The Pros & Cons of Robo Advisors

Technology & Investing

Over the years, the definition of FinTech or “Financial Technology” has expanded from covering companies that supply 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 by way of their in-house robo-advisory platform.

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. These are ‘fancy’ transaction platforms that focus more on ease of transaction than on measurable deliverables like the creation of a customised investment portfolio or having a goal achievement plan.

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 aspirational 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, it would be wise to understand their pros and cons.

Advantages of Robo Advisory Platforms

The obvious plus point of Robo Advisors is their convenience. They typically involve little or no paperwork, saving investors from the hassles of having to sign stacks of documents before they can invest. While this was a major factor when these platforms first came up, today most investing platforms are paperless and require no physical documentation for investments.

An interesting feature of Robo Advisors is their ability to provide consistent advice. However, this consistency may not always be beneficial. Standardized advice often lacks the personal touch needed for unique financial situations. While Robo Advisors can automate many processes, they may miss out on tailoring advice to an individual's specific goals and circumstances, which is a crucial part of successful investing.

Disadvantage of Robo Advisory Platforms

Limited Scope: Since Robo Advisors operate with standardized algorithms, the scope of their advice is typically quite restricted. Based on inputs fed by an individual the platform would provide limited advice.
Lack of Personalization: Being an automated algorithm driven model, these are unable to understand the unique financial situation of an individual and also lack the understanding of any sentimental value attached to specific financial goals.
No Goal Orientation: Robo Advisors may not focus on long-term financial goals or personalized investment roadmaps, as these typically require a deeper understanding of an individual's unique needs, financial situation and future aspirations—something automated systems may not fully grasp.
Transactional Focus: These platforms often concentrate solely on transactions without considering the purpose or unique requirement of an investor's financial aspiration.
Lack of Expertise: Robo Advisors lack the ability to thoroughly assess your current investments and adjust them for optimal performance. They cannot provide nuanced advice on rebalancing or making portfolio adjustments as you go through different life stages or as your financial goals evolve.
Absence of Human Touch: Successful investing isn’t just about managing a portfolio; it’s about managing behavioral biases that often arise during the investment journey. Factors like greed during market highs or fear during downturns can derail long-term plans. An expert advisor helps navigate these emotions, guiding you toward disciplined, rational decisions.

Robo Advisors are not equipped to manage the human side of investing, such as helping investors avoid emotional decision-making pitfalls. Robo-advisors do face challenges with client churn, particularly when market conditions are unfavorable or when clients' financial needs become more complex and require personalized advice.

More often than not, investors make losses not because they chose the wrong product to invest in, but rather because they get carried away by their emotions during some stage of the investment decision-making process. Unfortunately, Robo Advisors can do precious little to circumvent this challenge.

End note

Investment success is best achieved through a personalized approach that takes into account your unique financial goals, life stages and emotional responses to market fluctuations. While robo-advisors offer convenience and low costs, assisted investment platforms, though perhaps less "fancy," are highly effective in delivering customised investment roadmaps.

Human expertise in investing provides a significant advantage. A knowledgeable advisor not only customizes your investment plan to suit your individual needs but also ensures that your portfolio is regularly monitored and adjusted as you progress through different life stages or achieve specific financial goals. Additionally, they help keep your emotions in check, preventing impulsive decisions that could derail your investment journey.

FinEdge's DiA (Dreams into Action) platform exemplifies this balanced approach by combining the best of expertise, collaboration, personalization and a streamlined investment process. It offers the ease of transaction found in digital platforms while ensuring that your investments are closely aligned with your financial aspirations. With DiA, you don't have to settle for one approach when you can benefit from the strengths of both human expertise and digital efficiency.

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