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Technically Speaking
September 2017
So, what are Robo – Advisors?
“A class of financial adviser that provide financial advice or
portfolio management online with minimal human intervention
based on mathematical rules or algorithms”
Need for Robo - advisors
Until recently, there were only two options
for aspiring investors:
a Do it yourself (DIY)
b Hire a financial advisor
While DIY is not an option for an average
first-time investor since there are too many
confusing, marketing messages out there in
the market & the actual decisions would
need a significant amount of time to be
invested in research.
And the latter option of hiring an advisor has
some imminent problems:
Reachability – Minimum requirement of
corpus investment which keeps the advisors
out of reach for the young (or) low value
investors
Cost of service
Customer
Profiling*
Asset
Allocation*
Portfolio
Selection*
Threat of biased advice – The advice might
be biased especially if the advisor gets
distributor commissions and would likely to
benefit the advisor more than the investor
With robo-advisors, most of these issues
can be elegantly tackled and if designed
properly, they can help the investors answer
the three fundamental questions of investing
– why to invest, how much to invest & where
to invest. Though the term robo-advisory is
used loosely, in general a robo-advisor is
expected to help the investor with the
minimum of following:
Investor profiling – Assess the financial
goals, liquidity preference & risk appetite
Asset Allocation – Determine the
investment class mix
Portfolio selection – Recommending the
actual funds to invest in
Trade
Execution*
Portfolio
Rebalancing*
Tax-Loss
Harvesting*
Portfolio
Analysis**
Governance and Supervision
Communication and Marketing
* Functionally typical in financial professional and client facing digital investment advice tools
** Functionally typical in financial professional facing tools only
Source: FINRA 2016 Report