FinTechRobo Advisors: Introducing the Era of Automated Investment Advice – Part I

INTRODUCTION

The wealth Tech sector falls within the ambit of the FinTech Sector in India and the meaning of the term coined Wealth Tech is as the word suggests, the fusion of “Wealth” and “Technology”.

Unlike its parent sector, the purpose of Wealth Tech is streamlined and specific. In this industry, machine learning driven algorithms are used to create a robust and methodical system for analysis of investment opportunities. Therefore, Wealth Tech primarily focuses on managing the wealth and investments of its users.

The constant development in technology, increase in usage of smartphones, increase in access to the internet, the ‘Digital India’ campaign, profound customer demand, higher-tech awareness, growing investment platforms, favorable demographics, and enabling Government policies encouraging the development in the initial years and being the catalyst and facilitator in the later years have resulted in an exponential growth of Wealth Tech Sector in India.

The prime reason that Wealth Tech Sector has witnessed exponential growth in India and the world at large is its unparalleled dynamism, variety, secure, robust, and the introduction of the most innovative concepts such as Robo Advisors, Personal Finance Management, Digital Brokerage, Digital Risk profiling etc.

In this article, we attempt to discuss the concept of Robo Advisors, how it works, its types, why the concept was introduced, and the current landscape of Robo Advisors in India.

THE CONCEPT

Robo Advisors basically acts as a wealth management company, which based on the inputs provided by its user regarding its objective and goal, provides automated financial advisory services without any human intervention, be it trading, investment, portfolio rebalancing or tax saving.

WHY THE CONCEPT WAS INTRODUCED

The introduction of diverse types of investment has made financial markets more complicated by the day than they already were, particularly for small retailers. Since retail investors especially those who are young and inexperienced often seek the advice of a financial advisor to achieve the desired goal. However, the experienced financial advisor asks for a hefty premium, which very few are able to afford.

Additionally, the retail investors while understanding the growing array of financial products, they are also required to evaluate risk, the effects, the tax implications of investment, and how to withdraw from their investment portfolio in case of breakdown is very complex and difficult to understand.

However, since it is known that Artificial Intelligence (“AI”) is better equipped to handle complex transactions and keep an eye on the constant fluctuation in prices than any human. Further, the AI allows its user to interact digitally with and manage their investment in an efficient manner at any point of the time from any location.

Therefore, in view of the above, the concept of Robo Advisors was introduced, as it makes it easier for client to navigate the complex world of finance in an efficient, cost-effective and real-time manner.

HOW IT WORKS

KINDS OF ROBO-ADVISORS

The Indian Robo Advisor market can be divided into three categories –

1. Fund-Based Robo Advisory:

Under this category, Robo Advisors based on risk profiling and goals desired by its clients, investments are made in single asset class funds, which are either managed or exchange-traded. This type of advisory is suitable for both new and seasoned advisory, who are relatively risk-averse and do not wish to have direct exposure to equity but need guidance on the most optimal investment mix.

2. Equity-Based Robo Advisory: 

Under this category, the Robo Advisors based on risk profiling and goals desired by its clients, primarily focus on equity portfolios. This kind of advisory is best suitable for investors who have a fair understanding of equity markets but require an expert’s guidance to design the most optimal portfolios.

3. Comprehensive Wealth Advisory:

Under this, the Robo Advisors based on clients’ aggregate financial net worth and their risk appetite offer comprehensive wealth management services. This kind of advisory is suitable for an individual investor and for an entire household as well.

Besides, fund-based portfolio recommendations, they also offer financial planning, portfolio management services, and financial advice for wealth and estate planning.

THE CURRENT ROBO ADVISORY LANDSCAPE IN INDIA

AMLEGALS REMARKS

The Robo Advisory industry in India is in its developing stage and is witnessing rapid growth, as a result of rising financial awareness, profound customer demand, higher-tech awareness, favorable demographics, and enabling Government policies.

Further, the Robo Advisor industry has helped in the inclusion of a lot of small-scale retail investors to explore the complex financial ecosystem and to invest in diverse portfolios,  in a cost-effective manner, which they would have been unable to do on their own.

However, in the absence of specific regulations and guidelines for regulating Robo Advisors with respect to privacy, anti-money laundering, transparency, audits, and licensing. The Robo Advisory technology in India is still at a budding stage as the investors are always under conflict and chaos due to lack of clarity of the regulation on the subject.

Therefore, in view of the above, there is an inevitable need for introducing a robust regulatory infrastructure for regulating Robo Advisors in India, as this industry holds a lot of potential, which can help transform the financial ecosystem of India.

In the next article, we will attempt to discuss the current regulatory infrastructure, the challenges, the pros and cons, and what is the future of the Robo Advisor Industry in India.

For any query or feedback, please feel free to get in touch with tanmay.banthia@amlegals.com or prarthana@amlegals.com.