Red Pill or Blue Pill – The Dawn of Financial Matrix in India

This post has been contributed by Vidit Dugar from Fintuned Team.

We live in times where Automation & Artificial intelligence have become buzz words and to be honest, these concepts come out to be super exciting. Taking the risk of making it a little too melodramatic, whenever I hear these words, moves like Robocop, IRobot, Matrix series etc., quickly flash through my head and then I end up using my time [you can call it wasting if you wish ;)] in watching some adrenaline pumping snippets from these movies on Youtube. However, this article is not about my day-dreaming trips and therefore, let’s leave it at bay 🙂

Recently the International Advisory Board (IAB) suggested SEBI to study fee based model for robo-advisories in the investment sector bringing the recent automation of the financial advisory sector into limelight. The marriage of automation and finance is an interesting move in the Indian financial ecosystem and while countries like US and UK have moved at light speed in this domain, the recent move suggests India is ready.

If the words robo-advisory model make you imagine Skynet taking over the world or think of a robot like Baymax (From Big Hero 6) framing your investment plans, then you are mistaken because Jetsons age is not here yet.

What is Robo-Advisory model?

It’s elementary my dear Watson; Robo-advisory represents online financial advisory firms that use algorithms and automation to offer investment advice. Depending on the service provider, there are different stages till which they are involved in the process. For instance, some help you simply choose the right investment for yourself whereas other platforms go ahead with providing options to complete that transaction and monitor your portfolio on a continuous basis.

us compared to US

The automated financial advisors are a recent phenomenon in the Indian financial space but have existed for a while in other markets. Ironically, some people are already predicting standalone online financial advisors may not survive (This article may be a good read if you want to read more about it http://www.cnbc.com/2016/06/14/is-the-twilight-of-the-robo-advisor-already-at-hand.html)

The Indian advisors apart from being at a nascent stage of development differ from their US counterparts in certain other aspects as well.

Firstly, the service is fully automated in the United States whereas a lot of input is required from the investor’s side in the Indian market. In other words, most Indian firms are suggestive bodies and the final decision making lies in the hands of the investor whereas in the United States, the service can automatically invest the corpus.

Secondly, the corpus by the Robo-advisory firms is invested in Exchange Traded Funds (ETFs) in the US whereas the money in India is generally invested in Mutual Funds which are actively managed.

The third difference comes in the way the investors are charged for the service provided. The fee structure in the US is based on Assets under Management (AUM). For example, if a company X has a charge of 0.5% of AUM and the assets it is managing for you is say USD 1000, the amount earned by the advisory is USD 5.  In India, the fee component for now is either free or a flat charge for using the services on a monthly or annually basis with some fixed charge on transactions.

Another observation that was brought up by the IAB and initiated the entire article is that in the US, the users are supposed to pay an advisory fee but in India, service providers earn through commissions by the MFs or the institution that is offering the instrument they promote.  In a way, they can be compared to those mystical Babas who predict your future and recommend you to buy certain priceless stones, all the while making commission on the stones sold as well. This sort of model certainly brings the legitimacy of the robo advisory model in India into question.

As the Indian model of automated financial advisers matures, we hope to see a wider array of instruments included in the portfolio designed by these firm. It Is also essential that we shift to a fee based model, like in the US as it will boost user trust on these models. That being said, it is welcoming to see that the Indian ecosystem is readying up to experiment with the robo-advisory model of financial planning as it ensures better efficiency, accuracy and flexibility.

Have any thoughts to share? Please feel free to mention the same in the comments section.

Cheers,

Team Fintuned

P:S: Here are some other interesting articles on robo-advisory, which will build in a stronger perspective in the domain:

http://www.livemint.com/Money/MGNQT2wi0XEza7v93ykLwM/Roboadvisory-which-one-is-for-you.html

http://www.livemint.com/Money/DOnQjdoOqd38ijz30HgtGM/Robo-advisory-could-change-distribution.html

http://www.morningstar.in/posts/39738/the-pioneers-of-robo-advisory-in-india.aspx

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