At the very least, in a robo advisory platform, which is very simple, the potential to do harm is minimised
India’s wealth management landscape is becoming more focused on robo advisory platforms. Vidhu Shekhar, country head, India, CFA Institute, a global association for investment management professionals, spoke to Mint about the shift, adding that there are still a few years to go before this segment evolves and matures.
To what extent can an AI or robo advisory platform take away from human advisors as the market grows?
Whatever is happening in the West (developed markets) will happen in India too, sooner or later. Simple things are getting automated. If you see Betterment or Wealthfront (automated, online financial advisors), once you open an account, all the analysis, asset allocation and outcome is taken care of by the system. You could have a premium account as well with access to a financial advisor. It is not an either/or situation. At some point, you start getting help from real people.
The idea is that through technology you can reach out to a much larger market. People who were until now either not able to afford or have access to a wealth advisor, now have a way out. Like in any other business, when large established firms realise that startups are disrupting their business, they evolve and adopt similar strategies. Eventually it plays out— whoever is better will win over the market. In India, you know that the demographics are favourable. In every demographic segment—high net worth individuals, the mass affluent and regular bank account holders—there is a very strong growth, so demand is there.
Right now we don’t see a lot of it but I think, to start with, most platforms are simple—for mutual funds. Even in the US, product complexity will keep increasing. This new field will evolve into a mature industry in the next two-three years and the competitive dynamics will change.
How does one distinguish between the various AI platforms and pick the best one?
The one thing we didn’t talk about was the quality of advice. Doctors take an oath to do no harm, most of our advisors are doing active harm to customers, knowingly or unknowingly. Incentives ultimately decide what you do. At the very least, in a robo advisory platform, which is very simple, the potential to do harm is minimised. It’s unbelievable what the bank did with Suchitra Krishnamoorthy’s money, for example. Both incompetence and lack of ethics are standing in the way of providing the right service to the ultimate client. Maybe robo advisors working with actual advisors will improve this situation. Sebi (Securities Exchange Board of India, the capital market regulator) has been pushing advisors away from commissions and towards fees because of all the mis-selling. Everybody will have to respond to the push coming from the regulator.
An AI system also ultimately relies on human intelligence. But, say, you are tuning the system to make more commissions for itself, maybe it will do the same. This is where the regulator’s responsibility does not go away and the regulator must have a different set of capabilities to manage this.
Can there be regulatory provisions to dis-align incentives from conflict?
Incentives always trump ethics. There is no difference between this industry and any other; it’s the same human nature. If you give an incentive for wrongdoing, it will happen. Something I read recently comes to mind, the writer quoted Paul McNulty, a former US deputy attorney general, “If you think compliance is expensive, try non-compliance." People at the top of all these big banks are recognising that they can’t allow things to continue as it is.
Big international banks are taking this very seriously. In India, if Sebi does the right things, that shift will happen here as well. You must operate at three different levels—at the individual level, firm level and at the system level. At the system level also, you have to have the conversations. The Citibank CEO just before the global financial crisis said that as long as the music is on I have to dance; if everybody else is doing it you will also follow. Hence, discussions have to happen at a system level. Many people from the asset management industry thanked us for talking to Sebi with the outcome that performance against the total return index has been made mandatory. This is because they say that by themselves they would not have made this change. So, everyone must come together.
Who is responsible for financial market and product awareness? The asset manager, the advisor or the regulator?
Last year I wrote an active versus passive article for Mint. What had happened was that in the US, people started launching class action suits saying that their pension fund administrator was not acting in their interest and not doing what they should be to get the best results. They could prove it by showing that they are paying very high transaction fees. Investors began winning these class action suits and the pension fund administrator then had to start paying attention to the ultimate outcomes of their clients and they started moving money out of active funds into passive.
In India, we don’t have a class action suit or lawyers who can do this. The pressure will have to come from somewhere; often it comes from a scandal. Think back to Satyam for example. Who is responsible? Everyone in the system is to some extent and we muddle along and try to improve the system.
Within the market place, you find good leaders and bad ones. Some will work genuinely towards improving the environment.