Investing in the digital age: The rise of robo-advisors

The world of investing has been transformed in recent years by the rise of robo-advisors. These automated investment platforms offer a new way to manage your money, without the need for human financial advisors. But what exactly are robo-advisors, and how are they changing the investment landscape?

What are robo-advisors?

Robo-advisors are automated investment platforms that use algorithms to create and manage portfolios of investments for their clients. These algorithms consider a variety of factors, such as a client's age, risk tolerance, and investment goals, to create a portfolio that is tailored to their specific needs.

Robo-advisors typically charge lower fees than traditional human advisors, as they don't require the same level of hands-on management. Many also offer a variety of investment options, from stocks and bonds to alternative investments such as real estate or commodities.

The rise of robo-advisors

Robo-advisors have become increasingly popular in recent years, as more investors look for low-cost, automated investment options. According to a report by Business Insider Intelligence, robo-advisors are expected to manage more than $1 trillion in assets by 2023.

One reason for the popularity of robo-advisors is the convenience they offer. With just a few clicks, investors can open an account, answer a few questions about their financial goals and risk tolerance, and start investing. The platform then creates a customized investment portfolio and manages it on an ongoing basis, rebalancing as needed to keep the portfolio aligned with the client's goals.

Robo-advisors also offer transparency, as clients can easily see the underlying investments in their portfolio and how they are performing. Many robo-advisors also offer educational resources to help investors learn more about the markets and investing.

How are robo-advisors changing investment management?

Robo-advisors are changing the investment management landscape in several ways. One of the biggest impacts is their ability to democratize investing. Traditional human advisors typically require a high minimum investment, which can be a barrier for many people. Robo-advisors, on the other hand, often have lower minimums, allowing more people to access professional investment management.

Robo-advisors are also changing the way that investment advice is delivered. With traditional advisors, clients typically meet in person or over the phone with their advisor to discuss their investment goals and receive advice.

Robo-advisors, on the other hand, rely on algorithms to make investment decisions. This means that investors can access investment management services without ever speaking to a human advisor.

Another way that robo-advisors are changing investment management is through their focus on passive investing.

Passive investing is an investment strategy that involves buying and holding a diversified portfolio of investments with the goal of matching the performance of a benchmark index, such as the S&P 500. This approach contrasts with active investing, which involves trying to beat the market through individual stock picking or market timing.

Many robo-advisors favor passive investing because it typically results in lower fees and can deliver strong long-term performance. By using low-cost index funds or exchange-traded funds (ETFs), robo-advisors can create a diversified portfolio that tracks the performance of a specific index or asset class. This approach also reduces the potential for human error, as the investment decisions are made by algorithms rather than human emotions or biases.

Finally, robo-advisors are changing the role of human advisors. While robo-advisors can provide investors with a low-cost, convenient way to invest, there are still some situations where human advice may be necessary.

Robo-advisory in India

In India, the rise of robo-advisors has been slower than in some other countries, but the trend is picking up steam.

According to a report by the consulting firm KPMG, the robo-advisory market in India is expected to grow at a compound annual growth rate of around 45% between 2020 and 2025.

One reason for the slow uptake of robo-advisors in India is the cultural preference for face-to-face interactions and personal relationships. Many Indian investors still prefer to work with a human financial advisor, rather than an algorithm-driven platform. However, as younger, tech-savvy investors enter the market, this trend is likely to change.

Another factor that has slowed the growth of robo-advisors in India is regulatory uncertainty. The Securities and Exchange Board of India (SEBI) has yet to issue clear guidelines on the use of robo-advisors, which has made some investors wary of using these platforms.

Also Read: Mastering the art of investing in a volatile market: 5 strategies for success

Despite these challenges, some robo-advisors have already made a mark in the Indian market. One example is Kuvera, a Bangalore-based platform that offers a range of investment products, including mutual funds, stocks, and bonds. Kuvera uses an algorithm to create a customized investment portfolio for each client, based on their financial goals, risk tolerance, and investment horizon.

Another Indian robo-advisor is Goalwise, which offers goal-based investing solutions for its clients. Goalwise creates investment portfolios that are designed to help clients achieve specific financial goals, such as saving for a child's education or retirement.

In conclusion, robo-advisors are changing the investment management landscape in a big way, offering investors a low-cost, convenient, and transparent way to access professional investment management. While the trend has been slower to take hold in India than in some other countries, the market is expected to grow rapidly in the coming years.

As younger, tech-savvy investors enter the market, and regulators provide clear guidelines on the use of these platforms, robo-advisors are likely to become an increasingly important part of the investment landscape in India and around the world.

Shuchi Nahar is a Certified Research Analyst. She can be found on Twitter at @shuchi_nahar

Note: This article is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related investment-related decision.