Robo-Advisory: What is a Robo Advisor?

What does the word Robot connote to you? An immediate reaction would be that of a mechanical human look-alike with flailing arms trying to perform activities more intelligently than humans. You are right, because robots are all about automation. They make machines more intelligent, more capable of evaluating multiplicity of factors and also capable of evaluating qualitative factors, which your normal computer programs cannot. This is the base of Robo-advisory, which is a combination of automated financial advice, automated support and automated execution.

For years, financial advice has been in the realm of one-to-one meetings. You had a series of discussions with your financial advisor who creates your financial profile, then creates your investment matrix and finally arranges the bricks and mortar of investments, protection and tax management to offer a workable solution. Instead, assume that the entire process from your financial profiling to your investment and insurance monitoring will be automated. That is what Robo-advisory is all about.

Understanding the ARQ Engine as a Robo Advisory platform…

The ARQ Engine, which is currently available to registered clients of Angel One, is an example of a Robo Advisory platform. As a registered client member of Angel One, the customer can get the complete benefit of the full gamut of services ranging from defining your goals, creating your plan, deciphering the mix between equity, debt, liquidity and protection as well as actually executing the transactions and monitoring them. There are 4 key things that one needs to understand about a Robo Advisory platform…

1. A good Robo Advisory engine must be a full service platform…

Robo Advisory comes in various shapes and forms in the Indian context. At the first level you have the pure advisory Robo platforms that only give you advice. These platforms will help you define your financial goals, create a financial plan, design an asset mix and track markets. They do not support actual execution of transactions. At the second level, you have the Robo Advisory platforms that combine planning, research and updates. This not only helps you to plan but also to monitor your portfolio on a real-time basis. Lastly, there is the full-fledged Robo Advisory service like ARQ. These services not only help you design your portfolio and help you design the asset mix but also support transactions and execution so that your relationship with your financial plan becomes seamless and robust.

2. Robo Advisory must put you, the customer, at the centre of the Engine…

This is the golden rule of Robo Advisory. You surely do not want an impersonal engine that keeps throwing up great research ideas and portfolio mix suggestions. You need to be sure that you and your requirements are at the centre of the entire activity. Remember, Robo Advisory is not about automation or about advisory. It is actually about you. A good Robo Advisory must ensure that every stage of the activity from defining your goals to creating your plan to monitoring your asset mix to executing the transactions is all done with your interest at the centre of the entire activity.

3. Robo advisory can actually enhance returns if executed perfectly…

Eventually, the proof of the pudding lies in the eating. The Robo Advisory platform has to deliver to the client in terms of better returns and better risk management. If the market index (Nifty or Sensex) gives you 12% per annum, then the Robo Advisory platform has to generate higher returns over a long period of time. There could be temporary hiccups, but over a period of 5-7 years, there must be outperformance without undue risk. That is the real proof you must look at before signing up for a Robo Advisory platform.

Interestingly, Angel One’s ARQ platform has outperformed the BSE Sensex by 34% over the last 6 year period. That is the proof you need to look for when evaluating a Robo-Advisory platform.