The Pros and Cons of Robo Advisors

Over the years, the definition of FinTech or “Financial Technology” has expanded from covering companies that supplied back-end software systems to Financial Institutions, to encompassing a multitude of ventures that leverage technology to disrupt existing ways of executing financial transactions or managing money. Indian FinTech firms now comprise a motley crew of lenders, financial educators, equity advisors, wealth managers and financial planners. In addition, most Asset Management Companies are peddling their direct plans on their websites.

One such application of “new age FinTech” is the Robo Advisor. Put simply, a Robo Advisory platform is a purely DIY model of investing, wherein an investor will have zero interaction with a real person. Robo Advisors have preformulated algorithms at the back end; clients typically answer a sequence of standardized questions which allow the algorithm to come up with best-fit investment solutions for the client.

Steadily increasing adoption of digital services, coupled with a growing population of young and impatient people in India, has resulted in the mushrooming of a few homegrown Robo Advisory platforms as well. Before you decide if these Robo Advisors are worth your while, its would be wise to understand their pros and cons.

Pros

The obvious plus point of Robo Advisors is their convenience. Since they typically involve little or no paperwork, Robo Advisors save investors from the hassles of having to sign stacks of documents before they can invest.

Another (albeit counterintuitive!) benefit of Robo Advisors is the fact that advice is standardized – and so there’s really no scope for investors to be mis-sold a product by an unscrupulous salesperson who may have a vested interest in ‘selling’ a particular product to an investor.

Cons

As mentioned earlier, Robo Advisor platforms function with a standardized set of algorithms at the back end, and hence the scope of their advice is typically quite restricted. For instance, a Robo Advisor will not be able to understand the sentimental value attached to a particular financial goal; neither will it be able to trawl through your existing investments and offer you suggestions on what to retain and what to liquidate.

Another key element that’s missing from Robo Advisory platforms is the ability to deal with the human side of investing. More often than not, investors make losses not because they chose the wrong product to invest into, but rather because they got carried away by their emotions during some stage of the investment decision-making process. Robo Advisors can do precious little to circumvent this challenge.

End note

Why not go for an Advisor that combines the convenience and ease of a Robo Advisor with the human touch of a qualified, competent Financial Advisor? Bionic Advisory platforms like FinEdge aim to do just that. Why settle for one when you can get the best of both worlds?