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Robo-advisories are software-driven systems that help manage the wealth of customers

The evolution of technology has redesigned conventional business into a digitally-enabled model. With technology-enabled rich customer experience in shopping, fashion and travel segments, the fintech industry has reshaped the traditional way of managing wealth.

The advent of robo-advisory in the fintech ecosphere signals the changing needs and expectations of digital customers — ranging from asset allocation to exiting from investments.

The concept of robo-advisory has undergone major changes — from being just a basic fund-offering service to algorithm-based portfolio management with value-added offerings, to catering to a large unserved population. Robo-advisory is a software-driven system, with an automated process replacing the human element to manage the wealth of customers. Just as a financial advisor defines the objective for a client in exchange for fees, the robo-advisory process starts with identifying the relationship with clients, basic profiling, assessment of risk and construction of portfolio, all of which are completely automated. It also has the capability to periodically rebalance the portfolio and reorganise it till the stated goals are achieved. Although there are about 35 companies offering robo-advisory platforms in India, the services differ on multiple fronts, including direct plan-based model, goal-based advisory and full-fledged services.

Goal-based planning

A robo-advisor supports customers in planning for various financial goals with suitable schemes, which are selected on the basis of risk assessment, value terms and the tenure of the goal.

It also periodically reviews and rebalances the portfolio without any bias towards individual schemes. The software keeps track of the portfolio until the goal is achieved.

Accurate decision

Robo-advisory is designed with a set of algorithms at a broad level. It is a combination of a set of quantitative and qualitative data addressing a larger segment of customers, and therefore eliminates the risk of biased decisions or errors.

Flexible and convenient

The advent of robo-advisory has offered a user-friendly interface that is convenient to use across geographies, and gives flexibility to manage mutual fund investments from a mobile application. Further, all documentation processes such as know-your-client (KYC) are automated.

Lower cost

Many mutual fund investors tend to ignore costs that seem small and insignificant in percentage terms, but over a long period add up to large amounts, and reduce the net value of an investment. Further, traditional financial advisors charge a substantial fee, making it expensive for small retail investors.

Exit advisory

The key element of robo-advisory is to give direction to exit from investment if a scheme is underperforming or when a particular objective is achieved. This decision is arrived at through logical reasoning, which human advisors overlook due to bias over schemes, as they earn commissions, or due to ignorance.

With rapid evolution in digital platforms and changes in customer preferences, robo-advisory has gained momentum to grab a share of the wealth management business. However, with more than 35 companies offering robo-advisory platforms in India, it is imperative that customers identify suitable platforms that offer holistic decision-making tools.

The writer is founder and CEO, 5nance.com

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