Would you trust a robot with your finances?

How they work: To begin with, a robo-adviser assesses a customer profile through a questionnaire, which would ask for details like goal, risk appetite and so on. With this data, it suggests portfolio recommendations, just as a human adviser would do.

However, it does so autonomously, by using algorithms and technologies like artificial intelligence and machine learning on the data.

A robo-adviser will recommend portfolios that best match the customer. Customers get to decide which of these they want to take up. If they feel that none of the recommendations are in line with their expectations, they can make adjustments to their profiles so that they can be suggested alternative portfolios. However, in India robo-advisers are at a very nascent stage.

“Mostly there are transaction platforms which are not robo-advisers. Only a very few will help you manage your asset allocation, rebalance your portfolio and weed out funds that are not working," says Prateek Mehta, co-founder and CBO, Scripbox.

A transaction platform is very low cost, but it has no accountability and provides no added value. It is for a do-it-yourself investor who knows how and where he/she wants to invest.

“Most recommendations that robo-advisers provide are very basic right now, with some exceptions. Based on the data you provide, a robo-adviser would put in one of the several buckets—whether you are aggressive, moderate, conservative or some more shades of these. Based on a particular profile, you are recommended a particular model portfolio. But there are more shades to a human," says Milan Ganatra, founder and chief executive, 1Silverbullet and former founder and chief executive of Miles Software.

Also, he says that the name ‘robo’ suggest it is something that does a mechanical job, which may not always be intelligent. But the robo-advisers that will take shape in the coming few years will be far more intelligent and have different data inputs to understand a person better.

Robo-advisers vs human advisers: The question that naturally comes up is this: are robo-advisers better than human advisers?

“It will be unfair to compare human advisers with robo-advisers. Both have their unique abilities. The benefit of robo-advisers is that they don’t function on emotional biases, which allows the creation of an optimal portfolio and limits any significant downside," says Prakarsh Gagdani, CEO, 5paisa.com.

Agarrwal lays down the pros and cons of robo-advisers vs human advisers. The benefit of a traditional adviser is that there is a human to talk to in a bear market to counsel you. Further, since you are speaking to someone, there may be more scope to customize a plan for you. The flipside is that the advice is based on the capability of the person, their emotional intelligence in the market and their ability to communicate and guide you well. For robo-advisers, the pros are the use of rules to build your portfolios, which means unemotional, logical plans. The flipside is that the rules are only as good as the people who wrote the rules; these rules can often be static, and the investor has no human to talk to about any concerns.

Cost savings: Robo-advisers come with significant cost savings. The fees charged by a robo-advisers could work out to be less than 1% of assets under management. This is simply because a human financial adviser can work with only so many clients at one time, while a robo-adviser can attend to multiple clients at once.

What to look for? Since a platform is only as good as the people behind it, understanding the pedigree of the founders who are building the robo-advisory platform is important.

Says Avinash Luthria, an advice-only financial planner and Sebi-registered investment adviser (RIA) at Fiduciaries. “Intelligence, integrity and value for money are the ways one should evaluate both an individual RIA as well as a robo-adviser."

“The Securities and Exchange Board of India (Sebi) regulations say that the managing director of a (specific) robo-adviser entity is responsible for all investment advice that it gives. So, clients could check the credentials and reputation of the managing director before they formally engage with a robo-adviser," he adds.

One should also understand the costs associated to avail the services, their incentive structure with mutual fund houses and hidden costs if any.

“Lastly, the frequency of their advice—if markets turn, your portfolio asset allocation changes dramatically; how often do they intervene and offer you rebalance advice?" asks Agarrwal.

Ganatra feels that robo-advisers are picked based on the fee that is being charged, and how good the user experience on a mobile or desktop platform is. But there is no data point to say that one robo-adviser is giving you better advice than another one.

Are they for you? “For those who are affluent and in a more mature stage when it comes to investments, companies are bringing in more a hybrid model to assist them. Such solutions are more nuanced and can provide more specific solutions to a client," says Mehta.

Agrees Agarrwal, “Generally with wealth management, I believe a co-bot model works best. Co-bot is a human adviser leveraging technology to build plans. This allows the best of both worlds where there is a human touch to the advisory but more standardized, unemotional advice that is less dependent on the human adviser’s calibre."

However, if you are an early-stage investor looking for services like asset allocation, portfolio curation and rebalancing and do not want to go to a traditional financial adviser, either because you do not have the time or you feel the fees are high, a robo-adviser could just be the right one for you to get you started on your investment journey.