Fintech Tracker: Goalwise Believes Algorithms Can Manage Your Money Better Than Humans

In the age of artificial intelligence, few things are left untouched by computer software. From moving billions of dollars across borders in microseconds to managing your personal finances, computers are now everywhere. And those who design these programmes are convinced they do a better job than humans.

Fintech startup Goalwise says that computers take the fuss out of investing. Their weapon of choice: a proprietary algorithm that invests on your behalf. What they offer is a “set and forget” system for new and seasoned investors, said Ankur Choudhary, co-founder and chief information officer at Goalwise in a conversation with BloombergQuint. The algorithms select mutual funds on your behalf and realign investments annually depending on how the funds are doing.

“Anyone can pull out a list of best performing funds through a simple web search, but this isn’t effective allocation if the funds are not delivering. Our algorithms realign funds each year based on performance and keep track of the goals that the customer is trying to achieve,” Choudhary said while adding that the algorithm also switches investments on its own.

As the company’s name suggests, Goalwise works on a goal-based model where customers put in their goals while signing up for the service. This, then forms the basis of investment decisions that the algorithm makes. This model was picked because research suggests that people are more likely to stick to their investments if they are saving for certain goals as opposed to just investing for returns.

In choosing the correct funds, Goalwise gets potential clients to answer a set of questions, which Choudhary claims are structured after a lot of academic research.

“We studied a lot of research to figure out the questions which are highly correlated with a person’s actual investing behaviour,” Choudhary said. “Once we have the risk profile, the system automatically recommends asset allocation based on that.”

The allocation, however, keeps changing depending on movements in the market or when a wealth goal is approaching, prompting the algorithm to switch to safer funds. This helps during periods of volatility.

This claim is contested by some financial planners.

BloombergQuint spoke to Arnav Pandya who is a certified financial planner based out of Mumbai. Pandya said that algorithms can work in intraday trading where speed and volumes are involved but can’t replace the financial management function which requires more insight.

Pandya said that financial products can be selected by anyone but it takes a human to judge what’s best for an investor.

Competition Versus Opportunity

The bad news is that Goalwise competes with a large set of about 40-50 firms in the market who are using algorithms for retail investing. It claims that it stands apart because of its goal-based approach.

The good news is that even though the market is crowded, the penetration of mutual funds is low, which may make room for a number of competitors. Mutual fund penetration in the country is about three percent as compared to more than 40 percent in the U.S.

Goalwise claims that this under-penetration is helping its business grow 20 percent a month ever since it started functioning in February 2016. The company says it has 2,000 users investing with it every month. During the course of 2016, the company raised $1 million from a group of undisclosed angel investors.

The Business Model

Goalwise operates on a commission based distributor model where it gets paid by the mutual fund for money invested by people.

“A mutual fund is going to charge you a management fee for the money that you invest. It can be something around 2.5 percent for an equity fund. From that, the mutual fund will pay a distributor 0.5-1 percent as the fee,” Choudhary explained.

The distributor model is the dominant model across the industry but slowly a new model is catching up where people can directly go to the mutual fund website and purchase a fund. In turn, the customer gets charged a lower fee because there’s no intermediary.

While Goalwise is a robo advisory, Choudhary prefers not to use that term because he feels it does not sit well with users who may be uncomfortable with the concept of handing their money over to a robot.

“If we talk to a user and tell them that we have automated investments, that is fine with them. But if we tell them that it’s a robo advisory, they will say I don’t know what that is,” he added.

The terminology used is not the only problem.

Dhirendra Kumar, chief executive officer of Value Research told BloombergQuint that none of the algorithm based fund allocation companies have proven themselves yet.