In mid July, I had the good fortune of being a part of a panel discussion on robo-advisory in India. I was the only representative of a bricks and mortar fee only Investment Adviser on the panel. I was invited onto the panel to provide a perspective of how a fee only Investment Adviser in India today goes about providing investment advice, how client acquisition takes place and the nuances of investment advice that need particular attention.

It was a surprise to me, that the only successful robo-advisory platform in India (whose CEO was on the panel) today was in fact a mutual distributor. The robo-advisory platform did not promote the sale of DIRECT mutual fund plans, but instead generated income from the sale of commission based REGULAR mutual fund plans – making them as per the definition of the latest consultation paper of SEBI simply a Mutual Fund Distributor (MFD) and not an Investment Adviser.

Current robo-advisors in India: As I dug deeper post the conference, I realized that an established economically viable fee only online robo-advisory platform has not yet been established in India. There are online mutual fund investment platforms that are completely free such as Mfutility, which we use extensively for our clients. Mfutility however is only an investment platform and does not provide advise. It requires investment advisors to initiate orders in DIRECT mutual funds and clients to accept the same online. A few promising start-ups in the space however do exist. Kunal Bajaj’s clearfunds and Ram Kalyan Meduri’s jama are case in points. clearfunds charges a flat fee of Rs 199/- per transaction. Their website says there are no charges for switching or redemption. For investors investing amounts in excess of 1 lakh Rs per transaction, the cost works out to be 0.20% -which is very reasonable. Will need to call their customer line and understand, what happens if the platform advises me on my Rs 50/- lakh portfolio and lets say, I first ask the robot to invest all the 50 lakh Rs in a liquid fund and then carry out switches from the liquid fund to other mutual funds (within the same fund house). Since there are no charges for switching, I will be charged only 199/- Rs for the entire 50 lakh Rs – which indeed is very very cheap. I need to understand in greater detail how client risk profiling and client goals are incorporated into the financial plan in clearfunds. jama on the other hand charges an annual retainer fee of 0.49% of the portfolio on its Platinum plan – their only plan that does all the functions required of an Investment Adviser. This is not very different from existing brick and mortar fee only investment advisory services that exist in the Indian market today. Dear clients, I encourage you to download these robo-advisory apps/login to their websites and experience for yourself how robo-advisory is evolving in India today.

Nuances of investment advice: It seems very elementary to construct a goal based frame work where the client states his goals and the adviser/computer spits out a combination of investment assets that will meet these goals. Has the adviser assessed the client’s emotional comfort with risk ? Is the advisor confusing a client’s emotional comfort with risk (pretty constant and independent of time) with the client’s perception of risk (time and market dependent). Have the unique circumstances applicable to the client been taken into account? Does a client have a large exposure to real estate, are stock options from his employer a significant portion of his net-worth? What are the business risks lurking in the client’s place of work/family business? and many other unique circumstances that require deliberation. An adviser must be able to have a nuanced discussion to ferret out these aspects from a client. Advice in the absence of such a nuanced discussion is lacking in fiduciary intent. Mapping out these nuances is one of the values that an investment adviser delivers – and advisers (whether brick or mortar or robo) who are able to do this well will more likely succeed.

Uncertainty in outcomes: Advice and investment advice in particular, entails decision making under uncertainty. Borrowing from Nassim Taleb, the outcome for the recipient of advice (advisee) is uncertain while the outcome for the advisor is certain, especially under the current investment advisory fixed fee construct that is practiced the world over. This duality in the uncertainty/certainty of outcomes for the advisee versus the advisor presents skewed incentives. We must ask ourselves a fundamental question– “why are investment advisors in business?” I think the answer is – “to improve investor outcomes”. How then can a fixed fee (% or flat) paid a-priori be justified when the long-term outcome of our advice is uncertain? Shouldn’t a large part of our fee also be uncertain and based upon the investment outcomes our clients experience?

Let us conduct a thought experiment and for a moment assume that we have the ideal investment advisor who/which is defect less and unbiased. This adviser (whether bricks and mortar or robo) has had detailed and nuanced discussions with the client and is able to come up with an Investment Policy Statement (IPS) that is defect less and of course unbiased. The advisor then proceeds to make unbiased investment recommendations based on the IPS. Does this guarantee desired investor outcomes? It hopefully improves the chances of superior outcomes but cannot guarantee so. This would mean that even the world’s best advice is subject to uncertainty of outcomes. These uncertainties must be incorporated into fee structures so that advisers get paid only for the long term successful investment outcomes in their client portfolios.

Robo advisory with deep artificial intelligence and cutting edge algorithms is I believe around the corner. They could potentially bring down costs and provide significant competition to and even work alongside brick and mortar advisers. However the fundamental question of uncertainty of investor outcomes needs to be built into fee structures such that investor outcomes improve and the best advisers thrive and poor advice is dumped. Evolving regulation and the consensus that there is a difference between selling (for a commission) and advice (for a fee) on a financial product, will hopefully allow market forces to chose the best advisors and allow poor advise and commission based selling die natural deaths.