How Robo-Advisory Is Influencing Investors' Perception And Way of Investing

Over the years, the financial services industry has witnessed many technology-based improvements, and each came with its own set of benefits and drawbacks. As with 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 to the financial services industry.

Several fund houses and financial institutions are now using Robo-advisory technology to provide portfolio management services to investors through online investing portals and fintech apps. In simple words, Robo-advisory refers to digital platforms that offer financial advisory services based on totally automated, AI-driven software with little to no human intervention.

Many investors have burnt their fingers in the capital markets by either being misled by an aggressive financial advisory or relying on media reports and advice of friends and family. However, these voids are now gradually being eliminated by the use of Robo-Advisory services. By automating financial planning, Robo-Advisors emphasise on the user experience and combat the behavioural aspects of investing that can cause you to fall short of your financial goals. As a result, the possibility of human bias or error will be eliminated by these programmed Robots.

While humans develop the code, the parameters or filters that it uses to pick the right investments or even suggest replacing an existing investment in one's portfolio with another are entirely based on factors related to valuations, governance, performance, etc.

Robo-Advisory is an online portfolio management platform that offers automated, algorithm-based portfolio management services with minimal human participation at a very low cost. It is slowly but steadily gaining popularity, and more investors are expected to migrate to Robo-advisory in the future.

Younger generations are more inclined than older generations to seek financial advice from a robot rather than a human. Millennials and Generation Z were raised in a technologically advanced society. Many investors want more than just investment advice, and they prefer to combine technology assistance with the expertise of a human advisor. As a result, they are more receptive to technology playing a pivotal role in their financial journey. Furthermore, the rise in digitisation during the COVID-19 has attracted the curiosity of younger individuals in seeking financial assistance through Robo-advisory services.

While millennials and Gen Z youngsters are quick to adopt new technologies, the older generation is actively working to become tech-savvy and accept the use of AI and robotics in areas they could never have imagined or trusted, especially those related to their finances.

According to financial experts, Robo-advisory is part of a broader business trend in which robots are used to manage wealth. But should you put your money in the hands of a Robo-advisor? Let's take a look at what Robo-advisors do and how they differ from traditional financial advisors.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

How does Robo-advisory work for the investors?

Robo-Advisor is nothing but a digital financial advisor who provides automated investment solutions online. So, you no longer have to appoint a financial planner in person to draw your investment plan.

• Robo-advisors use algorithms to understand and predict investor preferences, risks, and goals. Usually, they do this by asking a set of psychographic and demographic questions that leads to a model portfolio. Simplistic Robo-advisors will use this information to create the investor profile. Comprehensive Robo-advisors look for more in-depth information through AI and data.

• A Robo-advisor collects information on a client through an online questionnaire that includes questions about their income, liabilities, risk tolerance, financial goals, investment horizon, and other factors. In order to gain a better understanding of your investment goals. This enables the AI-based system to create an appropriate investment strategy for your portfolio.

• Robo-advisors provide services such as portfolio rebalancing regularly, either automatically or at predetermined intervals, such as quarterly. Most Robo-advisors do this via computer algorithm, so your portfolio never gets out of whack from its original allocation.

• It offers a variety of financial planning tools, such as SIP calculators and retirement calculators, etc. Tax planning and other tax-strategy products on taxable investments are also available through Robo-advisors.

• Although you can refer to the investment plan suggested by the Robo-advisor and invest manually as needed, certain fintech platforms also offer investing automatically for clients based on their data. Passive index investing strategies are frequently used by Robo-advisors.

Robo-advisory vs Financial advisor

1. 24X7 Accessibility - All one needs to access a Robo-advisor is an internet connection. The majority of Robo-advisors are supposed to be simple and basic to use. In comparison to human, Financial advisors, Robo-advisors are frequently more accessible, providing a platform that could be used 24x7 throughout the year.

2. Low costs - A Robo-Advisor's fee is typically 1/3rd to 1/5th of that of a human, Financial advisor. Robo Advisors are more cost-effective than Financial advisors because they do not have to pay for an office or a team of professionals.

