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Why is it wise to switch over to robo-advisor for investing?

Written by - Naren

May 4, 2017 4 minutes

Like all the other aspects of life, the way we manage our wealth is also set to transform with the advent of robo-advisory, the latest gift of technology in financial services industry. Over the years, the industry has witnessed many technology-based improvements and each came with its own merits and de-merits.

Robo-advisory, though has been a part of financial planning for more than a decade in the western countries, is still in the nascent stage of development. An online wealth management platform which provides automated, algorithm based portfolio management services with minimal human intervention at a very low cost, robo-advisory is slowly but steadily gaining popularity and it may be ideal to switch over to robo-advisory in times to come.

Sound financial advisory involves asset allocation after assessing the income, expenses, risk-taking capacity and financial goals of a person. Traditionally, bank managers or insurance agents have been filling in the gap of financial advisors to provide wealth management services to the majority of the population in India. Owing to the huge advisory fees, structured financial advisory is limited to a very few.  More often than not for an average Indian retail investor wealth management is more of a product push rather than sound financial planning. Hence, robo-advisory is the ideal solution to meet the gap in wealth management needs.

The distinct advantages of robo-advisors over human advisors include:

Use of algorithm based asset allocation– Unlike traditional advisory; in case of robo-advisory asset allocation is based on scientific calculations based on the inputs provided by the investor. Once an investor registers for robo-advisory he has to enter all his personal details like income, expenses, monthly savings, and future goals. Apart from this a risk profiling is also done through a series of pre-set questions. Based on the input provided by an individual, asset allocation and investment portfolio is done.

No emotion-based decisions– Many a time, investments are made on emotions rather than proper planning. Making investments through friends and family, or following the herd mentality, over too bullish about a stock or sector are some of the factors which lead to poor choices and investment decision for most of the investors. Robo-advisory does not have any room for such emotions as the decision is based on a rational independent algorithm based calculations. Portfolio selection is based on trends of market movements keeping human emotions away.

Periodic Rebalancing: For any portfolio to perform well, it is extremely important that it is reviewed on a regular basis so as to maintain the desired ratio of debt and equity. In case of human advisory, this rebalancing of portfolio is hardly a case. With a huge number of clients to service an advisor can hardly do periodic rebalancing for its clients. He would only approach his client at the time of a new product launch and try to sell the product without taking into consideration his actual asset allocation. But in case of robo-advisory, this is not the case as it makes suggestions to periodically adjust the portfolio to the desired asset allocation. Investors can greatly benefit with this re-balancing by selling some investments when they are high and buying when they are low.

Reporting of trigger events and providing suitable course of action: The capital markets all over have multiple things happening simultaneously and each event impacts the performance of your portfolio. For a human advisor it is difficult to keep track of all these events and provide this information to individuals, but automation ensures that each and every event gets captured and alerts the investor accordingly. Let us take the case of mutual funds, fund manager has a direct impact on the performance of the fund. As an investor this information is vital and advisors may not be able to communicate the same to their investors either due to lack of communication or information. However, all this is constantly reported to the investor via SMS and email in case of robo-advisors along with suitable course of action.

Lower costs make robo-advisory affordable to everyone:  Robo-advisory involves much lower costs than human advisory. The high costs involved in human advisory restrict such services only for high net worth individuals. But robo-advisory provides ease of access and advisory services to all type of investors.

Thus, robo-advisory can be a one stop solution for all your investment needs, especially for the tech-savvy investors who prefer to do everything online. Apart from the fact that these portals have easy access and provide financial planning based on scientific calculations, there is no minimum investment amount for you to start investing.

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