You are in India. You have wealth to be managed. Can we make the following assumptions about you?
- You are a rational investor– You know the choices and are most likely to make the rationally correct one, with a little bit of help – at least if the choices are narrowed down for you.
- You know what the current risk-free rate is, and understand that you may not expect even 50 -100 bps over and above that unless you take some risk (have I lost you already?)
- You understand what risk is. You know risk and volatility are not the same things. Equities have implied volatility and you are prepared for it! (Don't go just yet!)
- You know what your goal is. It is creating more wealth. No, let's preserve - if in the process we make something, good for us. Or, let's say, it is saving for retirement. Actually no, it is saving enough after you have travelled the world, fulfilled your worldly duties. At the least, it is saving for a rainy day. Chuck it, it may just be saving After all people can erode what they have. (err..mmm...)
- Most importantly, after you set up your plan, you stay the course and don't vacillate.
Actually, if you are all of these, you are a robo yourself. Congratulations, you don't need anyone to manage anything for you. If you are not, read on.
Before writing this post, I read many on the Internet. Some in India have reproduced what they have read about Schwab and Vanguard and seem to think Robo advisory is cost saving! That, I am afraid, is alarmingly untrue.
Do remember that after all, some humans have created those algos that choose the funds and, at the helm of the Firm again, there exist some humans who are running a FOR PROFIT organisation.
Robos are cost saving – for the Firm that offers these services because it does not need to engage human employees at least for some portions of the service they provide. They were not built to save your cost. Common, you can't be that naïve.
In fact, I would say, keep the cost parameter out of the discussion completely because that's a tricky one. What with everyone debating e-commerce models and accusing them of enticing customers with discounts now, only to rope them in and charge later.
Also, India is not a large Index-based passive fund management market. Creating Alpha is still in vogue and will continue to fascinate for as long as there is volatility (which I suspect is a very long time). So, even if robo advisory were less costly, that would (should) not be the reason for choice.
In my experience as a private banker, the following are the DEFINITE value-adds a human advisor can make:
- She/He can set the return expectations in accordance with your risk profile. Please don't take this lightly - It is a continuous and difficult process. Often the client assesses incorrectly, his ability to see volatility. Sometimes, the temperament allows for higher volatility and higher returns and sometimes it just doesn't. The age-old Asset Allocation theme is golden and will always be.
- She/He can help you to prioritise your goals. We recently recommended that a NRI client of ours pay off the home loan he had taken as a resident as opposed to topping up his Equity investments because that is what was right for him.
- She/He can clarify tax implications with the help of a CA's opinion where necessary. In a country where there are different taxation rates for dividend, interest, capital gains for listed/unlisted securities- long term, short term, gains on , shares, debentures - convertible and non convertible, suffice to say that clients will have questions and they need to be clarified. Even firms who calculate your Capital Gains involve humans.
- The most valuable job that your wealth manager does for you is help you to STAY on COURSE during difficult times, or make surgeries if required after discussions. Over the last decade, we have avoided multiple debacles of panic selling by way of these meetings and joint decision making.
- Your wealth manager works with you across life stages, knows your changing needs and can alter plans and strategies to suit them. Your old balanced fund investments can give you monthly tax free withdrawals, you don't need a MIP or a tax free bond; Your Profits need to be reinvested to see the magic of compounding; If you must liquidate a portion of your holdings to buy a lifestyle item, it is the laggard in the portfolio that needs to go and so on...
Creating and preserving wealth is a long journey. What will really be of help (and NOT be competitive) is technology in any form that enables wealth managers to assist in servicing the client better. But that's assistance, not advisory.
I don't think there is an argument on Human vs. Robo. There can never be. Robo is what Robo does and Robo does what man thinks.
P.S.: Ofcourse, if you have just started working and you want to start some SIPs and save up for a car or a vacation, go right ahead and engage a Robo and chug along with it.
Image: Human Evolution to become a Robo? Not my choice. Yours? Courtesy: Creative Commons
(Everything that I write are my personal views, not to be construed as anyone else's.)