3. Transparency - The risk of a behavioural bias is one of the disadvantages of Financial advisors. Robo-advisors are automated Financial advisors that attempt to keep fees, trades, and portfolios transparent. Robo Advisor enables you to make the proper investment selection without human intervention by providing a limited number of but thoroughly evaluated unbiased, transparent, and reliable investment options.

4. Efficiency - Online Robo-advisors are more efficient since it doesn't require meeting and discussing, unlike a traditional Financial advisor for explaining objectives, filing paperwork, etc. This saves investors precious time and money.

5. No minimum investment - The majority of professional advisers who provide assisted advising services charge hefty advisory fees and require a minimum investment. Most millennials and Gen Z investors are at the beginning of their financial journey and cannot afford such high fees or any minimum investment amount. Therefore, they prefer to invest using the AI-Based Robo Advisory.

6. All under one roof - Comprehensive financial planning or 360 degrees financial planning includes all the aspects like investment planning, tax planning, and retirement planning. Many professional advisors offer these services as individual solutions and even charge separately for each one of them. Whereas most Robo Advisors offer comprehensive financial solutions or all-inclusive solutions to all investors without charging separate fees.

7. Regular Rebalancing - Due to volatile market conditions, any change in the asset category might have an impact on portfolio performance. As a result, the portfolio should be evaluated and rebalanced regularly. A Robo-advisor creates your portfolio based on your investment objectives and rebalances it on a regular basis to keep it in line with market cycles.

Should you opt for Robo-advisory services?

The evolution and growth of Robo-advisory services were fueled by the rise of a new investor class of tech-savvy professionals who wanted digital and automated guidance for managing their investments. Robo-advisors have come to prominence in the last decade, with the fintech sub-sector encouraging increased active participation in saving and investing from younger investors and the masses.

However, keep in mind that these Robo-advisory services have some limitations. Robo-advisors are not well suited to make sensible recommendations in the face of market exigencies and anomalies. In the event of unusual market conditions and uncertainty, the algorithm may fail to deliver optimal judgments.

One of the most significant disadvantages of Robo-advisors is their inconsistent quality. While some platforms utilise cutting-edge AI and machine learning to create portfolios, the vast majority of platforms on the market today still rely on traditional approaches. These services do not allow investors to customise their portfolios. Robo advisers typically follow a predefined model based on instructions such as risk tolerance and investing goals, which may or may not meet the investors' individual needs.

The number of Robo-advisory platforms in India is growing by the day, thanks to rising internet penetration and a growing population of tech-driven youth in the market. However, Robo advisories have not yet performed as per the expectations, and still, there is a lack of awareness and understanding amongst investors about the Robo-advisory services.

Therefore, If you need an expert opinion or a personal discussion before making an investment, a traditional financial advisor may be the best option. A Robo-advisor is a way to go for your assets if you desire ease of transaction, instant access, and are comfortable with AI-based investment decisions. Whether you choose Robo Advisor or traditional financial advisory, it's important to start investing as early as possible to achieve your envisioned financial goals in life.

To conclude...

In this digital era, due to advancements in technology, various portfolio management platforms offer the concept of Robo-advisor as the ultra-tech modern-day investment advisor in the market. You can simply manage your investment portfolio with the help of a Robo-advisor; it will assist you in selecting worthy investment options based on your risk tolerance and implement a systematic approach.

Although Robo-advisor will take care of your investments and offer you services with risk-adjusted returns, somehow, it will be necessary to enhance your financial knowledge so you can grasp the suggestion given by the Robo-advisor and, in turn, make informed financial decisions.

PS: We at PersonalFN have an exclusive online platform PersonalFN Direct that offers Robo-advisory services for hassle-free mutual fund investments; it is a platform to access and invest in Direct plans of mutual funds. PersonalFN Direct offers you to invest in a ready mutual fund portfolio based on your risk profile, which is strategically designed by our research team to suit your investment needs. It offers single-point access to help you with investing and tracking your transactions with different AMCs.

So what are you waiting for, begin your mutual fund investments online with PersonalFN Direct now!

Happy Investing!

Warm Regards,
Mitali Dhoke
Jr. Research Analyst