If you are a small investor, who cannot shell out Rs 20,000-30,000 a year to hire a financial planner, there's help. You can sign up with an online wealth management service, termed a robo adviser. These provide automated, algorithm-based advice, without human intervention and at a lower cost.
"It has always been difficult for retail investors to get quality advice at an affordable cost. When individuals approach banks or agents, they are sold products," says Manish Shah, co-founder and chief executive, BigDecisions.com. For instance, if they wish to put money in equities, they are pitched the best performing mutual fund or unit-linked insurance plan. Professional advisers that would help with the best-suited instruments come at a cost. A financial planner charges Rs 15,000 to Rs 40,000 a year to manage a client's finances. Wealth management companies, which cater to the wealthy, charge 0.75-1.5 per cent annually of the assets under management (AUM).
Depending on the company, the charge for a robo advisor varies from Rs 1,000 a year to Rs 7,500. Some charge 0.15 per cent of the AUM. A few only work on the commissions they get from a fund house or insurers, and the client does not pay anything.
These are companies which only use algorithms for a specific purpose. Scripbox, for example, offers a ready basket of funds on the basis of the user's investing horizon. An investor with a longer time frame will be directed to a basket of four pre-selected equity funds. A shorter timeframe will throw up a portfolio of debt schemes. These baskets of funds are selected based on proprietary algorithms.
Aditya Birla Money MyUniverse and FundsIndia use technology to create a portfolio and suggest asset allocation. The investor needs to put in details such as the investing time frame, amount of investible money and risk profile. For their services, these companies don't charge the customer but rely on the commissions.
Then, there's BigDecisions, which helps individuals take financial decisions based on parameters such as age, income, risk profile, location and so on. For example, if a person needs to know the amount of health insurance needed, BigDecisions' algorithm uses data from its partner (a third party administrator, Paramount Health Services) to calculate hospitalisation cost and the way this has increased over the years. Based on a person's profile, it suggests the health coverage.
Similarly, it offers free help in calculation of various other requirements such as investment, child education, insurance, housing, and loans. For investments and purchase, it redirects the person to their partner platforms such as FundsIndia for mutual funds and PropTiger for housing.
Fully automated
Only two companies offer complete end-to-end financial planning services online. These are ICICI Securities and ArthaYantra. The former sends an advisor who interviews the client to understand goals, cash flows, assets and liabilities, and to profile a person. A central team of financial planners design a comprehensive plan. "The data is then fed into an algorithm which simulates 2.6 million paths to decide on how the money should be allocated," says Abhishake Mathur, head, investment advisory services, ICICI Securities. The robo advisory platform, called Track and Act, then manages the client's finances, giving suggestions or triggers as and when the situation changes. Mathur feels the risk profiling of the person cannot be done by a machine as it changes with the situation.
As it is part of ICICI Securities, an investor's entire portfolio can be tracked online, including the stock investments. The platform also offers model portfolios for individuals to decide on stocks they should have. If the person wants to redeem some of his or her investments urgently, the algorithm also suggests the stocks or mutual funds the client can sell, based on tenure, taxation and an asset's performance. It also takes recommendations into consideration. For example, if an analyst has a 'sell' rating on a stock in the investor's portfolio, the algorithm would suggest selling it when the person is in need of money.
The first-year fee is Rs 17,500 with a portfolio review every six months. From second year on, it is either Rs 7,500 or 0.15 per cent of the AUM, whichever is higher. If a person doesn't want to come on board, they can get a financial plan for Rs 15,000 with a six-month support.
ArthaYantra is fully online, from evaluation to management. Risk profiling is done online, using behavioural finance. The person's inputs (age, marital status, income, expenses, existing assets and liabilities, etc) are simulated on 60 model portfolios and an optimum one is designed, which includes recommendation on health and life insurance. Apart from this, it provides tax planning tips. Once the report is generated, a financial planner calls the customer to explain the report. The company does not offers stock-related investments and advice, as it thinks mutual funds are the best way to build long-term wealth.
"Once the financial management starts, the algorithm also analyses the expenses of the person and suggests areas where it can be cut down. On an average, we have been able to increase clients' surplus by 21 per cent," says Nitin Vyakaranam, founder and CEO, ArthaYantra. The annual fee for the company is Rs 1,000, waived for people earning below Rs 20,000.
Online vs offline
All executives of robo advisory firms believe online financial managers cannot be a replacement for humans. These services help in reaching the masses and those with lower incomes, who might not be able to afford a financial planner. Vyakaranam notes 47 per cent of ArthaYantra clients are below the age of 27 years, with a household income less than Rs 7 lakh a year. There are clients from 600 cities. Being managed by computers, it transparent, the advice is consistent and does not hold any bias.
