‘We will see a shift to a blend of automation and offline advisory’

Black-box proprietary models may hide some risks. The regulator needs to ensure that the online fund selection process is disclosed to users or put in public domain to be analysed by experts, says Manoj Nagpal, CEO - Outlook Asia Capital, a consulting and wealth management firm.

How can a small retail investor who is not financially savvy get affordable financial advice?

The penetration of financial services is low in India and there is lack of quality advisory services to masses. This is due to low distribution margins; and technology can help solve this issue. But it is too early to say whether robo-advisory will offer quality advice. They use somewhat simple profiling parameters such as age and income levels to come up with generic solutions. Also, users do not share authentic data online. The selection process is using quantitative algorithms that are based on historical data and these have their own set of limitations. All these factors may put the quality of advice at risk.

What role can regulator play?

I think the regulator now has a focus towards growing online channels. The regulator needs to ensure that both offline and online channels grow and are placed on an even keel rather than focus on just online. They must ensure that the online fund selection process is disclosed to users or put in public domain to be analysed by experts. Black-box proprietary models may hide some risks. Also, right now there is only a small number of funds under robo-advisory. But once that increases, there could be a risk of fund houses trying to influence the algorithm.

Some regulations may have to be re-considered. For example, you can invest ₹50,000 per year in a fund house with e-KYC but a user may invest more using this route through a robo-advisory. There is no way to verify if the limit has been reached.

What are the issues with the existing distribution system?

About 70 per cent of the distribution happens through banks and private wealth firms and this where the trust deficit is the most. Relationship managers are given incentives on meeting monthly targets. There is no long-term commitment to the client. Also, when banks sell financial products, they are not under the regulation of the RBI or SEBI. These regulatory gaps need to be plugged. Where do you see the future of financial advisory, with the advent of robo-advisors?

Various models can co-exist giving users choices to pick from. I feel we will see a shift to a blend of automation and offline human advisory. Even in the US, robo-only advisors manage 10 to 15 per cent of the assets and robo-plus-offline advisories take care of another 15 per cent. The bulk of the money is still managed by traditional advisory services. Online-only services typically do not differentiate between individuals and the mass customisation can lead to disgruntlement, down the road. Also, investors need hand-holding during downturns when emotions may wreck financial plans. So, traditional advisors will continue to play an important role.

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