What are Robo Advisors? Do Robo Advisors Exist in India?

Automation is rapidly changing how we handle money and business today. Nowadays, computer programs or "algorithms" seamlessly execute multiple jobs that people used to do, making financial tasks faster and easier for everyone. Robo advisors are a prominent, new-age solution that can help you grow your wealth effortlessly. In this article, we discuss the world of robo advisors and their benefits (especially in the Indian context)!

What is a Robo Advisor? 

A robo-advisor is a digital platform that offers automated, algorithm-driven financial planning and investing services without human supervision. A typical robo-advisor will conduct an online survey to inquire about your financial condition and future objectives. It uses this data to offer personalised investment plans based on risk tolerance, time horizon & financial goals and executes them automatically in your own account.

How Does a Robo-Advisor Work?

• If you want to avail the services of a robo-advisor, you’ll need to complete a quick questionnaire. Usual questions include the client's age, gender, income, investing goals, liabilities, current assets, and degree of risk tolerance.  These data points are utilised to allocate assets in a portfolio.
• Robo-advisors analyse these replies using an algorithm and complex software to build a diversified portfolio of exchange-traded funds, index funds, direct equity, and other assets.
• The algorithm automatically rebalances the portfolio once the money is invested, to ensure it remains close to the target allocation.
• Some robo-advisors include live consultations or access to a licensed human financial planner who can help you prioritise your goals and give strategies for reaching them. Users can log in to their investing accounts to track progress.

What are the Benefits of Robo Advisors?

There are various benefits that Robo Advisors offers:

1. Accessibility: Robo-advisors make investing easier for everyone, even those who might not have a lot of money or experience. Their sign-up and investment processes are much easier than the heavy paperwork involved with human advisors. You can start investing with a small amount and manage your portfolio from your phone or computer. 

2. Low Cost: Robo-advisors often charge lower fees than traditional financial advisors. A majority of robo-advisors in the US charge between 0.25-0.5% of the specified investment amount as annual fees. (Robo-advisory platforms in India usually charge a flat monthly, quarterly or annual fee). In contrast, the usual fee charged by a human financial advisor ranges from 1-2% or even more for commission-based accounts.

3. Personalised Advice: Robo-advisors use algorithms to understand your financial goals and risk tolerance. They then create a personalised and diversified investment portfolio just for you.

4. Automated Portfolio Management: The automated algorithms used by robo-advisors continuously monitor the market and rebalance portfolios based on predetermined strategies, eliminating the need for constant manual adjustments.

What are the Disadvantages of Robo Advisors?

1. Lack of Human Touch: Robo-advisors lack the personal touch that human financial advisors can provide. This can be particularly important for investors who prefer face-to-face interactions or require complex financial planning advice.

2. Risk of Technical Issues: Like any tech-driven service, robo-advisors are not immune to problems. These may range from platform outages and data breaches to errors in their underlying algorithms.

3. Challenges with Complex Financial Needs: Robo-advisors excel in simple investment scenarios but may struggle with more intricate financial tasks like tax planning, estate management, or specialised investment strategies. In these situations, human expertise is often essential.

Do Robo Advisors Exist in India?

Yes, robo-advisors do exist in India. However, they operate differently compared to the ones in the US:

• Robo-advisor services in the US are typically fully automated, with capital being allocated and invested without the need for user involvement. However, Indian regulations allow automation only for the initial investing process. For any changes to a user’s portfolio beyond the initial investment (like re-balancing or tax loss harvesting), the platform must obtain explicit consent from the customer/user for each transaction.
• US-based robo-advisors typically focus on passive investment strategies using ETFs. In contrast, Indian robo-advisors (like Scripbox and FundsIndia) often prioritise actively managed mutual funds.
• Robo-advisors in the US usually charge a transparent annual fee based on assets under management (AUM), typically between 0.25-0.50%, aligning with the performance of the investments. In India, fee structures vary, often involving flat quarterly/annual fees or commissions per transaction.

As India's financial markets continue to evolve, investors are seeking ways to make informed investment decisions with minimal effort. Robo-advisors, with their automated investment strategies, offer a promising solution to meet this growing demand. 

However, do keep in mind that robo-advisory platforms you come across in India are technically "semi-robo advisors" — they do not offer complete automation of your investments. While the Securities and Exchange Board of India (SEBI) has established regulations for traditional investment advisors, it hasn’t yet implemented a comprehensive framework specifically addressing automated financial advice platforms. Looking ahead, the evolution of India's regulatory landscape will likely play a crucial role in shaping the future of robo-advisors!