September 2016

ROBO-ADVISERS: Automatic for the people

Basgo-MonasteryRobo-advisers could engage millions of investors in India who conventional fund distributors struggle to reach. Indrajit Basu reports. With its burgeoning young population and a huge number of financially excluded investors, India seems to be at the tipping point of online investing. It could well be a testing ground for one of the most talked-about technologies in fund management: robo-advisers. India’s wealth is growing fast. According to a report by consultancy EY, India has the world’s quickest growing high-net-worth population (individuals with over $1 million in investable assets) both in terms of the number of individuals and wealth levels. Yet, while India is home to around 125 million middle-income professionals, only 5% of the Indian population invests in mutual funds. Online channels seem a natural means of reaching investors who are not being served by conventional financial advisers. There are more than 400 million internet users in India and more than a billion mobile phone users. Robo-advisers could be the most cost-effective way to reach them. WELCOME THE ROBOTS
Robo-advisers are a class of financial adviser that provide automated financial advice or portfolio management online based on algorithms or computer programs. An investor typically provides details such as their risk profile, investment objectives, personal or life goals, which are then analysed by a machine. Based on such information, the robo-adviser suggests a financial plan and investment options. Like a human adviser, the robot reviews progress periodically and suggests changes if required. In India, like in rest of Asia, robo-advisers are a nascent phenomenon that made their debut about two years ago. Unlike in the US, the sector doesn’t have big players such as Wealthfront or Betterment.  However a number of firms, large and small, are stepping in to offer various forms of automated advice. “One reason why robo is catching up fast in India is that not all can afford a human fund adviser,” says Mukesh Jindal, founder of RoboAdviso, which calls its service a social effort for investors who do not have a financial adviser. A personal wealth adviser may be a sensible choice for someone with an investment portfolio of more than a million rupees ($15,000), but for an investor with less than that, a human adviser ends up very expensive. According to the EY report, most professional financial planners in India charge 15,000 to 40,000 rupees a year to manage a portfolio, while wealth management firms, which mainly cater to wealthy clients, charge an annual fee of 0.75%-1.5% of the portfolio size. In contrast, Indian robo-advisers operate on a low-cost model, generally charging between 1,000 and 7,500 rupees, or 0.15% of the portfolio size, per year.  There are a few, too, that only work on the commissions they receive from fund houses, with no direct charge to the investors or clients. COMING TOGETHER
But it is not only the fee structure that makes robo-advisers interesting. According to Sanjiv Singhal, founder of robo-advice firm Scripbox, the technology is exciting because of its ability to bring a much larger number of investors into the financial advisory net. In other words, it facilitates financial inclusion. Singhal says that, barring the high-net-worth segment, Indian investors largely avoid paying for any kind of financial advice. Robo-advisers are not about undercutting existing advisers, he says, they are about reaching people who would be otherwise by ignored by the funds industry. “The role of robo or automated investment services in India is about expanding the market,” he says.  “Seventy percent of our customers are first-time investors who are not looking for cheaper advice but for good advice.” It follows that Singhal is trying to reach a much bigger target market than the young and well-educated users that have tended to be the main customers of robo-advisers in the US and Europe. “Our robo clients are not just the technology-savvy millennial population, but also span across different age groups, from many investing 500 rupees a month to a few investing 400,000 a month,” he says. Robo-advisers can fulfil the ‘financial inclusion’ role by employing a business model with low overhead costs, which allows them to reach a large number of customers spread out across a wide area. “Traditional [human] advisers have limitations,” says Dinesh Rohira, founder of 5nance.com, a robo-adviser that claims to offer holistic financial advice. “They cannot scale up beyond a certain level and go beyond top cities. This is why we have clients from some of the remotest parts of the country.” PROBLEMS
However, the human touch still matters, and the lack of it may the biggest obstacle to the proliferation of robo-advisers n India.  “Trust in the machine and the comfort level is a big issue here,” says Srikanth Meenakshi, a founder-director of robo-advice firm Wealth India Financial Services. Many investors are still sceptical about online investing and find it difficult to accept recommendations from a computer over a human wealth manager. There is also a lack of awareness about financial products and a lack of financial literacy in India. “My basic challenge is that a large part of my millennial clients who have just started earning are not open to investments,” says Jindal of RoboAdviso. “They switch off the moment they hear that word.” Robo-advice boxIn future, Jindal says robo-advisers will struggle to contain their costs as they seek to spread awareness, education and improve the quality of advice. “For, as soon as a robo-adviser increases fees to cover increasing operational costs, clients tend to gravitate towards human advice,” he says. Another challenge, according to Murali Balaraman, partner at EY, is the lack of reliable data available to make robo-advised portfolios resilient and responsive. For instance, a simple plan drawn up by robo-advisers might be unable to address sudden life changes such as a job loss or a death in the family, which would require alterations to a portfolio. MOVING ONLINE
Despite these challenges, most experts expect the share of the wealth management sector controlled by robo-advisers to grow. Some robo-advice firms report their business volumes doubling every quarter. “It has to go through its journey. Whoever imagined a decade back that internet banking would completely take over personal banking today?” says Rohira of 5nance.com.  “Similarly, being a financial instrument and a logical product, wealth advisory too is slated to move online in almost its entirety.” The next five years in the Indian robo-advice sector promise to be interesting. ©2016 funds global asia

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