Robo-advice is the new buzzword for the sphere of online investment and savings platforms. By employing automated guidance with the use of technology and algorithms, the aim is to take out subjectivity and emotion in the decision-making process.
Four individuals share their views on the scene in India.
- Ajay Bagga, Executive Chairman of OPC Asset Solutions
- Nitin Vyakaranam, Founder and CEO, ArthaYantra
- Sunil Subramaniam, CEO, Sundaram AMC
- Vineet Arora, Head - Products and Distribution, ICICI Securities
Is robo-advice a threat to IFAs and distributors?
Sunil Subramaniam: Robo advisory has come up in recent times as a threat to the entire distribution community. The right way to convert this perceived threat into an opportunity is to look at robo advice as a part of what I call DOFA - digitization of financial advice. Robo advice is just one piece of a larger picture because digitization is here to stay.
The trick is for IFAs and distributors to understand what robo advisory is and how they can use it. Today, a lot of advice from an IFA is subjective. They understand the customer and the fund. They try to pitch a new sector fund or something they believe will do well, and they are answerable for that. The biggest challenge he faces is when things don't go right. Can he then face his customer?
IFAs can use robo-advice as a backend to objectivize their advice. That is its biggest strength. Once you have numbers and algorithms, and everything to justify the decision, your ability to provide more objective advice and answerable solutions, and in the bargain strengthen the relationship over the long term, gets immensely enhanced.
So I would like the IFA and distribution community to view this as an opportunity.
India is a fast growing market. There is lots of alpha, but there's also negative alpha which has played out. So over cycles how do you manage customer expectations when things are going bad in terms of fund recommendations which have a strong subjective element?
But when a technology platform, which does the basic number crunching, is used as a basis for allocation, the customer gains confidence that the advice is not just due to better commissions or a great presentation from the manufacturer, but it's more fact-based, numbers-driven, based on a certain past trends delivering future value.
That's where the opportunity lies. But I don't see that yet happening in a big way - somebody setting up a robo platform which distributors or advisers can use. The robo platforms we have today are directly trying to reach customers and look at the business.
Vineet Arora: The way everyone tends to understand robo advice is full-fledged replacement of an adviser by an electronic platform. But there are different parts of it. Can it come as a support tool? Can it come as a monitoring tool? Can it come as a review tool? Can it come as full-fledged tool?
One question is how do you really monitor? Once goals are set in place, how do you really monitor and review the entire process of your investment using a robo tool? The part where there is an interface required with the client, I still feel that's a little farther away to go because that's when you are supposed to get the client to articulate his goals better, that's where you are going to sense a few more things which the client might not be able talk about and that's why we feel you still need a lot of human interface in that to happen.
So, where we stand today is that once the entire planning is done, once the entire advice is being created, then you kind of shift it to a platform or a robo where it kind of helps in monitoring it much easier. That's today's scenario. But, going by past experience on our equity platform, it doesn't take time for people to catch on and it doesn't take really too long for people to start doing it themselves because it becomes easier.
Technology has brought in so much of computing power that now you cannot do simple tools. A much more complex computation has to be in place. So when you create advice, you actually run through a couple of million algorithms, paths, et cetera, to get to a right probability of what will happen to that particular portfolio. So, I think the computing tools are making it much more easier for various aspects of the variables to be picked up and then a probable advice to be given out.
Nitin Vyakaranam: With respect to robos working with IFAs, what we will see is an emergence of new business models where technology companies will work with IFAs to really expand the market. At the end of the day, this is about expanding the market: 75% of our customers are first time investors. We have customers from 600 cities in India. The scale at which we operate is very different. Yet, we are personalized. Where IFAs and robo advisers can partner is to basically come in together, IFAs maybe can be the face in front of the customers and robos can provide them the technology backend to be able to support the customer. But that has not happened.
I think that's where new business models will be discovered. And over the next one year or so –I'm not giving it five years. You will see new models emerging where the IFAs will also have to change the way they look at things. The robos will also try to tailor themselves to the needs of the IFAs.
Ajay Bagga: The cost of technology is falling, cost of getting technology and getting models done is very low now. Broadband, 4G kind of things coming in. If you see e-commerce, 65% happens in Tier 3 and Tier 4 cities on smartphones, not through PCs.
How will the distribution evolve? I think robo advisers will bring in needed technology. The cost of technology will go down. Every distributor will be able to afford a plug and play. That will become a commodity - you come in and I am able to put in your details.
But the relationship that distributors bring in, the life planning that they bring in, that will be bigger than the aggregation. There will be aggregators and robos who will do the basics, but that last mile and specially after a limit, I don't know where the limit is - $50,000 or $100,000, a customer needs touch. So there is a high-tech customer, who doesn't want to talk to any banker. In banking, 65% of transactions are automated - ATM, online, phone, IVR. Nobody wants to walk into the branch, per se. It's not happened in mutual funds because it's still a product which is advised and that's not going to change very fast.
So a bit will go to the robos. The Money Management Institute just came out with a report on investing Americans: 14% have a financial adviser, 42% said they would like to meet a robo adviser, but 72% out of that 42% said they would still prefer personalised offline advice.
India is a nascent market. You don't have depth of penetration of financial advice. Robos will come and expand the market. Cost of technology and connectivity will go down, but the basic distributor will get strengthened by it because the market will expand.
This discussion took place during the Morningstar Investment Conference held in 2015.
