New fintech disrupter: Robo-advisor

Algorithms and patterns charted by robots are slowly making inroads into the investments advisory business. Given their significance, the robo-advisory approach is emerging as one of the hot areas for fintech start-ups, something that is coming across as the next big disruption in the space. In fact, according to YourStory Research, there are close to 50 Indian early-stage start-ups flocking around this sector.

Robo-advisory leverages client information through algorithms, automating and recommending tailored investments to individuals. However, what we are talking about is the consumer slab of robo-advisory. Historically, wealth managers who have serviced high net-worth individuals (HNIs) have always been equipped with the most basic form of data analytics. Now, start-ups are leveraging the power of artificial intelligence (AI) to penetrate till the middle of the financial pyramid (i.e. the banked populations of the country).

But, with India having the lowest mutual fund investment rates (7%-odd) and mutual funds accounting for only 3.4% of total investments by individual investors (including HNIs and retail), how is the robo-advisory technology intervention going to thrust a change in the ecosystem? Maybe, Ishaan Gupta, who runs a digital investment management platform - Wixifi, has the answer to this. The 32-year-old-entrepreneur, says, robo-advisory as a segment will become a product which will be offered by the incumbents (or banks and larger financial institutions). "Hence, robo-advisory companies will become service providers to these big financial institutions," he said.

Also, this is a capital-intensive business with companies witnessing high burn rates for acquiring customers. As a result, companies which already have large customer tractions will have an edge, adopting the technology and providing it as a service. Banks no longer want to invest their workforce and capital in acquiring every customer. They are becoming selective towards individuals who are at higher income brackets with more disposable income to invest. Obviously, they want more bang for the buck. So for them, the rest of the population might move to an automation or robo-advisory model.

According to Amit Mehendale, director and co-founder of robo-advisor platform robobanking.in, there are currently two ruling models in the segment - regular plan and the direct plan. In the regular plan, the advisory platform (or marketplace) gets a commission from the distributor (of the mutual fund) for every investment made. This leads to biased perceptions in the market. In the case of a direct plan, the final consumer or the direct investors pay a flat fee to the advisory platform.

Users make investments by themselves, not paying the platform for any execution. "At present," according to Mehendale, "90% of the market seems to be dominated by the former players (pursuing the regular plan). However, the dynamics will change in the next two years, with both plans having equal market share. Eventually, direct plans will start dominating the market."

But, what about the trust? Ishaan's answer to it is fairly simple. He believes that once adoption starts for financial institutions, which already have established trust amongst its customers, people will start adopting the technology. However, the current models offered by startups do involve some personal or telephonic intervention to give users the required confidence.

Sanjay Swamy, a veteran in the fintech space and managing partner of Prime Venture Partners, is of the view that financial advisory services in India is still in the nascent stage - and have mostly catered to the affluent because of the high-touch approach. "It is clear that for robo-advisory to scale, automation and low-cost approaches are going to be key. However, customer education needs to be addressed first - and once that is done, robo-advisors will be relevant."

Courtesy: YourStory.com