Robo advisory could change distribution
Is it a bird? A plane? No? Superman? No, not him either. Come on, get real! But you’re close—it’s a robot. And it’s here to manage your money, and your investments. Called robo advisers, these bodies of artificial intelligence are springing up in the US. And India seems to be catching up. Some homegrown firms are entering this space. And if experts from the investment advisory and distribution space are to be believed, this tribe is only set to grow and grow fast.
As per a Citi Research report dated 7 September, robo advisers are set to grow to about $5 trillion in terms of assets that they manage by 2025, up from about $14 billion that they managed till the end of 2014. According to an A.T. Kearney report dated June 2015, robo advisers in the US could manage about 5.6% of the total investible assets in 2020, up from about 0.5% of the assets that they are expected to manage by the end of 2015.
Should distributors in India be worried about this onslaught? Or, is this an opportunity? How will the investor benefit?
What is robo advisory?
When you use the service of a financial adviser or distributor, she sits with you, understands your goals and requirements and then suggests a financial plan. A robo adviser does all of that, but instead of a human being, you deal with a computer –based algorithm or programme. Typically, you fill up a form that asks for your details. The robot then analyses it and suggests a financial plan for you that includes investments or asset classes where you ought to be allocating money. Then, just like a human adviser, the robot, too, reviews your progress periodically and may suggest changes.
In the US, there are popular robo advisers such as Betterment Inc. and Wealthfront Inc. that manage billions (about $2.5 billion and $2 billion, respectively). Robo advisers such as these channelise their clients’ monies into low-cost index funds and exchange-traded funds (ETFs). Due to the minimal human interface, the fee is low. And since their underlying schemes’ fees are also low (passive funds have among the lowest fees in equity funds), you tend to incur low costs when dealing with robo advisers.
In India, we haven’t yet seen a proliferation of true blood robo advisers nor do we have a wide bouquet of index funds and ETFs that robo advisers can offer as a means to lower costs. What we have is some firms that are generally referred to as robo advisers but offer different versions of interface. Most of them are free of cost and earn from trail commissions. Some firms, however, charge an advisory fee.
FundsIndia.com, an online platform that offers MFs, has four portfolios, called smart solutions, targeted towards four goals; child’s education, child’s marriage, retirement and one aimed at a first-time investor. Based on the number of years to go before you reach your goal and a monthly sum you are prepared to invest, it suggests some schemes, which it has curated based on its methodology. Portfolio is reviewed regularly and rebalancing suggested, as we approach the goal.
BigDecisions.com is more of a research platform that tries to answer your very first questions when you start planning—how much do I need to plan for, how much do I need to save to reach there, and others. There’s a bunch of smart calculators that aim to give you solutions about your retirement, child’s education, amount of life insurance and health insurance needed and so on. It doesn’t offer you products; for that, it directs you to transaction partners; for example, FundsIndia.com, if you need to invest in MFs.
Scripbox is a portfolio in a ‘basket’. It offers three portfolios of MF schemes of equity, debt and tax saving, which are curated using an in-house research process. Once a year, it reviews its portfolios and suggests changes, if any.
ZipSIP is an investment tool that allows you to invest in a basket of MFs through systematic investment plans (SIP), based on your risk profile and investment capicity. It’s a part of MyUniverse, a platform offered by Aditya Birla Customer Services Pvt. Ltd. It allows you to link your bank accounts, demat accounts, MF investments made online through fund websites, and credit and debit card websites so that you can get an aggregate and real-time view of your personal finance life.
Then there is ArthaYantra; probably one of the truest forms of robo advisories in India. Once you sign up, you fill in a lengthy questionnaire that asks for details such as goals, income, expenses, liabilities and so on. You then get a customised financial plan followed by a call by one of its advisers to explain the advice. You can choose to execute the transaction on the platform. Portfolios are reviewed and rebalanced half-yearly.
Cost varies. For example, Scripbox and FundsIndia are free; Arthayantra charges Rs.1,000 for a financial plan but ongoing monitoring is free. BigDecisions is free; it has a revenue sharing agreement with transaction partner like FundsIndia.com.
Be it an adviser who charges fees to her clients or a distributor who only executes client’s transactions, experts believe that if they can demonstrate value to their customer, they will survive. “The reality of ‘distribution’ is that automation and the Internet have redefined many fields already. They provide less expensive modes to reach many clients and we already see models with low, flat fees. This will challenge advisers whose value is not clearly differentiated from providing products since clients will be able to access these products far less expensively,” said Shawn Brayman, president and chief executive officer, PlanPlus Inc., a Canada-based financial planning software specialist.
“I don’t think that robo advisers pose a threat to financial planners who truly offer value-added financial advisory services. Pure transaction-based distributors who are thriving on facilitating convenience will face heat when robo advisers become popular and more accessible,” said Sadique Neelgund, founder, Network FP, a firm that trains aspiring financial planners.
Some distributors feel that there is enough space for robots, fee-based advisers and transaction-only distributors. “The number of distributors in India is very less. Also, not everyone can afford an adviser’s fee or wants to adapt to technology. Therefore, all three types of distributors will survive,” said Kanak Jain, who is an MF distributor and mentor, Ask Circle MFRT India, a Kolkata-based MF distributor association.
Then again, distributors that sell only MFs might get impacted as opposed to those who advice across asset classes. And as they move towards various other assets, they would need to gravitate to getting a Registered Investment Adviser license. Securities and Exchange Board of India (Sebi), has laid down a rule that mandates distributors advising across asset classes to get registered with Sebi.
Vishal Dhawan, founder and chief executive officer, Plan Ahead Wealth Advisors, a Mumbai-based financial firm, said: “Even advisers who are running full-fledged advisory models will find that sophisticated robo advisory platforms could offer such services. Some advisers will end up having to expand services, like offering life planning, estate planning, and such services that are not easy to replicate in the robo advisory world.”
Quite a few robo advisory firms are expected to launch in India; some will connect directly with the investors (business to consumer; B2C), while others will bring smaller distributors on to their platform, and who would then use the platforms’ algorithms to offer portfolio solutions to their own clients (business to business; B2B). Bengaluru-based Mymoneysage.in is one such platform that aims to launch its robo advisory, both B2B and B2C modules, within three months. “The advice is the same for both B2B and B2C version. The algorithm offers recommendations (asset class level and product level) for the client, but the adviser can override the recommendations based on her understanding of the client’s situation,” said Kishorkumar Balpalli, founder of the company.
Saurabh Bansal, founder, Finatwork Wealth Services Pvt. Ltd, a Bengaluru-based, fee-charging financial planning firm that is planning to start a robo advisory arm, said that those of his clients who don’t wish to pay fees would eventually move to a low-cost robo advisory platform. “There are some clients who want a planner associated with them. But for those who don’t mind embracing technology, they would move more towards automation,” said Bansal. In general, he added, those in their 20s and those who are at an early stage of their careers are ideal candidates. This could be a large, fast-growing segment that the robots could tap.
Technology and robo advisory platforms are the way to go. We are yet to see which model of robo advisory would add the most value to the investor, but their rise will bring in another revolution in the Indian distribution space, which will result in more transparency, better services and lower costs.