Robo Investment Advisory — The next big disruption in the Indian FinTech?

In this piece, let’s discuss the Investment Advisory Market in India — problems, opportunities, their offerings, traction, and business model, with a prime focus on Robo-advisory FinTechs.

Few of my friends manage their own stock market and mutual fund investments, they research the segments, pick their stocks/Mutual funds with the hope that they will outperform markets or beat the FD returns. Many other friends are still struggling with how to invest their money, and need some help and guidance.

Here’s where Expert investment advisory (Human-based) or Robo-Advisory (Algorithms-based) kicks in, for the people who don’t want to put time and effort into managing their investments and at the same time, want a good return for their investments.

Problems and Market Size:

Currently, there are more than 18 Million active equity investors as per NSE, who trade at least a year, and 22 Million unique active Mutual Fund investors in India. The big discount brokers like Zerodha (~3.5 Million accounts), Upstox (~2 Million accounts) along prominent Investment Apps like Groww, Paytm Money are serving the Millenials and GenZ market.

While these big startups have solved for the distribution of these financial products, the advisory space seems to be a lot more fragmented. Many firms like Zerodha are trying to put immense effort to educate people and provide tools that help retail investors make better trading decisions, but there is still a big gap in the investment industry.

We might have heard multiple times, that only ~1.5% of Indians invest, but an interesting number to note is that there were only ~4.22% Indians who filed income tax returns last year, which makes the Total Addressable Market to be much smaller than it seems as we can’t expect people who don’t even file their taxes to come and invest a huge chunk of money through these Investment Apps. This means that the potential opportunity to attract investors to capital markets is between 35 to 40 million Indians . The next problem worth solving is helping these people make better and informed investment decisions.

Now, in the advisory market, not every one of these 35 to 40 million would like to take advisory services, as only 20% of these populations have more than 5 Lakhs income and as per CFA Retail Investor research, only 31% are willing to listen to primary advisers. We get the Total Addressable Market (TAM) of the digital advisory market who has a significant amount of wealth as 2.48 Million or 25 Lakhs. Not very promising, duh!

A large revenue per user (ARPU), can compensate for this very easily, making it still a lucrative market, which can eventually come from revenue models like % based fees on AUA(Assets Under Advisory), as it exists in the US.

Regulatory Landscape:

In India, traditionally, distributors of products have been advisors as well — Mutual fund distributors advising on mutual funds, brokers advising on stocks, insurance agents advising on insurance policies, and so on. Many times, distributors also earn from the manufacturer but this presents a significant conflict of interest as the distributors will only try to sell high yielding financial products which have fat commissions.

SEBI has been trying to avoid this conflict of interest by segregation of advisory and distribution business. It says that you can be either be a distributor (stockbroker, mutual fund distributors) or an Advisor (Registered Investment Advisor or Research Analysts) and recommends earning money either through distribution commissions/fees or advisory fees.

RA (Research Analysts) are professionals/firms registered with SEBI, who can research on various asset classes or investment products and can give generalized investment advice to the public while an RIA (Registered Investment Advisor) is also SEBI-registered, can give personalized investment advice, tailored to an individual as well as generalized advice.

As per SEBI, both Expert investment advisors or Robo-Advisors need to have the RA or RIA license.

Let’s now move on to what the Indian FinTechs are up-to in the Advisory space and their business models as well:

Indian FinTechs: Evolving Robo-advisory landscape

Typically, Platforms that recommend an automated and personalized portfolio based on an investment theme or strategy are considered as Robo-advisors.

The Advisory provided by Indian FinTechs can be categorized broadly into three types:

  1. Mutual Fund-Based Robo Advisory
  2. Equity-based Robo Advisory
  3. Comprehensive Wealth Advisory (with Expert Advisory)

They offer risk-profiling and goal-based suggestions to their customers. They are suitable for new investors, who are relatively risk-averse but need guidance on the most optimal investment mix for them.

Most of them aren’t generating any revenue and focussing only on user acquisition riding on VC money and direct mutual funds proposition. Cross-selling revenue-generating products like Digital gold and subscription-based models might be the ultimate revenue stream for them.

Examples: Scripbox, Niyo Money, Fisdom, Orowealth, and Kuvera.

