What’s the first thing you do when you wake up? You check your phone.
Be it social media, news apps, or finance, every other field is dominated by technology.
Not only millennials or Gen-Z, almost every generation relies on smartphones for day-to-day activities.
Fintech apps are no surprise in a world where everything is digital. Robo advisory, for instance, allows anyone to automate an investment portfolio. Doesn’t that sound awesome?
But is it really reliable?
The questions everyone should be asking right now are-
Can Robo Advisors handle complex investment portfolios?
Is it safe to trust an AI algorithm that runs on limited data?
And does Robo Advisory guide you when the market falls and panic strikes?
Let’s answer each question, shall we?
A Robo-advisor is an algorithm-based automated financial advisor that manages investments and provides investment advice with little to no human intervention.
They usually work by asking a series of preset questions such as goals, risk appetite, income, assets, liabilities, etc. through questionnaires to understand investment behavior and accordingly make investment recommendations.
This software enables buying and selling of assets and the periodic rebalancing of portfolios.
However, in reality, Indian Robo-advisor apps do not depend on self-learning algorithms but instead are quite simplistic wherein a human consultant codes certain algorithms based on pre-set questions and answers, to understand investor behavior.
1. Simple Robo-Advisors
Simple Robo-advisory asks a set of questions much like a quiz to understand the investment’s risk preference, goals, net worth, liabilities, time horizon, etc.
These are more like surveys with options to pick from 3-4 different choices of answers and once the investor makes his pick, he’s then recommended certain investment products to invest into.
Most Indian advisor platforms use this method for providing investment recommendations and according to Indian rules and regulations, one has to initiate transactions on their own.
Evolved Robo-advisors focus on artificial intelligence and data learning to provide investment advice.
These robots basically dig deep into your financial transactions and assess the spending patterns on your credit/debit card as well as banking transactions, rather than focusing on the claims you’ve made by simply picking one of the few available options.
This method helps to fill gaps by having verified information on what you’re spending, any liabilities you may have failed to remember as well as any other patterns related to your decision-making.
These mathematical algorithms then use this available data to help provide tailor-made solutions for each individual.
They also allow you to permit auto-pilot mode, which enables auto buying and selling of assets on your behalf.
However, the concept of Robo Advisory in its current form i.e. simple Robo advisors is not new to India. These platforms are more Do It Yourself (DIY)/ Digital platforms.
Platforms like ICICI Direct have existed for almost 2 decades now with basic DIY functioning. We personally believe that the current platforms addressing themselves as Robo advisors, is mostly a marketing gimmick, burning private equity money with hardly a new invention at hand.
In fact, even independent human financial advisors use similar digital platforms to manage your portfolio and at the same time let you log in, filter, select, buy/sell and track funds on your own.
The big difference is that there is an experienced human being handling your investments for you using technology versus a call center executive or a sales executive with hardly any experience in wealth management and a pre-written script on the call trying to add the human touch to these Robo advisory platforms.
When there’s an option for both digital and human interactions, why limit your possibilities with Robo advisors?
Being able to achieve financial goals via online platforms sounds enticing. Then why are many investors still reluctant about Robo-Advisors?
A study published on ResearchGate compared the perception of Human vs. Robo advisors. In the study, the respondents were randomly assigned to human advisors (both high/moderate experience) and Robo advisors.
The data was gathered from respondents based on various parameters and it showed the following results:
The Trust factor of various advisors was measured on a scale of 1-100. Expert Advisors scored 68.14 whereas Novice advisors and Robo advisors scored 61.24 & 52.25 respectively.
Additionally, the Performance Expectancy was measured on a scale of 1-7. Here again, Expert advisors scored 5.39 while Novice advisors and Robo Advisors scored 4.92 & 4.73.
Furthermore, the Intention to Hire was measured on a scale of 1-7. Based on the above findings, it’s no surprise that Expert advisors scored the highest, which is 5.33. Novice advisors and Robo advisors scored 4.98 & 4.81 respectively.
Findings:
From the table below, you can see that there’s not much difference between Novice advisors and Robo advisors on the basis of performance expectation, and intention to hire. Yet, respondents preferred Novice advisors over Robo advisors.
Expert advisors clearly scored the highest due to their knowledge and ability to build trust by maintaining transparency.
After analyzing data on various factors such as trust, performance expectation, and intention to hire, it is evident that most respondents chose experienced human advisors over Robo advisors.
(Image Source- researchgate.net)
Another study released by Vanguard found that many investors prefer human advisors to tackle complex portfolios. Especially when the markets are volatile, panic-struck people craved human connection instead of an algorithm.
The Vanguard Study also revealed that - 93% of investors working with human advisors said they wouldn’t switch to Robo advisors. On the other hand, 88% of Robo-advisor users said they would consider switching to human advisors for comprehensive portfolio analysis.
(Image Source- Vanguard’s Study on Robo or Human Advisors?)
