Virtual advice for real finances

Physical advisors have been receiving tough competition from algorithm-based investment counselling and robo-advisories

The end of a financial year and the beginning of a new one brings the annual pangs of managing taxes and investments. The scramble is on both sides — The individuals assessing and seeking advice on liabilities and investment, and sellers of financial products that are keen to cash in on the concerns. 

In recent times, physical advisors have been receiving tough competition from algorithm-based investment counselling. This category has been rising steadily and created its own segment of robo-advisory. 

The promise is fairly simple, but the process of creating the advice can be complex. An individual has to submit personal finance details to the tech-enabled robo-advisory service. This includes income details, tax commitments, investment and wealth-generating goals. Based on this, the algorithm works and creates a portfolio of investment options that include suggestions on how to minimise tax commitments. 

Wealth management has three dimensions: plan (advisory), execute (transactions), and track/review/rebalance (manage). “We’ve automated this entire wealth management value chain into one online platform. We’ve automated the planning / advisory section, which gives out a plan in real time as soon as any variable is changed. This enables us to deliver the plan online and instantly as opposed to the time period of four weeks in the offline model, and with a fewer advisors too,” says Nitin Vyakaranam, founder and CEO of ArthaYantra, which was launched in 2012. 

There is also a significant shift from the early offerings of robo-advisory. In the initial years, the service was limited to investment advice based on the risk appetite of users. The companies asked the investor their risk tolerance and built a portfolio based on it. A certain investible surplus was simply divided into different asset classes. 

The advisory is more sophisticated now. The data points that profile the user create a deeper understanding of the personality. ArthaYantra asks more than 20 questions of its users. The information about income and existing loans, and expenditure behaviour is also factored in. Additionally, general, life and health insurance policies are assessed in the final recommendation that the robo-advisory offers. 

To make smart decisions, the algorithm proves to be more efficient and rapid than the traditional individual based advice. The final advice doesn’t just tell the user where to invest but also gives them an insight into their consumption behaviour. 

The entire approach is focused on a holistic and comprehensive personal finance management rather than just guiding investment decisions. 

Advisories are also helping individuals manage their assets for the next generation. An important part of the new robo-advisory service is helping users create their wills. In India, most people don’t care about writing a will for their family. The templated wills offered by robo-advisory allows customisation to the required degree. 

The European Banking Authority estimates that the financial assets under management by robo-advisories globally will be about $450 billion by 2020. India is following the global trend. Indian robo-advisors’ asset management is rising, according to Statista. From $42 million, the assets under management by robo-advisors will rise over 36 per cent to $145 million by 2023. The average asset under management per investor is about $580. While the number of users is expected to be 216,000 in 2023, some estimate that the rate of growth could be much higher as more investors who are internet savvy join the financial mainstream. Traditional asset management companies are also joining the movement.  Many have begun to offer algorithm based services to stay in tune with rising complexities of investment options while enhancing a deeply personalised service for the users.