5 Simple Steps To Select A Good Robo-Advisor
May 10, 2017

Author: PersonalFN Content & Research Team

You have probably read tons of articles on robo-advisors— highlighting the good, the bad and probably even the ugly parts of robo-advisors. And the flood of information has perhaps left you unsettled. And now, you’ve decided to take the plunge into the sea of financial automation, but don’t know where to start?

PersonalFN’s here to help…

A visit to the website of any robo-advisor (by the way, ‘robo-advisor’ is the nickname for automated money management services) will leave you awed with the interactive user interface. Each provider will claim the ease of use, advanced technology, low costs, and so on.

So, how do you separate the wheat from the chaff?

PersonalFN has outlined five steps to zero-in on the right robo-advisor.

Step 1: Identify your need

Financial planning services can vary from simple goal-based planning, to a more comprehensive service of managing your debt and cash flows. Most robo-advisors today are only equipped to handle the former.

So before you get your expectations too high, remember that a robo-advisor may only be able to automate your investments towards new financial goals.

Therefore, if you have not started actively saving and investing towards any financial goals or if you are planning to add new investment goals, then robo-advisors are for you.

Here again, robo-advisory platforms come with different options – some may offer complete automation, while others may offer hybrid services that pair the computer algorithms with financial planners. You need to choose wisely.

If you are looking for simple goal-based planning, the former may help. But, as your investment portfolio and financial needs grow, you may someday require the services of a human advisor or a Certified Financial Guardian. Hence, it would be prudent to select a robo-advisor that offers advanced financial planning (with human interaction) as an add-on service.

Step 2: Shortlist only SEBI-registered robo-advisors

Once you have decided on the ‘type’ of robo-advisor, you need to shortlist such platforms and make sure they are registered as ‘Investment Advisers’ under the Securities and Exchange Board of India (SEBI).

SEBI has laid out stringent guidelines to ensure that investment advisors – both online and offline – offer only ‘suitable products’ to their clients, with proper risk profiling. Under the regulations, the advisor also needs to divulge any conflict of interest in the advice provided.

You need to be wary of mutual fund distributors who act as robo-advisors. Though some may offer the platform free, they earn a commission from the mutual funds they suggest. Hence, there is a conflict of interest and the investment advice may not be completely prudent and unbiased.

Step 3: Take the free trial or free membership

Most robo-advisors allow you to create a free account to explore their services. Some offer the entire platform free, as they earn from commissions. So before you commit your money, either by subscribing to the service or making an investment, you can first take a test drive of the platform.

Doing this, will ensure you get a feel of their platform – whether the user interface is friendly and easy to understand, and if it is free from technical glitches. Though glitches may arise once you start transacting, it will be better if you confirm that the platform moves smoothly before any monetary commitment.

Step 4: Rate the robo-advisor on 5 important criteria

Once you have tried and tested the robo-advisors, it’s time you evaluate them. PersonalFN has outlined five important criteria…
  1. Service offerings
    As mentioned earlier, some robo-platforms may offer you only transactional services, while others may provide you with a host of offline and online personal finance offerings. In addition, some robo-advisors may offer advanced tracking and portfolio rebalancing services. Those that offer a mix of services should be worthy of your long-term financial commitment. However, you need to keep an eye on costs too. Robo-advisors offering advanced services as an add-on subscription will go easy on your pocket as compared to those that charge a lumpsum package.
  2. Unbiased and research-backed advice
    Most robo-advisors will suggest investing in mutual funds as these are the most convenient instruments to invest in and you can allocate your investment among different asset classes. A robo-advisor backed by strong research processes will help you select the right mutual fund schemes. Remember, fund performance should not be the only criteria. There needs to be different qualitative and quantitative parameters that need to be considered before arriving at the top schemes suitable for your portfolio. Robo-advisors that prudently pick the best schemes for your portfolio should rank high amongst those shortlisted.
  3. Established and reputed company
    There is no dearth of robo-advisory platforms as the barrier to entry is low. While the competition is immense, you need to choose wisely, entrust your money to best advisor!

    Don’t fall for the freebees offered such as gifts, lucky draws, attractive discounts or extended subscription plans. You need to opt for robo-advisors who are genuinely concerned about your long-term financial well-being. Care should be taken such that you do not entrust your money with fly-by-night operators. With the immense competition, smaller robo-advisory firms may find business unviable, could shut shop, and leave you in the lurch.

    Opt for robo-advisors backed by established companies in the financial services space. Sound and ethical research processes fully support their investment recommendations. They should be fee-based to ensure that the commissions they earn do not influence their advice.
  4. Query resolution
    The robo-advisor should be backed by a team of experienced customer service associates and financial planners. If you have any query related to the investments you make or if you are facing issues when transacting, your problem should be resolved quickly and professionally. After all, robo-advisors cannot operate all on their own. Human intervention may be needed at some point down the line.
  5. Costs
    Costs play a crucial role when you are planning your investments. Different robo-advisors may charge you through one of the methods below:
    • An advisory or subscription fee (monthly, quarterly or yearly)
    • A transaction fee (each time you execute a transaction through them, they charge you a fee)
    • A percentage of the amount invested. (Popular in the US)
    • A percentage of the amount invested. (Popular in the US)
    • Commissions earned from fund houses of recommended funds

    While the first three forms are upfront one-time costs, watch out for the last option, as the advice here may be biased.

    You can always decide whether the subscription fee or transaction fee is worth your money depending on the quality of advice and services offered. Also, if you have a high quantum of assets, you can avoid investing with robo-advisors that charge you a percentage of your investment value. The costs may end up higher than the one-time fees you would pay otherwise.

Step 5: Make a decision and stick with it

After the crucial evaluation process, now the time has come to pick the robo-advisor worthy to manage your investment. As you have followed a stringent 4-step process to narrow down the list, you may feel there’s little that can go wrong; however, selecting the right platform is just the first step to your financial independence.

Once you set out to achieve your financial goals, keep it on track. Many a times, individuals avail of the services of a financial planner or investment adviser, but are unable to stick with the plan through the entire investment horizon. This can adversely affect their financial well-being.

So remember, once you begin, make sure you stay on until the end. If there are genuine issues with the robo-advisor that warrants an exit, make sure you continue with another. This will ensure that your financial goals are not impacted.

Key Takeaway

Robo-advisors certainly may be a compelling alternative to many sources of traditional advice, and in many cases may be a step ahead of such sources of advice due to their lower costs, well-grounded investment methodology, and alignment with you financial interests.

At the same time, you need to acknowledge that not all robo-advisors are perfect. Their advice may not be fully customisable. Hence, the robo-advisory service you choose needs to be well equipped to care for your investments and financial goals.

If you have not yet zeroed in on a suitable robo-advisor, we suggest you wait, because the best robo-advisor is just around the corner.

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