The Evolving Robo-Advisory Landscape In India
Not happy with the financial advice you have been getting? Tried at least a few advisors and advisories? Still no luck?
You may want to look the robo advisory way.
Robo advisory services have rapidly evolved in India in the last couple of years. Technology-driven startups are going beyond pure mutual fund distribution to offer digitised, long-term financial planning. Similar to human advisors, robo advisors will try to understand the financial position, goals, aspirations and risk appetite of users. Except they will use the information they gather to algorithmically build personalised investment portfolios.
The services of these platforms range from automated plans, goal-based asset allocation, automated portfolio reallocation and re-balancing, to comprehensive financial advisory.
Although the efficacy of these algorithmic models to generate satisfactory returns will be known only a few years from now, there is a fair level of optimism around the business model within both fintech startups and traditional wealth management firms. For now, millennials constitute a bulk of the customer base of robo-advisory services globally and in India.
What Kinds of Robo-Advisors Are Out There?
To be sure about the definition, only those platforms that recommend a custom portfolio on the back of an investment strategy using one or more asset classes are considered as robo-advisors in this article. This excludes several pure-play digital fund distribution and investment platforms, which also claim to be robo-advisory services.
The Indian robo advisory landscape can be categorized broadly into three types.
- Fund-Based Robo Advisory
- Equity-based Robo Advisory
- Comprehensive Wealth Advisory
Fund-based robo advisors offer risk-profiling and goal-based suggestions to their customers. Investments are in a single asset class—funds—which could be either managed or exchange traded. They are suitable for investors, new and seasoned, who are relatively risk-averse and do not wish to have direct exposure to equity but need guidance on the most optimal investment mix for them. Almost none of them charge the customer for their services and revenues are mainly through fund distribution commissions.
Examples of such solutions include Scripbox, Goalwise (now acquired by Niyo), Fisdom, Finpeg, Orowealth, and Kuvera. Kuvera has also diversified into other asset classes such as equities and gold.
Equity-based robo advisors focus purely on equity portfolios. These solutions allow execution through multiple brokers. They are suitable for investors with a fair understanding of equity markets, who have moderate to aggressive risk profiles but prefer the guidance of experts to design the most optimal portfolios. Some of them offer thematic portfolios which are designed around specific sectors or investment philosophies. Pricing is usually fixed, either as an annual fee or as a transaction fee.
Examples of such solutions include Smallcase, Fyers, Tauro Wealth, and Markets Mojo.
A comprehensive wealth advisory is one that focuses on aggregating the financial networth of the customer, understanding their risk appetite and then offering complete wealth management services. This can be at an individual or a household level. In addition to fund-based portfolio recommendations, they also offer financial planning, portfolio management services and human financial advisory with wealth, and estate planning. Pricing is usually fee-based for a packaged combination of services.
INDWealth, Cube Wealth, and Arthayantra are well-known names in this category.
A Nascent Market
At this stage, the assets under advisory or AUA for the Indian robo advisory segment is low compared to most advanced markets, such as the U.S.
The AUA of leading robo advisors in India looks something like this based on their own disclosures:
- Kuvera: Rs 14,500 crore (~$1.97 billion)
- Orowealth: Rs 3000 crore (~$408 million)
- Scripbox: Approx. Rs 1,500 crore (~$203 million)
- Goalwise: Rs 850 crore (~$115 million)
These numbers are significantly lower than peer companies in mature markets. For example, Betterment’s AUA has approximately $21 billion under advisory, Wealthfront has $13.6 billion, and Personal Capital has $14 billion in AUA.
In many ways, this is not surprising since robo advisors entered the U.S. market over 10 years ago (circa 2009) and instruments for passive investment such as ETFs and Index funds have been popular there for many years.
Industry pioneers such as Betterment, Wealthfront (both U.S.) and Nutmeg (the U.K.) are considered benchmarks for robo advisory services globally. Choice of allocation strategies that keep the risk-reward equation optimal, passive investments exclusively in ETFs, and a focus on long-term goal-based wealth creation, have been the primary factors behind their success.
In contrast, there are several behavioural and systemic barriers in India on the road to executing similar models. For one, younger investors who are moving towards robo advisories may have limited experience with risk and volatility. Second, the share of passive funds, which helped global robo-advisories grow, is low in India. The AUM of passive funds constitute only about 6.5% of the overall AUM of funds, according to data from AMFI.
Growth And Future Outlook
Still, the number of advisory platforms in India is growing, suggesting that many see opportunity in this WealthTech segment.
One reason for this is that, on average, over 50% of new investors are youth and millennials aged between 25 and 38, showed a 2019 survey conducted by CAMS. To capture this segment, a raft of new launches have taken place.
As per MEDICI research, there were 486 WealthTech startups (personal finance management, robo-advisory, marketplaces, investment brokerage) in India as of June 2020 and the number of robo-advisors went up from 3 in 2013 to 16 companies by the end of 2019.
Digital public goods have played a key role in the growth of this sector. Many of them heavily leverage Aadhaar authentication, eKYC and DigiLocker for new customer onboarding, UPI for transactions and fees, and eSign for document signatures thereby bringing down operational and growth barriers significantly. Financial data aggregation enabled by Account Aggregators could give this process another push.
Low decibel M&A activity is already taking place across India’s robo-advisory landscape. Recently, Niyo acquired Goalwise and rebranded it as Niyo Wealth. Existing and upcoming neobanks, several of whom are looking to grow inorganically into financial advisory services, are likely to play a role here.
Growing per capita income, favourable demographics, increasing smartphone and internet penetration, and an expected shift in investment behaviour (primarily triggered by economic uncertainty in the last two years) from ‘borrow and spend’ to ‘save and spend’, makes India a promising market for wealth advisory solutions in the mid- to long-term. The growing interest in ETFs and index funds in a see-saw market may also be supportive of a move towards robo-advisories.
Still, just like with any new service, consumers, especially those new to investing, need to be aware of the risks. In this case those risks include the volatility linked to different investments segments and also the fact the enough historical data is not yet available on the performance of robo advisories, notwithstanding the back-testing which most of them do to prove their models.
This article was originally published on MEDICI Global and has been republished as part of an editorial partnership.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.