Ever thought of robots managing your portfolio? Well, the times are probably here!
A detailed survey was conducted by Oracle, which stated 90% of corporate leaders believe that during the next decade, robots will replace finance professionals. One-third of them anticipate it will happen as soon as 2025. In India, there is widespread enthusiasm for AI, with 87% of respondents stating that businesses must rethink their financial operations.
Robo advisers are algorithm-based investment platforms that analyze a user’s financial situation (existing assets and cash flow), goals, ambitions, time horizons, risk appetite, and financial market predictions before providing algorithm-based solutions. Robo advising services were originally presented in the United States in 2008, and they quickly gained popularity because of their low cost, minimal risk, and convenience of use. Robo guidance has developed in India over the last several years as a result of increased financial understanding across the board. According to MEDICI, a fintech research agency, the number of Robo advisers in the country has increased from three in 2013 to sixteen by the end of 2019. Assets under management (AUM) in the Indian Robo advisory segment is expected to reach $53.9 Bn by 2025, with a 43.8% CAGR during 2020-2025, according to Statista.
But the question is, how do Robo Advisors Work?
A Robo advisor’s primary role is to provide investment advice and assistance in the development of investment plans. Users must fill out the required information, describe financial goals, and identify their tolerance for risk on a Robo advising platform. When all relevant data (time frames, risk appetite, goals, nature of employment, age, and other financial facts) is fed into the system, the programme analyses these characteristics to provide a score for each individual, develops a matching involve money on that score, and maintains it independently. Many Robo-advisors use a popular strategy called modern portfolio theory, or MPT, that follows funds like the S&P 500 and prioritizes diversification to minimize risk. Robo-advisors thus rely on low-cost mutual funds or index fund exchange-traded funds (ETFs) that spread your investments across different assets. Beyond just mutual funds and ETFs, however, the Robo-advisor uses your investment goals ultimately to help decide your asset allocation. Your investment portfolio to save for a future home in the short term will most likely look different than your portfolio to save for retirement in the long term. In fact, more and more Robo-advisors offer individual retirement accounts (IRAs) for retirement purposes. As market conditions change, or as you invest more money, the robo-advisor’s software will automatically adjust your portfolio to best align with reaching your goals. This periodic buying and selling are better known as “rebalancing.”
Though Robo-advisors are based on the premise of no human supervision, some offer access to real financial advisors should you want one on your investing journey.
Listed below are a few Advantages and Disadvantages of Robo Advising –
Advantages:
1. Highly Effective – Robots are highly effective as they can do a lot of work in a pretty less time, they can compute and present a lot of data within moments, and come up with financial models.
2. Lesser Cost – Robo Advisors cost way lesser than conventional financial advisors, traditional financial advisors generally charge around 1-2% whereas robo advisors charge way lesser like 0.25 to 0.5% and even 0% in few cases.
3. Higher Accuracy – Robo advisors minimalize the chances of error and nullify the chances of human error.
Disadvantages:
1. Lack personalization – One of the biggest draw backs of fortunately or unfortunately for robo advisors is that they are not humans. Which is a major set back for a lot of investors as they don’t really want to trust a machine completely with their money. Robo Advisors can also not provide one to one talking experience.
2. No face-to-face meetings: Since Robo Advisors thoroughly work on the basis of the tech scenario, its impossible to have a face-to-face meeting. When we consider having a personal financial advisor, we can easily clear the air by asking all sorts of questions we have. However, this wouldn’t be possible in case of robo-advisors
Now, since we know the pros and cons of robo advisors, let us consider their growth during the covid 19 pandemic. During the pandemic, we saw a downfall in the global financial markets in the initial stages at least, however on the flip side of it, the industry of Robo Advisors saw a growth, wherein companies like Vanguard showed a 14% growth and 35 % surge in customer numbers. Amidst the crashing equity markets, many investors relied more on the advice of automated robots than their shaken knowledge and experience.
The Indian economy has seen a dynamic environment with reference to the performance of the stock markets. However, does it really make sense for Robo Advisors to find their implementation in the Indian economy? Currently, in the Indian economy, we have Robo Advisors like Kuvera, Orowealth, Scripbox, and Goal Wise. Based on the performance of these advisors on the basis of their AUM, its clear that the current industry of Robo Advisors is in its Nascent stage, since the numbers witnessed by the current industry players is significantly lower as compared to the peer companies in even better and mature markets.
So, are Robo Advisors worth your time? Well, from an Indian Perspective, we can expect the industry to see massive growth in the upcoming years with the better performance of the stock markets and simultaneous entry of more participants in the Indian Financial Industry. One important point to be considered here is that even though robo advisors would consider all possible algorithms before coming at a final best solution, it wouldn’t implicitly mean that the investor wouldn’t require to do his own research and just rely on the results produced by the software. Instead, the investor can make his research concrete by analyzing the company from his end too and be sure about the fact that the company’s current valuation is satisfactory and its worth investing in the specific company.
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