Investing is never easy and any money related decision is always very critical, in fact, we have seen people availing the services of financial advisors and wealth managers over the years for managing their money. But in the recent past, we have also seen a huge traction in the popularity of Robo-Advisors, the same will keep on accelerating with more and more technological enhancement happening in the financial services domain.

Live TV

Loading...

So, should you decide to use a robotic investment advisor? Well, that depends on your unique situation and goals and the whole debate of which option is best may never end because each has its own pros and cons and both can work well under different circumstances and depends on the investor’s behaviour and investing style.

Algorithms versus Wisdom:

A robo-advisor uses algorithms to do your financial planning and plan out the right asset allocation strategies which suits your risk profile and aim to achieve your financial goals. So, the foundation of a robo-advisor is based on a passive model of investing not aiming to outperform the market, with time it will change. Whereas an expert in the filed i.e. a good financial advisor will work more minutely to help you with the timely strategies for getting better returns and outperform the markets. The most important point in the whole debate is the use of wisdom versus using the algorithms, the robo advisors work on the algorithms and analytics for doing complex calculation and dishing out patterns and solution but it only analyse the data you put in the system and what data needs to be put in requires wisdom which comes from experience. But, with constant machine learnings algorithms driving the robo-advisors will also become more intelligent command greater credibility, but the Robo-advisor will have to go through that phase in building that credibility over time.

So, when the stakes are low and when you are new to the financial world wanting to taste the waters, robo-advisor will suit you better. But on the other hand, investing is always a long-term thing because your life events will keep on changing i.e. right from getting your first job, buying your first house/car, getting married, having kids, their education and your retirement planning etc. These patterns will keep on changing and call for a professional help which comes with greater accountability and expertise thereby calling the need of a financial advisor.

Emotions and Behavioural impact on our financial decisions

Robo-advisors are equipped to handle a standard set of investors having specific needs and thereby lacks handling the emotional behaviour of an investor. As you know, emotions keep influencing the behaviour of an investor involving every minute decisions of their day to day life and your relationship with money defines your investment decisions.

So, for example, what will you do if you hit a jackpot or receive a bonus or some surplus cash or when you blessed with your first baby? Like many Indians, won’t you start thinking of buying the next i-phone with that extra cash or plan to invest in your baby’s name instantly? Almost all the above-mentioned events have a huge emotional outcome and many-a-times it has been observed that people end up splurging that extra money than using it wisely or people fail to invest in the right financial product which suits their objective like kid’s education.

The emotions like using money and living life to the fullest or instant gratification or just investing in a child’s name without understanding whether it is invested in the right financial instrument or not drive their investing behaviour.

So, whether you have made a rational decision or not, is where the role of a good financial advisor comes in picture. A good financial planner will help you take the rational decisions after duly taking in to account your emotional behaviour.

Tailor-made advice versus generic advice:

Robo-advisory is completely based on automation and follows a one-size-fits-all pattern and will take time to bring more customization. As of now, it may offer different model portfolios but the same cannot be customized suiting your individual goals and needs. Whereas the financial advisor will offer you customized plans based on your individual goals and needs. So, you need to do your math first and set your financial priorities first, if your goals and needs are clear and specific then a robo-advisor can help you as against the situation where you need a help of a financial advisor in doing your financial planning.

Which option to choose finally?

Robo-advisors are best suited for a young investor who is new to the whole concept of investing because of a lower fee structure and ease of use. But people make the mistake of comparing investing to other fields where the robos are driving the business say for example booking tickets from a travel agent and how their business got impacted due to the arrival of online travel companies. Booking tickets online save you huge cost and time and a mistake here and there may also not impact otherwise.

But can you compare booking tickets versus investing in a financial product which is more complex and requires more deep study and professional help as stated above. In fact, the emergence of a robo-advisor is great for an investor as it puts the financial advisors under checks and they have to be on their toe. But in case you already have a trusted financial advisor who has been assisting you over the years in creating wealth and is also your go-to person for every financial need you may have, when you are there or when you aren’t, meaning available for you and your family in case of any emergencies. So, if the price you pay for the services of your financial advisor is worth its weight then go for the financial advisor.

So, in short, robo-advisor helps you kick-start your financial journey but as soon the decision of creating wealth in the long run kicks in, go for a financial advisor who brings the necessary experience and expertise to help you achieve your financial goals and someone you can make accountable. And once robo-advisors also proves over time and establish the required credibility and possess the deep knowledge than giving your hard end money to a black box may not be an issue but till then choose carefully.

Rishabh Parakh is a chartered accountant and chief gardener at Money Plant Consultancy.

First Published:Oct 2, 2018 10:04 AM IST