure of the year but for a robo advisor year is part of its program. You have to choose one. You cannot choose a range.
- Robo-advisor platform is not a full-service platform. All offer automated investment advice to make you invest. They are not advisory driven, they are investment driven. Generally, a distributor/advisor is behind such platform with the aim to source investments.
- Robo-advisor doesn’t always mean investing in DIRECT PLANS. Most of them make you invest in regular plans and the same conflict of interest arising due to commission exist in the funds they recommend. Very few do fee only advisory.
- Typically the advice will vary across the platform. The results will be different if you use different robo-advisor for a single Some may offer just one fund and some may use more funds.
- During short-term market volatility, or in the case of a personal emergency, if you are not able to invest. The automated advisory platform will send reminders stating that you are moving away from the long-term goal. But it will not suggest an alternative.
- Most planners agree that a robo-advisor may be used for the small transaction or say starting a SIP, but for long term detailed planning you need to have a life coach with you.
- Robo-advisory is a new concept. The world over trend started in 2008 and in India, after 2014 some players have build platforms. The trust factor, the proven track record, the alignment with the customer’s interests, the hand-holding of the customer in turbulent times until he gets to the goal are missing.
Do you think – Aren’t these important things to miss? Can you miss the behavioral part?
Where Robo-Advisor scale high?
- COST: most of the robo advisors charge less than a normal advisor. This is because of the business model. They are online, hence want to make money on scale/volumes. Some charge monthly fees (like Rs 199 pm etc) or a flat fees (Rs 49 or 99 for one transaction) or flat fees for a year (subscription like Rs 999 pa) etc. Very few charge on AUM basis or portfolio valuation basis.
- An individual advisor cannot think of these revenue model as these are unscalable revenue models. So most of them tie value to their advice and services.
- Millennial and Generation X investors who are technology-dependent will like robos. They do not like to search and shop for a financial advisor. This category is much more comfortable sharing personal information online. They trust technology with important tasks, such as wealth management.
- Single transaction or Financial planning in-waiting investors use Robo platforms to benefit from the asset allocation and knowledge part. They can find assistance to invest with robo advisors.
Many financial planner and media say that Robos are for small investors and individual advisor is for seasoned investor.
Well, I do not buy that point. This is for the reason that it is the interaction between you and your financial planner that makes you seasoned. So how do expect to graduate your skills when you deal with the automated system in your initial years of investing?
Also, the small portfolio also needs valued advice and hand holding in times when you as an investor is facing cycles of greed, fear, anxiety, and euphoria. I don’t think mechanized advice can solve this.
Yes, I agree, on the cost factor, robo advisor will be cheaper option to start investing with guidance.
As I said it may look biased, but believe me robots have never been a threat- in mind or work. In fact, when I started my practice I had the option to develop a Robo platform or do what we do currently. I chose to be individual as my experience says, you get better when you interact and share.
Have you invested through a Robo Advisor? What was your experience?
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