"It has always been difficult for retail investors to get quality advice at an affordable cost. When individuals approach banks or agents, they are sold products," says Manish Shah, co-founder and chief executive, BigDecisions.com. For instance, if they wish to put money in equities, they are pitched the best performing mutual fund or unit-linked insurance plan. Professional advisers that would help with the best-suited instruments come at a cost. A financial planner charges Rs 15,000 to Rs 40,000 a year to manage a client's finances. Wealth management companies, which cater to the wealthy, charge 0.75-1.5 per cent annually of the assets under management (AUM).
Depending on the company, the charge for a robo advisor varies from Rs 1,000 a year to Rs 7,500. Some charge 0.15 per cent of the AUM. A few only work on the commissions they get from a fund house or insurers, and the client does not pay anything.
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Partially automated
These are companies which only use algorithms for a specific purpose. Scripbox, for example, offers a ready basket of funds on the basis of the user's investing horizon. An investor with a longer time frame will be directed to a basket of four pre-selected equity funds. A shorter timeframe will throw up a portfolio of debt schemes. These baskets of funds are selected based on proprietary algorithms.
Aditya Birla Money MyUniverse and FundsIndia use technology to create a portfolio and suggest asset allocation. The investor needs to put in details such as the investing time frame, amount of investible money and risk profile. For their services, these companies don't charge the customer but rely on the commissions.
Then, there's BigDecisions, which helps individuals take financial decisions based on parameters such as age, income, risk profile, location and so on. For example, if a person needs to know the amount of health insurance needed, BigDecisions' algorithm uses data from its partner (a third party administrator, Paramount Health Services) to calculate hospitalisation cost and the way this has increased over the years. Based on a person's profile, it suggests the health coverage.
Similarly, it offers free help in calculation of various other requirements such as investment, child education, insurance, housing, and loans. For investments and purchase, it redirects the person to their partner platforms such as FundsIndia for mutual funds and PropTiger for housing.
Fully automated
Only two companies offer complete end-to-end financial planning services online. These are ICICI Securities and ArthaYantra. The former sends an advisor who interviews the client to understand goals, cash flows, assets and liabilities, and to profile a person. A central team of financial planners design a comprehensive plan. "The data is then fed into an algorithm which simulates 2.6 million paths to decide on how the money should be allocated," says Abhishake Mathur, head, investment advisory services, ICICI Securities. The robo advisory platform, called Track and Act, then manages the client's finances, giving suggestions or triggers as and when the situation changes. Mathur feels the risk profiling of the person cannot be done by a machine as it changes with the situation.
As it is part of ICICI Securities, an investor's entire portfolio can be tracked online, including the stock investments. The platform also offers model portfolios for individuals to decide on stocks they should have. If the person wants to redeem some of his or her investments urgently, the algorithm also suggests the stocks or mutual funds the client can sell, based on tenure, taxation and an asset's performance. It also takes recommendations into consideration. For example, if an analyst has a 'sell' rating on a stock in the investor's portfolio, the algorithm would suggest selling it when the person is in need of money.
The first-year fee is Rs 17,500 with a portfolio review every six months. From second year on, it is either Rs 7,500 or 0.15 per cent of the AUM, whichever is higher. If a person doesn't want to come on board, they can get a financial plan for Rs 15,000 with a six-month support.
ArthaYantra is fully online, from evaluation to management. Risk profiling is done online, using behavioural finance. The person's inputs (age, marital status, income, expenses, existing assets and liabilities, etc) are simulated on 60 model portfolios and an optimum one is designed, which includes recommendation on health and life insurance. Apart from this, it provides tax planning tips. Once the report is generated, a financial planner calls the customer to explain the report. The company does not offers stock-related investments and advice, as it thinks mutual funds are the best way to build long-term wealth.
"Once the financial management starts, the algorithm also analyses the expenses of the person and suggests areas where it can be cut down. On an average, we have been able to increase clients' surplus by 21 per cent," says Nitin Vyakaranam, founder and CEO, ArthaYantra. The annual fee for the company is Rs 1,000, waived for people earning below Rs 20,000.
Online vs offline
All executives of robo advisory firms believe online financial managers cannot be a replacement for humans. These services help in reaching the masses and those with lower incomes, who might not be able to afford a financial planner. Vyakaranam notes 47 per cent of ArthaYantra clients are below the age of 27 years, with a household income less than Rs 7 lakh a year. There are clients from 600 cities. Being managed by computers, it transparent, the advice is consistent and does not hold any bias.