The rise of machines

Jun 11, 2019

The first consumer-facing robo-advisers, Wealthfront and Betterment, began operations in 2008, yet neither company offered financial advice to retail investors until 2010. A natural evolution has been the established financial institutions co-opting the technology and user experience improvements of robo-advisers to expand their own businesses. Investment services firms like BlackRock, Charles Schwab, Credit Suisse Group, Invesco, Morgan Stanley and Raymond James Financial have built their own robo-advice offerings.

According to the A.T.Kearney 2015 Robo-advisory Services Study, robo-advisers from almost 100 companies around the globe were managing $60 billion worth client assets and it is estimated that it will hit $2 trillion by the end of 2020. In the U.S. alone, assets managed by robo advisers have surpassed $200 billion.

Robo-advisers in the U.S. have faced three main challenges: high client acquisition costs, ongoing costs of servicing clients, and low revenue yield on client assets. The advertising cost per account acquisition at robo-advisers is approximately $300 per gross new account and $1,000 per net new account. At their presumably low operating margin after they become profitable, the payback period on advertising costs can be more than a decade. Expanded service offerings and higher revenue yields dramatically reduce the operating expense ratio and client asset hurdles to reach the goal of profitability. We estimate the break-even point for robo-advisers that sustain a 50bps revenue yield could be $15 billion-$25 billion of client assets, 38%-63% lower than the break-even point for a robo-adviser that charges 25 bps. Not surprisingly, many robo-advisory firms are still unprofitable.

Robo Advisory in India

Robo-advisory platforms aim to offer low-cost investment services, devoid of human judgement. They target tech-savvy retail investors and millennials with a bouquet of products such as ETFs, stocks, mutual funds, along with services like auto rebalancing, and goal-based planning.

Since the introduction of the direct share class in 2013, a number of players offering direct plans have sprung up. One of the earliest in this space was Invezta, followed by Kuvera, ORO Wealth, Clearfunds (now MobiKwik), and Paytm Money and Groww. Some offer regular plans and earn from AMCs in the form of trail commissions. Portals like Uppwardly, Scripbox, Arthyantra, Roboadviso, FundsIndia and Fundsupermart offer regular plans; ET Money offer regular and direct plans.

In addition to mutual funds, platforms like FundsIndia offer NPS and PPF, corporate fixed deposits and direct equities. ET Money offers personal loans and insurance schemes. Those who only offer mutual funds as of now, are likely to provide more products going ahead.

Since a lot of these users are first-time mutual fund investors, robo-advisory has helped augment the industry’s penetration. More than 70% of investors who initiate their KYC on Paytm Money are from the B30 cities. With over 10 lakh investors, Paytm Money is reaching out to an investor segment which is untapped. Most of its users invest Rs 4,000 to Rs 6,000 annually.

ET Money was launched in 2017 and has over 40 lakh users. According to an ET Money official, the app is registering the highest new SIPs in the robo/online/app space. It uses a selfie video KYC which helps it process KYC for first-time mutual fund investors faster. Besides mutual funds, it offers a facility called loan pass whereby customers can avail a loan of Rs 2 lakh and withdraw this amount in multiple installments as and when they require the money. For a personal loan of up to Rs 20 lakh, it has partnered with Ratnakar Bank. Besides, users can also track their expenditure made on debit and credit cards.

Most platforms offer value added services like alerts, portfolio rebalancing, portfolio reporting and goal tracking for premium accounts. Arthyantra offers online financial planning services. Based on your current financial situation, goals and investment horizon, its algorithm-based tool ARTHOS recommends a set of funds to help you reach investors goals. Direct plan platform MobiKwik too offers a set of model portfolios to choose from, depending upon the user’s risk appetite.

Some websites also allow investors to move their existing regular plan investments in direct plans. NJ India’s B2B platform ewealth offers a host of services such as inter AMC switch, transaction through SMS/email, asset allocation-based portfolio called MARS, mobile app, and dematerialization of shares.

Then there are B2B and B2C platforms offered by national distributors NJ India, Prudent, FundsIndia and iFAST, to name a few. B2B platforms are for distributors who wish to offer online services to their investors. FundsIndia offers B2C services, where clients get online access to their portfolio, along with the ability to transact. Bajaj Capital has launched its online investing portal to complement its physical advisory.

Many platforms offering regular plans offer their services for free as they receive commissions from fund houses. Typically, most robo-advisers offering direct plans don’t charge for simplified accounts, Kuvera and Zerodha’s Coin are cases in point. For value added services, some charge a flat annual fee or a transaction-based fee.

Regular Versus Direct Robo-advisers

There is a misconception that robo-advisers will disintermediate the traditional advisory model. Banks, IFAs and national distributors are continuing to show robust growth in client assets despite the rise of robos. Brick and mortar advisers are building their robo arsenal to take on the competition. Many distributors have tied up with BSE StAR MF, NSE MF II and MF Utility platforms to offer digital transactions to clients. Given that the penetration level of mutual funds is low, there is sufficient room for different players to thrive.

Depending on the business model, experts estimate 4-5 years for as breakeven. While robo-advisers offering regular plans have some visibility of revenues as their income is tied to the quantum of assets, those offering direct plans have to provide ancillary services or offer more products to breakeven.

Getting a fee from customers every year could be a challenge, especially when the portfolio is underperforming.  Sustaining solely on direct plans without charging fees is not sustainable, unless the players have a plan to monetize it.

According to industry estimates, the cost of acquiring one client in India is anywhere between Rs 2,500 and Rs 7,500. Again, that could vary depending on the organization. In developed markets, the break-even point for robo-advisers that sustain a 50bps revenue yield is estimated at $15 billion-$25 billion of client assets.


Much of the growth of robo-advisers in the U.S. occurred over the past nine years, which gives the impression that investing with robo-advisers may outperform financial advisers. But do remember that a bull run contributed to sentiment.

Robo-advisers and financial advisers tend to be portrayed as mutually exclusive, when in fact they are complementary. Generally, robo-advisers are more efficient in computational-intensive tasks such as dynamic portfolio allocation and auto-rebalancing. For financial advisers, incorporating robo-advisers into their practice can free up time to pursue tasks that contribute value to their clients, such as playing the role of behavioural coaches. The growth of robo-advisers may actually be beneficial to financial advisers because it highlights one of the most valuable contributions that an adviser can bring to their clients: helping them overcome their behavioral biases.

Adoption of technology helps in faster transaction execution, cut costs, eliminates paperwork, minimizes errors, and helps the industry scale up by lowering costs. Distributors and advisers would do well to complement their services with digital capabilities to provide a seamless experience to clients. Irrespective of the rise of robos, we believe that the human element in advisory cannot be completely eliminated.

You can access more such insights in the India Markets Observer. All you have to do is register and gain free access to the entire online publication.

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