The evolving role of Robo-Advisory in Financial Services in India and the future ahead

Retail investors frequently turn to established financial institutions or financial consultants to get started, especially those who are young and inexperienced, but they rarely achieve the results they were hoping for. For starters, relatively few firms in this market do in-depth, need-based analyses and offer tailored solutions based on the results. However, high-quality financial advice is expensive, and relatively few small investors can afford it. In these situations, one chooses robo-advisers, which assist customers in navigating the complex world of financial investments effectively and affordably.

Automated investment platforms known as “robo advisers” offer algorithm-based solutions after evaluating a user’s financial situation (current assets and cash flow), goals, aspirations, time horizons, risk tolerance, and capital market expectations. Robo-advisory has been around for a while, and while it is now a very large industry globally, it is also growing quickly in India, thanks to the rising financial awareness across the board.  Also. As private banks and wealth managers need to create more distinctive offerings to successfully respond in order to better express the value they provide and better support their fees.

There are already 85 robo-advisory firms in India, with Mumbai and Bengaluru having the most, with 27 and 23, respectively, according to data from Tracxn, a start-up data analytics company. However, as robo-advisory has grown in acceptance and popularity over the years, smaller towns have also seen their fair share of such firms.

How Do Robo Advisors Work?

The fundamental purpose of a robo adviser is to advise customers on their investments and help construct their financial strategy. Users must enter the required information, describe their financial objectives, and indicate their risk tolerance on a robo advising platform. The software analyses these factors to generate a score for each individual after receiving all pertinent data (time frames, risk appetite, goals, nature of job, age, and other financial characteristics) and then develops a matching portfolio based on that score and manages it independently.

In order to supplement the services of a traditional financial advisor, robo advisors often use investment algorithms based on artificial intelligence and machine learning.

What Kinds of Robo Advisors Exist?

Fund-Based Robo Advisors

The fund-based Robo advisers make goal-based recommendations to their clients based on their level of risk tolerance. The majority of the investment recommendations are for funds, which are a single asset class that can be managed or traded on an exchange.

For new and seasoned investors with a limited tolerance for risk, fund-based Robo advisers are a viable option.

Equity-Based Robo Advisors

As their name implies, they mostly concentrate on equity-based investments. These equity-based investments are appropriate for seasoned investors with a moderate to aggressive risk appetite, in-depth knowledge of the equity market, and these characteristics.

Comprehensive Wealth Advisory

The primary goal of the comprehensive wealth advisory, also known as the comprehensive Robo-advisor, is to provide investors with 360-degree financial solutions aimed at boosting their financial net worth. The comprehensive Robo adviser pays close attention to the investor’s present financial situation, future financial goals, and risk tolerance in order to create a comprehensive, individualised financial plan that attempts to meet the investor’s financial goals.

The young and growing robo market

Even while the value of Assets Under Management, or AUM, for the Indian Robo advisory category may be below, it is unquestionably rising at a steady rate when compared to the proportion of conventional investors to millennials and Gen Z investors in the market.

India’s Future With Robo Advisors

Similar to sophisticated markets like the US, the UK, and other countries adopting cutting-edge technology, India’s robo-advice is currently in the 3.0 phase and is anticipated to advance to the 4.0 phase.

Due to the complete digitalization of financial advisory services, the emergence of fully automated robo advisors will further reduce current costs and rationalise the fee structure in this market segment. The three potential savings areas are personnel costs, operating expenses, and capital expenditures.

Based on current trends, experts predict that a hybrid robo-advice model that combines the best of traditional and digital services will soon develop in the country. These will essentially be robo-advisories powered by AI and ML, with alternatives for interacting with human advisors.

Additionally, M&A activity in this sector has already been observed by the market. To grow their own businesses and user bases, existing and prospective fintech players may purchase significant robo-advice with plans to enter the financial advice and wealth management industry. In terms of growth and technological advancement, robo advisors could have an exciting future for a very long time.

(The author is Mr. Vineet Tyagi, Global CTO, Biz2X and the views expressed in this article are his own)