The future is Robo

Way back in 2000, while trading had already moved from the pits (or rings as it was called in India) to the VSAT linked trading terminals, we still did not have any stock broker who allowed or offered internet trading to retail clients. Clients either visited the stock broker office or called on the telephone to place orders.

In those time got launched a new venture called 5Paisa.com. At a time when intra-day trading meant paying the broker 0.10% on either side, this site started straight away at 0.05% and what more, offered you the ability to trade directly from your home without the need to call your broker to know the rates or place an order.

While I wasn’t a broker in those times, I was around them most of the time and the feel I got was that this was not going to change anything. After all, clients depended on the broker not just for rates but also advice and handholding.

And for a few years, they seemed to be right as internet trading really did not take off as one would have expected. But they constantly kept the brokers on the toehold and brokerage rates fell from 1.0 to 1.5% (which most brokers charged for delivery) to miniscule percentages and finally today we can buy stocks without paying a Rupee in Brokerage.

But is the old model dead and buried?

Well, even today you can see brokerage offices having clients who sit through the day and place orders. But the business model has changed and the good old days of the past will never come back.

Disruption of existing model is never liked by those who stand to lose. When Uber got launched, the main skepticism was that these new drivers could never match the knowledge of taxi drivers who knew the road map of the city like the back of their hand. How wrong were they?

The Robo Advisory model in the Mutual Fund / ETF space is very new even in US where everyone is still working on which model will finally be able to take hold as an alternative to traditional advisory model.

In India, there are very few firms (though one tweet suggested that number is 30) and most of them will fold up over time since we are at a very early stage of the financial evolution. Things are changing as seen from the continued inflow mutual funds have seen even as performance has flattened or gone negative.

An Advisor will play a role for now since most investors have no clue as to what they want, let alone what they desire. But as they start understanding the nuances, they will move to cheaper models (Direct for instance) unless the advisor is able to provide real valuable advise rather than saying they will hand hold you through good times and bad.

I have not much of contact with distributors but I do wonder how many have really worked on models to select the best possible funds or do they just sell you what is the hottest running fund / highest return fund.

It’s nice to have goals such as Retirement funding / Children’s Education among others, but how many advisors really have the skillset to deliver especially when they are at the mercy of the fund manager who can under-perform for long because he chased the wrong ideas.

While 100% Robo investing may take time, the future for now seems to the way Vanguard is approaching with a mix of Robo Selection + Human contact. With growing pool of mutual funds / ETF’s, it’s imperative that the fund section / risk ascertainment process be outsourced to the algorithm while the advisor focus on providing the client hope when times are bad and perspective when good.

Rejecting Robo altogether in my opinion is akin to throwing out the Baby with the Bathwater.