Robo Advising v/s Personal Financial Advisor

• 1 July 2016 | 1337 Views | By Mint2Save

The avid presence of automated robotic technologies can be seen everywhere. Right from the writings of Isaac Asimov to self driving cars, robots have made a strong impression to our minds.

Another hard hitting fact that is always making us ponder upon the value of money and investments. Mixing these two, definitely a hot topic to discuss upon!

Robo Advising has established itself as new dimension in financial advising,

It is not difficult to imagine an algorithm based advising when there are all technical results are available. Every mutual fund has a fair graphical representation of its past performance which describes it risks, returns over period of time (CAGR),  investment portfolio etc. Based on these, an algorithm is generated which enables a potential advisor to decide on his investments.

This lucrative idea has been grabbed quite a number of fintech startups who have robo advisors which, either via app or website suggest investments portfolios to their clients.

This ideology is certainly a big hit among the young investors and is on increasing trend. Being conveniently available online, accessible anytime  is making people think and even replace personal financial advisors with the Robo Advisors. Initial hype and reaction is expected when anything new hits the financial market, but is it good enough to replace the good old sit and talk technique of personal advisors ? Let’s compare these two elements of financial advising to various real needs of an investor.

1. Analysis: Being equipped with highest degree of data analysis techniques, robo advisors have a deeper understanding for suggesting financial products. On the other hand, the human advisors only get better with experience and continuous research over the products.
2. Product Comparison: When seeking comparisons, robot advisors steer ahead too. They would not only suggest the best investment available, but would also help you choose from various products with respect to that investment.

For instance, when settled upon investing into a tax saver mutual fund, a robo advisor would list down all the available options and would even let you sort as per your duration of investment, minimum amount of investment, service charges etc.

A hired advisor would not have a plethora of investments, but would have a filtered list of top few mutual funds which are known to reap good returns.

3. Off the Market News: Information about the news which are not related to the market, but can have a deep impact on the market is not available with everyone. RoboAdvisors, though equipped with all information, would utterly fail the purpose here. Let’s take up another mutual fund example here. The mutual fund you have been recommended by the robot algorithm, would fail to attract the investors, once any of the fund managers or fund houses get caught in a scam or misconduct. These off the tab news are more known to the people than the machine and no suggestion derived from these news can be put by the machine.

4. New Product Information: Advent of new products into financial world is an interesting aspect which should be taken into consideration by all sorts of financial advisors. Since, a lot of investing is taking place via the internet, these new products are more easily absorbed by the robo advisors. Personal Advisors, might not instantly catch up with the new products, and undermine the expected returns owing to lack of information.

5. Investment Product Coverage: A huge advantage that personal advisors get over robo advisors is being able to roam, travel, research and arrive on classifying investments in a custom manner. It enables them to suggest varied products to their clients, making it easier and more convenient for them to earn returns.

For instance, when someone wants to invest Rs. 15,000/- in tax saving, robo advisors would throw up a whole assortment of tax saver mutual funds (ELSS), NSC, KVP etc. On the other hand, the personal advisors, knowing the value of Rs. 15,000 might suggest you take up a loan for purchase of real estate. The loan would not only create an asset, but would also give you tax relaxation.

The above mentioned pro-con comparison is just a beginning to the demarcation of robot vs human in the financial advisory market. However, it has to be realised that both of these can only survive when they work in a complementary manner. The human cannot rely on the presence of robo advising only for something as important as one’s finances.