29 May 2017 10:07:22 IST

The lowdown on robo advisory

These online advisors uses algorithms to offer the right investment options for you

With the advent of robo advisors, customised financial and investment advisory is just a click or a tap away. These advisory platforms dole out tailor-made investment suggestions based on your goals, using an algorithm. Besides on your life goals, they also get data such as your salary, investible surplus, age, investment horizon and risk appetite. Based on the input data, the platform recommends suitable asset allocation and specific schemes for investment.

Thus, you can create your own portfolio from the comfort of your home, without having to approach or interact with a financial advisor. There’s a plethora of robo advisory platforms that offer you online investment options across investment classes. While most platforms focus on mutual fund schemes, there are a few that also offer fixed deposits and direct equities. Besides this, they also help you track your investments and access them all in one place.

Models and charges

There are three different fee models and charges depend on which one you choose. Under the first model, these platforms offer the services end-to-end, from advice to actual transaction, for zero fee. So, how do these platforms make money? The business model is similar to that of a distributor. Whenever a customer invests into a mutual fund scheme through the platform, the respective fund house pays the platform a commission. And this is usually linked to the quantum of investment facilitated by the platform.

The value to the customer here is advice, transaction and portfolio tracking services for no cash outgo. However, since these platforms facilitate investment in the regular (indirect) option, the return may be lower than the direct option. Most platforms fall under this category; this includes FundsIndia’s Money Mitr, Scripbox, RoboAdviso, Goalwise and Fisdom, to name a few.

The second model is where they act as a pure-play advisory platform and charge you for the advice. You can transact directly through the mutual fund house’s portal or registrar and transfer agent.

However, some platforms also facilitate transaction through them for a convenience fee, of course. For instance, Unovest has different plans to suit customer requirements. Its basic plan is a do it yourself (DIY) one which enables the user access to research and also view, track and get portfolio insights all at one place. All this for a fee of ₹2,400 per annum.

The trusted advisory — Pro plan — where one is assigned a dedicated advisor who will assist in creating a customised portfolio based on the respective goals, risk appetite and investment horizon comes at a cost of ₹12,500 per annum. Other prominent platforms that offer pure advisory services include ORO Wealth and Bharosa Club. While most players currently offer MFs, they plan to expand to bonds, insurance and loans eventually. The advantage to customers in this model is customised investment advice and higher return compared to the distributor-like platforms, thanks to the strategy to invest in direct plans.

And the final model is a mixed one. Under this, the platform charges you for the advice only if you opt to transact on your own. ArthaYantra is a good example of a mixed model; the platform charges an annual fee of ₹1,000 if you don’t transact through its platform. However, if you do, it gets a commission from the fund house on the investment made by you and, hence, reimburses the annual service fee. This model will better suit tech savvy and large investors who can get the low-cost advisory fee as well benefit from the higher return on direct plans by investing on their own.

Sign up procedure

The procedure for signing up for a robo advisory service is relatively easy. All you need to do is fill up the online form upon creating your user id, which captures information such as investment horizon, financial goal, quantum of investment and risk appetite. And once this is done, you can access the platform’s customised portfolio recommendation. However, if you want to transact through these platforms, you need to have a common account number (CAN) which is a single reference for all MF investments. In case you don’t have one, you could apply for one through the platform by fulfilling the KYC requirements. The process takes anywhere between two and four days.

Besides automation and convenience, the major advantage of robo advisors over personal financial advisors is the cost. The cost of getting an independent financial advisor will be much higher and hence not affordable for small ticket investors.

That said, while robo advisors are definitely helpful to investors who are new to equities and may be a good way to start, savvy investors may be better off doing their own research. Those with good knowledge about the market and investments may want to understand the factors that have been considered by the robo advisor while giving a recommendation, before they invest in their offerings.

(The article first appeared in The Hindu BusinessLine.)