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The Rise of Robo Investors

Robo Advisors are a digital platform to provide financial services to customers with limited human interface. Using technologies such as artificial intelligence and machine learning, historical numbers of companies are crunched and analysed to forecast growth and invest accordingly.

A Robo advisor suggests investment options according to your financial health, financial roadmap and risk appetite at a low fee. The platform provides a passive, diversified portfolio with a mix of asset classes such as equity, blue chip stocks, bonds and certificate of deposits(CD). It monitors and rebalances the weights of asset classes in your portfolio according to economic and market conditions

Evolution of Robo Advisory Sector

The Robo advisory sector embarked on its journey decades ago with just a questionnaire that filters and proposes different investment options. Then in the next phase, Robo advisory firms started to take direct orders in lieu of mere proposals. Investment managers were hired to handle the portfolio of the clients. Investment managers had their algorithm to manage the client’s portfolio. The next phase marked the onset of automation. Investments were made using different computerised algorithms. What the fund managers did was last-minute fine-tuning only. Currently, the most modified robo advisor makes investment decisions based on self-learning artificial intelligence and machine learning without human supervision.

The Robo Roadmap

Every Robo advisor has a set of stocks which are analysed daily. The algorithm profiles the client's risk when the client fills up the questionnaire. The questionnaire may contain questions such as future goals, income, investments, debt, savings, marital status etc. After risk profiling, the Robo advisor invests money favourable to the client. The Robo advisor monitors the portfolio daily and rebalances it to maximise returns and avoid significant losses.

The SOFI Story

With the onset of exponential growth in brokerage accounts and knowledge of personal finance, more and more customers are forging ahead to invest their money more systematically so as to maximise returns. Sofi Technologies Inc is a financial services firm which implemented Robo advisors from 2017-18, resulting in exponential growth in their revenue. As the number of accounts goes up, the firm's revenue also increases.

In India, the number of Demat accounts is nearly 9.28 crore, with lakhs of investors joining every month. The market for Robo advisors simultaneously opens up for the large pool of Demat account holders.

Why Robo Advisors?

  • Low fees: Most firms charge less than 0.5% of the total assets under management which is way too less when compared with that of traditional fund management

  • Accuracy: The investments are only based on numbers and market conditions. So, there will be no personal biases for a company.

  • Tax Optimisation: Robo advisors are designed in such a way that taxing is minimised for the capital gains

  • Low Minimum balance: Most firms do not have a minimum balance. Thus, small retail investors can also leverage the technology.

  • Personalisation: Investments are made according to the client's needs and wants. Also, the portfolio is rebalanced time and again to avoid significant losses and maximise returns as the market's momentum may shift anytime.

The Funding Fortune

Many VCs are betting on this revolutionary idea and pooling in their money. Robo advisory firms such as Scripbox, Indmoney, Fisdom, Kuvera, and Cubewealth raised $21M, $75M, $21M, $10M, and $2.5M, respectively in the past three years from investors such as Accel Partners, Tiger Global and Beenext. The investors envision high growth in the industry with this revolutionary technology which eliminates the role of a middleman, i.e. fund manager. The only concern is the flooding of Robo advisors, which may result in the cooling of funds. As of now, there are over 86 Robo advisory firms and a lot more are to come. Thus the venture capitalists are concerned of an overcrowded market and also the ability of big firms such as HDFC to make their own Robo model. Moreover, with the evolution of the Robo plus model, which is a Robo advisor aided by a human advisor, VCs may also think of this hybrid model as a viable and profitable option.

Future Ahead

As of now, the Indian Robo advisory sector is not fully automated. There are only a few automated firms, but with exponential investing in research and development, more and more firms will enter into complete automation. According to CFA’s survey, institutional investors and affluent investors will not be impacted by this disruptive technology and will prefer their traditional fund managers more.

Statista stated that assets under management in India are expected to show an annual growth rate (CAGR 2022-2027) of 24.48% resulting in a projected total amount of $45.82bn by 2027.

Moreover, a rapid mobile phone penetration, low-cost internet services and increased knowledge of personal finance will fuel Robo Advisory services' growth.

There’s no rose without a thorn. Similarly, also, the lack of awareness of the technology and no human contact will be a stumbling block to its growth. Robo advisors won’t be able to comfort the clients during the phase of significant losses and thereby risking to lose clients altogether. They have limited flexibilities and thus won’t allow you to buy specific stocks, nor are they programmed to face unexpected circumstances such as a financial crisis or institutional pumping/dumping.

It’s just a see-saw battle between Robo advisors on one side and traditional wealth managers on the other. The question is who will eventually win the race: an experienced human or a samrt number-crunching algorithm?
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