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What Is a Robo-Advisor? Pros and Cons

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We’ve all been there – those moments in life when we’re scratching our heads, trying to figure out how to make our money work for us and build some wealth.

During these moments many people have turned to trusted financial advisors to help them out with the complexities of managing their money and saving their incomes. But there’s more to the story now. With this new era of technological advancements, the robo advisor is enhancing the approach to financial management.

 In this article, we’ll dive into the world of robo-advisors. We’ll cover everything from what they are, how they’re being used in India, how they operate, and of most importantly, their pros and cons!

What is a Robo-advisor?

Thanks to technology, you’ve got everything at your fingertips, and that’s exactly what the best robo advisor brings to the table too.

Technically speaking, financial robo advisors are computer programs that provide you with automatic financial advice and take care of your investments based on logic.  Simply put, they are financial advisors who analyse your financial situation, risk tolerance, and investment goals to create a personalised investment portfolio with the least human involvement. 

The idea of robo-advisors came about to meet the demand for effective and easily accessible financial advice. Unlike human advisors, who may ask for high fees for their assistance, robo-advisors provide a budget-friendly option that makes financial management accessible to a wider range of people!

Robo advisory in india

Robo Advisory in India is a new endeavour that is swiftly catching on, especially among the country’s youth. According to Tracxn, there are around 39 Indian companies that offer robo advisory services out of which 10 of them have funding from the robo advisory services.

Now different firms offer different services. For instance, some suggest the right mutual funds to invest in and charge advisory fees, making investing more convenient. Others function like traditional advisors, giving advice for different funds and assets while earning commissions from mutual fund corporation houses. And then there are some platforms that blend these two methods. 

Yet, because this is a fresh concept in India, it differs a lot from similar services in the US. In the US, robo advisors are fully automated, whereas in India, the process cannot be completed without human initiation. Other than that, while US robo-advisors lean towards passive investments – Exchange Traded Funds (ETFs), Indian robo advisors put their attention on actively managed mutual funds. The shift towards paying for financial advice is another key difference. In the US, users pay advisory fees, while in India, where commissions are more common, there’s a gradual transition towards models where fees are charged.

Even though the growth of robo advisors has been relatively slow in India compared to other countries, it’s anticipated that they will gain more popularity in the future!

Also Read: Robo-Advisors vs. Financial Advisors: Which is Better & Why?

How do robo-advisors work?

The procedure followed by the financial robo advisors is fairly simple. Let’s explore the step-wise guide to how a robo advisor works –

Initial Questionnaire:

First, you’ll be asked many different questions related to your personality traits and demographic details. Then you’ll likely be asked about your financial goals, risk tolerance, and investment horizon, etc. These questions help build a basic understanding of your financial preferences and situation. 

You will also be asked to link your investment account to your bank account to fund it. While there’s an initial deposit to begin (varying by robo-advisor), the goal is to keep adding funds over time for continuous growth.

User Profiling:

Based on the answers to the initial questionnaire, the robo-advisor will create a basic profile of you as an investor. This might include factors like gender, income, willingness to take risks, and your current investment allocation.

Portfolio Creation:

With the information from the initial questionnaire, the robo-advisor will build a clear and accurate picture of your financial situation and behaviour. And then the algorithm would process your information to design an investment portfolio tailored to your profile.

Robo-advisors will utilise cost-effective mutual funds or index fund exchange-traded funds (ETFs) to diversify your investments across various assets.

Regular Reporting:

You’ll receive periodic reports detailing your portfolio’s performance and suggesting any necessary adjustments!

Pros and cons of robo advisor

The robo-advisor monitors your investments and adjusts the portfolio as needed to align with your goals and market conditions. This routine process of adjusting, often termed “rebalancing,” involves buying and selling as needed.

Portfolio Management:

Every coin has two sides, and financial robo advisors are no exception to this rule. Even the best robo advisor would have its cons. Let’s take a closer look at both sides of the equation:

Benefits of Robo Advisors

Drawbacks of Robo Advisors

Cost-EfficiencyAbsence of Human Engagement
Tailored ApproachBugs and Glitches 
Convenient AccessibilityLimited Scope for Adaptation
Tax EfficiencyLimited Options for Investment
Transparent InsightsSecurity Concerns Over Personal Data

Pros of robo advisors

Cost-Efficiency:

Robo-advisors can be money savers. They come with lower fees compared to human advisors, which is pretty great news for a lot of people. It means you don’t need a huge stash to get some good advice on where to invest your money!

Tailored Approach:

Robo-advisors design investment portfolios tailored uniquely for you. They take into account your goals, your risk appetite, and what you’re comfortable with.

Convenient Accessibility:

With robo-advisors, your investments are at your fingertips. You can check on your investments whenever and wherever just by going online. It’s like having a 24/7 investment advisor right in your pocket!

Tax Efficiency:

Taxes can significantly affect investment returns. This holds particularly true for capital gains, especially short-term gains, which are taxed at standard income tax rates. Robo-advisors are designed to minimise the impact of capital gains taxes due to their full automation.

Transparent Insights:

Robo-advisors don’t keep secrets. They provide clear visibility into investment opportunities, portfolio performance, and associated fees.

Cons of robo advisors

Absence of Human Engagement:

When you’re investing your hard-earned money, you naturally prefer discussing it with a person who understands your situation and the emotions you may go through in the process.  That personal and empathetic touch of human advisors is missing in robo-advisory services.

Bugs and Glitches:

Technology isn’t flawless. Just like any tech-driven service, robo-advisors can face technical glitches that disrupt the investment experience.

Limited Scope for Adaptation

Robo-advisors follow algorithms, and they might not be the best at dealing with complicated financial situations that need a bit of creative thinking. Hence, they are not ideal for every scenario.

Limited Options for Investment:

Robo-advisors may not offer the diverse range of investment options that traditional advisors do.

Conclusion

In the evolving landscape of financial management, robo advisor offers an exciting blend of accessibility, cost-effectiveness, and customisation. However, their rise is not without challenges, such as the absence of the human touch and the potential for technical glitches.

As India’s financial market continues to embrace these digital financial advisors, individuals should carefully weigh the pros and cons to determine if robo investing aligns with their unique needs and preferences. Whether you opt for human expertise or algorithm-driven guidance, what matters is making informed decisions for a stable financial future.

Also Read: Best Long-Term Investment Plans In India