robo advisers are set to grow to about $5 trillion in terms of assets.!

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 it about robo-advice?

“You really can’t go anywhere and not hear someone talking about it,” Aaron Klein noted at the TechLeaders 2015 conference on Thursday before rhetorically asking: why, and specifically, why now?

Klein, CEO of Riskalyze, a technology firm that matches client risk tolerances with suitable investment strategies based on the precepts of Nobel Prize winner Daniel Kahneman’s work in behavioral economics, believes the answer involves something akin to the five stages of grief.

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.

With the aid of robo-like technology, advisors can develop those smaller accounts into “full-service clients of the future, and democratize access to great advice for all investors.”

So how, exactly, does that work for advisors from a strategy standpoint? By effectively segmenting clients.

“For those under, say, $250,000, they’ll receive reduced services and enjoy corresponding low fees, but it will still be services they need. Be honest with them, and inform them that you will do all you can to get them to $250,000 in assets as quickly as you can. Once they reach that threshold, however, they will need to be reminded that the fee increases, but so will their service.”

Looming threat?

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.

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.


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