In a time and place where Swiggy and Uber have become verbs and wallets are digital it wasn’t long before portfolio advisors went robo. For an average investor who expects their food app to throw up personalized menus and search engines to set up custom news feeds and alerts, it was a natural progression to expect intelligent, automated guidance to help with their money decisions.
Robo advisors have established themselves in the banking and financial services sectors. Personalized services to customers, bundling and unbundling of customized offers, high scalability to serve customers from anywhere/anytime are driving the rise of robo advisors.
As people grow up with technology, they have fewer reservations about accepting personal finance advice from a robo. They have already let technology into their personal dating lives, and post pandemic, even medical advice has gone online, so trust barriers have fallen dramatically.
Various Models Of Robo Advisors
There are many models of robo advisors in the market – standalone robo advisor products can handle requirements of varying complexity including hybrid human and robo services. Even traditional advisory firms use technology to parse the hugely complex financial data to make investment decisions.
This technology provides efficiency and diversification, maintaining asset allocation for intended risk/return objectives. It can provide value-added services spanning a wide spectrum including planning for core goals, discretionary goals (your wish list), monitoring and finding financial opportunities from wealth transaction patterns, etc.
Power Of Algorithms
When a customer reaches out to a robo-advisor for portfolio management, a fair bit of information is gathered -- their risk profile, short/medium/long term goals, and overall outlook. A solution considering the goal, timeline and risk is suggested. This could be further tuned by providing ‘what-if’ scenarios, with some parameters tuned up or down, or providing intelligence on money opportunities via money patterns insights.
Artificial Intelligence’s (AI) deep learning capabilities coupled with machine learning, natural language processing and sentiment analyzers provide the benefit of highly scalable algorithmic attunement, at the same time keeping the customer’s perspective and convenience in mind. There are also chatbots, APIs and other value-added services/interfaces which enable the tech-savvy customer to interact from any platform or channel, with next generation robo-advisors (e.g. Advisor-as-a-Service). Robos can repeatedly rebalance portfolios in an ever changing market, and continually recalculate tax optimization.
Financial companies are integrating robo advisors into their service portfolio. Robo advisor solution uses clients’ responses to an online questionnaire to understand their risk tolerance and investment goals,
and then provides customized portfolio recommendations. Investors can also access advice though phone-based advisors.
Test road readiness before your investing journey
Pure-play robo advisors are leveraged by younger investors with starting capital to invest, and as they evolve up the wealth continuum they prefer to have some human interaction for more complex interactions; and as they hit the high net worth individual (HNI) bracket, the game changes entirely.
It is critical to investigate the security and credibility of the solution. Does it have a track record of delivering safe, secure, stable services? This is not just from an investment and returns perspective, but from a technology and platform perspective. Is it from a company that has the resources to navigate dynamic market conditions, and the staying power to sustain and evolve its product?
You should also consider if the product is in sync with your orientation. If you need the comfort of a human to speak with, then opt for a hybrid model. If you are not comfortable with technology, then start with a small investment and grow it as you go. And just because it is an automated, hands-off model, don’t stop monitoring your portfolio and your product. Every investment needs regular tracking, automated or not. And also check that what is under the hood of your product is always sound and functioning.
Investors must do their financial due diligence, and just as they should not be entirely reliant on a human advisor without verifying and tracking the market and their investment health in some form, they should not be entirely reliant on robo advisors. But robo advisor solutions are a new digital avenue in personal finance and something worth looking.
The author is a Senior Vice President at Wells Fargo, leading the Wealth and Investment Management Technology team in India.
DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.