It’s clear that - Most investors are trusting human advisors more than Robo advisors.
Robo advisors may be suitable to manage small investments. But when it comes to real market scenarios, most people would rather go with human advisors.
Let’s dig deeper into the topic.
As an investor, you must be aware of realistic market scenarios. The market can change quite often, thereby creating uncertainty.
Even though Artificial Intelligence can do unbelievable things, there are certain things that Robo-Advisors might not be able to do.
Robo-advisors do claim flexibility and personalization, but there are limitations to it. The algorithm molds itself based on the questionnaire you answer.
That means the recommendations are suitable for investors like you- not you in particular.
Besides, most investors are not fully aware of their personality when they answer these quizzes. They may get confused and select unsuitable options.
In our experience, while answering such quizzes, most people often select options based on what they want to be and not based on who they really are.
For example, the majority of investors think they have an aggressive risk appetite. They assume that they can invest aggressively without getting intimidated by market volatility, but that’s not always true. Many investors panic-sell when their portfolio falls.
Why would feelings matter, you may ask?
Well, you are human and you have feelings. You are most likely to panic when the market falls and would need someone to talk to. Someone with experience, who handles market volatility.
Robo-advisors have no idea what to do when investors push the panic button. They have no feelings, hence, they cannot give real-time advice.
You have no one to manage your investments and your feelings on digital platforms.
On the contrary, human advisors can identify gaps in your portfolio. Also, They can assist you during market volatility, help you understand your risk profile better, and guide you to make suitable investments.
Who would you rather call? An experienced human advisor or a sales executive with limited knowledge?
Some Robo-advisors have the option to talk to sales executives or communicate with a chatbot. Both options, even though convenient, aren’t logical.
A sales rep or a chatbot cannot give you ‘real’ advice. They are following a script given to them. So while they may have answers to your basic questions, they cannot tackle complex portfolios.
There’s very limited human intervention, which can endanger your financial goals.
Robo-Advisor algorithms only follow implicit values provided to them. It’s a piece of code designed after gathering limited and in some cases, biased data.
There are many reasons why an algorithm might reflect biased responses. Social agendas, financial revenue-sharing schemes (kickbacks), conflicts of interest, and many more.
Basically, the algorithm will only respond in a way it has been trained to respond.
The bottom line is Robo-advisors can kickstart your investment portfolio. You can create a simple portfolio with a small amount of investment within a few clicks. But when your investment portfolio grows and risk profiles expand (which is inevitable), these digital platforms cannot guide you any further. That’s why most investors even today, seek professional financial advice from humans, most of whom, are anyway equipped with digital platforms to enable ease of transaction.
The major difference between Robo Advisory and Human Advisory is the conversation. Sure, Robo advisors listen to you too, but to a certain extent.
When you seek answers to complex financial queries, only human advisors can help you.
Human advisors can align your portfolio with your long-term financial goals. They can talk to you whenever you want any financial advice.
No advisor- neither human nor robot, can guarantee higher outcomes. In fact, they are not supposed to create an illusion of higher returns when it is clearly uncertain.
Nevertheless, human advisors can give you sensible recommendations which can deliver credible results.
For example, we believe that the stock market follows the economy. So, in the long run, as the economy grows, so will your investments, irrespective of everyday market volatility. All you have to do is wait, have patience, and not panic-sell anything.
These and more such recommendations may not be possible with Robo-advisors who may recommend a sell call in a falling market, when a stop-loss is triggered based on the algorithmic code. Thus, making you book a loss, which may have been avoided if you would have stayed invested.
How much would you trust a predefined algorithm? At some point, it ought to deliver inconsistent results thereby losing your trust.
You don’t know what’s going on at the backend of Robo advisors. There’s no transparency.
Human advisors have nothing to hide from you. They can analyze your portfolio in front of you. They can pinpoint gaps and assess risk profiles. At the end of the day, you trust a person who talked to YOU about YOUR portfolio.
If you have any financial queries about your investment portfolio, VNN Experts are just a call away. Give us a call at +91 8408020995 to plan long-term financial goals.
If you are a new investor and would like to kickstart your investment portfolio, Robo-advisory might seem like an easy choice. However, relying completely on the algorithm will not help you achieve your financial goals.
There will come a time when Robo-advisors won’t address all of your questions. There’s a gap between what an algorithm can do, what’s really happening in the market, and your evolving risk appetite, which requires frequent portfolio reviews.
That’s why the data in the studies above show that many investors prefer to communicate with Human Advisors.
Human advisors can offer you suitable recommendations. You can communicate with them effortlessly and seek advice that aligns with your long-term goals.
You may want to read these 6 tips before choosing the right financial advisor for you.
Now, if you already have signed up for Robo-advisory, do not worry. You still have the opportunity to seek professional advice.
At VNN Wealth, we offer a thorough analysis of your investment portfolio and risk profile and help you set financial goals. Give us a call or send us an email whenever you are ready to take your investments to the next level.
