Robots have started entering our lives in different spheres and giving financial advice is no exception. Robo-advisers, or automated services based on computer algorithms, are catching on in the Indian market due to the relatively lower penetration of financial products in India compared to developed markets.
Globally, the market for robo-advisory services is growing and experts believe that the Indian market will follow suit. According to a Business Insider Intelligence forecast, robo-advisers (with some element of automation) will manage investment products worth $1 trillion by 2020, which will go up to $4.6 trillion by as early as 2022.
Over the years, technology advancement has also enabled robo-advisory services to be developed and scaled up to meet the specific needs of individual investors. Along with lower cost of computing and storage, “advances in machine learning and artificial intelligence are making customized advice possible", according to Rajashekara V. Maiya, assistant vice-president and head of product strategy for Finacle, Infosys Ltd. “Machine learning keeps on learning consumer behaviour and applies pattern recognition and behavioural learning so that you are able to create customized products for each unique individual," he added.
Sanctum Wealth Management, in its mid-year investment outlook report for 2017, said that customized algorithm-based banking and robo-advice will allow rapid transformation of unstructured raw data into structured data. This essentially means that once data from sources such as people’s conversations is transformed into a machine-usable form, it will lend itself more easily to automated platforms such as robo-advisors. The report added that robo-advisory teams will be an attractive option for financial institutions looking to cut labour costs, while lowering investment and financial planning costs.
Before robo-advisory services came into the picture, personalized financial advice was only for the affluent. But with robo-advisers, financial companies get the chance to grow in scale and reach a much larger base of retail customers. Dinesh Rohira, founder and chief executive officer, 5nance, a financial technology (fintech) firm that has a robo-advisory platform, said that technology is the only way to reach the masses. “This was an area that had only been led by professional wealth managers," he said.
Others in the industry concur with this view. “Robo-advisory, without the need for human intervention, brings down the cost of such services to those investors who otherwise couldn’t afford them," said Rahul Parikh, chief executive officer, Bajaj Capital Ltd, which is set to launch a robo-advisory platform.
“We are seeing that wealth management is getting democratized to retail investors. So far in India, if you wanted to have a private wealth advisor, you had to have at least Rs20 lakh to Rs1 crore (as investment corpus). As the economy and the aspirations of the people started growing, a transformational shift took place from ‘low volume and high value’ to ‘high volume and low value’," said Maiya.
However, some experts say robo-advisory services are still in the early stages and not much is happening, especially in India. “When it comes to robo-advisory fintech in India, there is nothing significant enough happening here. Globally, you can look at Betterment, Nestegg Solutions Inc., Wealthfront Inc. and Hedgeable, Inc. which are offering leading robo-advisory services. I think Betterment and Wealthfront are the leaders and have got a few billion dollars under management. But this (area) is still a work-in-progress," said Sunil Sharma, chief investment officer, Sanctum Wealth Management.
Scepticism notwithstanding, financial institutions in the country are realising the benefits of robo-advisory services by either building the product in-house or partnering with fintech companies to develop robo-advisers. Take the case of FundsIndia.com, which has a robo-advisory service for which it is forging partnerships with financial biggies. “We have a partnership with Axis Securities and one more company. There is a growing acceptance from the industry, and we are trying to enable better product design," said Srikant Meenakshi, co-founder, FundsIndia.com. According to him, 15% of his company’s overall portfolio comprises robo-advisory services. Similarly, 5nance has an agreement with HDFC Mutual Fund for its robo-advisor.
Robo-advisory start-up ArthaYantra uses a patented methodology called the Personal Financial Lifecycle Management on its online platform, Arthos. Since its launch in 2008, the site claims to have helped 120,000 customers across more 650 cities and 30 countries.
Partnerships could also be a step towards acquisition of smaller fintechs by larger companies. “Everyone wanted to raise capital and build clients. Getting clients is a big challenge. In such a situation, there is no alternative but to opt for tie-ups. Companies are looking for partnerships without spending too much money and it eventually becomes a value-added service. Eventually, you will see a situation where the robo-advisory fintech will get acquired by larger banks and financial services," said Parikh.
Companies such as ICICI Securities, on the other hand, are building robo-advisory products in-house. “People are getting used to online services. We launched our robo-advisory product in early 2016 and currently we have 3,000-4,000 customers using this product," said Abhishake Mathur, senior vice-president of investment advisory and customer service, ICICI Securities Ltd.
Does this mean we will completely trust a robo- advisor to give us financial advice? Not really; some human intervention will still be needed at the back-end. “We do have a back-end call centre," said Rohira. “For the first few transactions, we see customers looking to call someone. But after three or four transactions, they get used to the machine," he concluded.