They focus purely on equity portfolios consisting of multiple stocks/ETFs and allow easy execution through multiple brokers. They are suitable for investors with a fair understanding of equity markets, who have moderate to aggressive risk profiles but prefer the guidance of experts to design the most optimal portfolios. Some of them offer thematic portfolios which are designed around specific sectors or investment philosophies.

Pricing is usually fixed, either as an annual subscription fee or as a transaction fee on each portfolio investment.

Examples of such solutions include Smallcase, Tavaga, Fyers, and Markets Mojo.

Smallcase has created a publisher platform where famous Investment advisors like Alok Jain from Weekend Investing, Deepak Shenoy from CapitalMind, Teji mandi by Motilal Oswal can create their own subscription-based portfolios and they have seen great traction so far with 25+ Lakh investors.

The short-term trading advisory is still whitespace, where not many FinTechs have evolved. Currently, most of the traditional short-term trading advisory is done either via Phone calls or Telegram/WhatsApp groups. The management of subscriptions, collections of payments, and manual execution of orders remain the problems to be solved.

A comprehensive wealth advisory is one, that focuses on aggregating the financial net worth of the customer, understanding their risk appetite, and then offering complete wealth management services. This can be at an individual or family level. In addition to fund-based portfolio recommendations, they also offer financial planning, portfolio management services, and human financial advisory with wealth, and insurance planning.

Prominent names include IndWealth and CubeWealth.

The revenue model is primarily subscription fee-based for a packaged combination of services. IndWealth has a variety of subscriptions starting from Rs. 400/month for a range of their features and services.

The Expert advisory is still preferred by many people as they need someone to guide them for everything, and that’s a kind of human behavior to trust other beings. Just like zoom-based teleconsultation has been a new trend in the Health & fitness industry, who knows, we can see similar trends in expert-based investment advisory as well.

Recently, Kunal Shah did a survey to understand the advisory market, and most of the people were reluctant for advisory services, even if by trusted brands like CRED! Hinting it to be quite a tough market.

A point to note here is, Algorithmic trading is way different than Robo-advisory and from a retail point of view, the regulations don’t quite allow the startups to place trades on behalf of their clients, and with very few programming-savvy traders, building for them is like chasing a very small market of only a few thousand traders. Further, high risks, costs, time, and efforts are major roadblocks to the mass adoption of algorithmic trading.

A Nascent Market as compared to the US

At this stage, the assets under advisory (AUA) for the Indian advisory segment are quite low compared to most advanced markets, such as the U.S. In many ways, this is not surprising since Robo advisors entered the U.S and Europe markets over 10 years ago and instruments for passive investment such as ETFs and index funds have been popular there for many years. Choice of allocation strategies that keep the risk-reward equation optimal, passive investments exclusively in ETFs, and a focus on long-term goal-based wealth creation, have been the primary factors behind their success.

In contrast, there are several behavioral and systemic barriers in India on the road to executing similar models. First one, younger investors who are moving towards Robo advisories may have limited experience with risk and volatility. Second, the share of passive funds, which helped global Robo-advisories grow in the US, is still low in India.

Further, a large professional advisory ecosystem like in the US is needed in the Indian Markets as well.

Growth And Future Outlook:

The number of advisory platforms is rapidly growing in India, hinting that many founders still see opportunity in the WealthTech segment.

In India, there are currently very few Registered Investment Advisors(RIAs) and Research Analysts~2K, and the growth of RIAs and RAs will play a vital role in Expert-based advisory, boosting the supply side. The customer’s unwillingness to pay monthly fees is also a major roadblock to the subscription-based business model.

Macro-economically, growing per capita income, increasing smartphone and internet penetration, and an expected shift in investment behavior from ‘borrow and spend’ to ‘save and spend’, makes India a promising market for wealth advisory solutions in the mid-to-long-term. The growing interest in ETFs and index funds is also a positive for the advisory market, as the growth in US counterparts was primarily fuelled by passive funds.

Personally feel that a blend of algorithm-based recommendations and expert advice will be the key. New ways of community-based investing and trading in the presence of an expert, can also be a trend to look for. Will be interesting to watch out, how the investment advisory market shapes up in the coming 3–5 years!

That’s all for this edition :)

Hit me up on Twitter or LinkedIn! Feedbacks are always appreciated. Always up for conversations and collaboration around FinTech and Banking :D

Passionate about FinTech, Banking, and Financial Markets. Final year Engineering & Economics Student at BITS Pilani Goa.