Last Updated on September 11, 2021 at 6:24 pm
In this post, I discuss the basics of robo advice, its pros and cons for the benefit of the interested layman as a lead up to the launch of the freefincal robo advisory template next week.
What is robo advisory?
Suppose you wish to plan for your daughter’s college expenses 10 years from now and wish to know how much has to be invested and where. Let us consider the inputs and outputs of this calculation.
Inputs:
1: The current cost of the education you have in mind (hard to come up with a number as this can change down the line, but we need some input to start with).
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
2: The rate at which this cost increases year upon year.
3: The return expected from the investment.
These three inputs are enough to provide the basic output: monthly investment necessary.
Even in this simple calculation, notice that input 1 is personal and inputs 2 and 3 are technical. While input 2 is only guesswork, there is a lot more to input 3, the return.
The return expected from the investment is not just a number. We need to decide how much to invest in equity and how much in fixed income. We need to know the kind of return we can expect from these over 10 years. Then we need to decide how to vary the equity allocation and fixed income allocation as the time for college admission nears. We also need to factor in taxes.
All these are possible in the several calculators available here. In a calculator, you the user enters both the personal data and technical data.
A robo-adviser is a calculator or piece of code that accepts only personal information and pre-determines the technical input, depending on the age of the person, investment tenure and risk appetite of the person (if sought).
It then outputs an investment strategy (asset allocation for each year) with product categories and products to invest in. If you invest “via” the robo website, then they also can remind you to rebalance the portfolio periodically and also fund change recommendations.
The trouble is, even if the robo adviser suggests commission free products (eg. direct mutual funds), they often recommend only certain types of products for all needs. For eg. they would recommend only a liquid fund or ultra short term fund for a short term goal and not a bank FD or RD because that will not benefit them in any way. So it is important to recognise that there is a conflict of interest involved in direct robo portals also. This was one of the motivating factors for me to work on robo template.
By offering robo template that is free to use and unattached to any transactions, I can focus on the limitations of robo advice and try to make them better without any fear of favour.
Pros and cons of robo advisory
Consider for a moment what an MBBS degree or a financial planning certificate does. It teaches and trains the student to react in “certain ways” if they notice “certain sets of symptoms”. This is pretty much how an algorithm works at a basic level. So there is a robo element present in every profession. In fact, it is a pretty strong element.
A competent professional is not just a well trained professional. She should be able to adapt and modify her recommendation depending on the needs and status of the patient or client.
The common complaint is that a robo or a piece of software will not be able to do this. This criticism is true in many instances, but this only means that the code does not factor in all relevant situations and needs constant modification. More importantly, the alternatives to robo advice are: true DIY (not AIFW-DIY) or working with a competent, conflict free financial planner. Not easy at all!
When it comes to financial planning, robo advice will work extremely well for young earners with uncluttered portfolios. The challenge is to make it work for older investors and especially those who are retired. This has been one of my core objectives. This area needs sustained efforts.
The first job of a robo advice software is to try and capture all the elements imparted to a financial planner during training. The second job is to capture other factors that come to light only when the financial planner interacts with clients and works on real cases.
The first job is more than possible and has been done by many. And in my case, thanks to some awesome beta-testing by friends, I am reasonably satisfied, but will leave the judgement to you. The second job is an ongoing task for everyone.
The biggest advantage of robo algorithm is that the user does not have to worry about the competence of a planner at least with respect to basics.
The competence of a planner with respect to course corrections is an unknown when we engage them. Wrt robots, the mathematics of investing is already coded in. The user should be able to intelligently modify the inputs as per their changing needs. Users who cannot do this, need to work with a “competent: human advisor.
So a DIY element is mandatory when it comes to robo advice. The user must strive to understand the scope of the algorithm from day one in order to use it better.
To conclude: robo advice plays a big role in our lives even if only consult human professionals. Choosing a good robo platform is as hard as choosing a good financial planner. Let’s Face It: Everyone Needs Do-it-Yourself Skills!
The challenge for robos is to handle a wide range of inputs and cough out a workable plan (free from conflicts if possible*). This is an ongoing process just as a financial planner cannot afford to stop learning.
- My friend Raghavendra Shenoy is fuming right now 🙂
Should I use robo advice?
You can if you are young with a simple portfolio. If you are not so young with a diverse portfolio, then you must be able to judge the quality of advice given and understand the plan of action proposed. Else, approach a human planner.
If you are one of those guys looking for an explanation every time the market falls, a robo will not help. Certainly not mine.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)