Old Money, New Mantra: Algorithms to recommend investment schemes
CHENNAI: Have you ever wondered how much does your financial advisor’s service actually cost? Most advisers will probably tell their customers it does not matter which plan they invest in. These advisors earn annual commissions in the range of 1-2 per cent; more in the case of first-time investors who need hand-holding.
Now, all this is set to change with robots entering the scene. Yes, automated advice platforms known as robo advisors are fast catching up in the Indian fintech market. These offer automated, algorithm-driven financial planning services with little to no human supervision.
“The successful robo models in India, however, will likely be different from the developed world -- serving a wider market, rather than the top-of-the-pyramid,” said Sanjiv Singhal, founder and COO of Scripbox. According to Singhal, it is difficult for the traditional personal advice model to meet the large-scale need for advice; the challenge is to have enough qualified advisors to meet the demand. “While it will not entirely eat up the market of traditional investors, we’ll see traditional advisors using both financial planning and practice management technology to serve more and more clients.”
Echoing similar views, Kunal Bajaj, CEO of Clearfunds, an online investment advisor, said it is also hard to find competent human advisors. “That being the case, algorithms and patterns charted by robots are gradually making inroads into the investments advisory business,” he said, adding these automated rules-based investing engines will pare down the fixed cost of investments for some investors.
Today, there are 45-odd early-stage start-ups flocking this sector. These platforms also offer products like ‘direct plans of mutual funds’, which, Bajaj claims, has no in-built commissions. “Our focus is on direct plans and we will not sell or recommend regular mutual funds because they end up costing our customers a recurring, hidden commission, year after year.”
According to Bajaj, the commision may not appear to be huge. But, in real terms, it could be. For instance, if a 35-year-old investor is to put in Rs 10 lakh in a one per cent annual commission bearing Regular Plan of a mutual fund, which grows at eight per cent a year, his investment would be worth Rs 76 lakh when he retires at 65.
Furthermore, if he switched to a Direct Plan of the same mutual fund and cut out the one per cent annual commission, his investment would grow to Rs 1 crore over the same period. This translates into a whopping Rs 24 lakh paid in commission!
While banks are becoming picky towards people who are at higher levels of pay with more discretionary income to invest, others may move to the robo-advisory model. As indicated by Singhal, there will a 25 per cent rise in investors utilising robo-advice, up from five per cent now.