What is Robo Advisory? Types, Benefits & Documents Needed

An investor education & awareness initiative.

Imagine having a robot to do all your domestic chores, drive you to work, set your reminders and fix your appointments. With today’s advancements in robotics technology, our lives are likely to become much easier, with a number of our mundane tasks being taken over by robots. Does this apply to investing? Yes, it does; here’s how.

About robo-advisory

Let’s say you want to plan for retirement. You seek an appointment with a financial planner who asks you the relevant questions and creates a plan for you. This plan tells you how much wealth you need to accumulate for your retirement and how much you need to save and invest every month/quarter/year to accumulate the amount needed. The planner will recommend investment products that are suitable for your investment risk profile, time left to retirement and other parameters.

Now, what if all this were automated? All you need to do then is think things through, fill in the necessary information, perhaps using a simple form on a website, and there you go! In just a few moments, an intelligent computer-based algorithm will devise a complete plan for you that is just as comprehensive as the one your financial planner would provide. This is what robo-advisory is all about. Think of robo-advisory as an automated financial advice using algorithms that understands your risk profile and financial needs and provides you with a suitable financial plan. All this can be done from the comfort of your own home, sometimes just using your mobile phone, with minimum human intervention.

Some of the popularly known platforms are Upwardly, Roboadviso, Wealthy, Fundsindia, etc.

Types of robo-advisory services

- Auto-pilot – The auto-pilot service is slotted into packages with a specific goal for each package. For instance, a robo-advisory service provider may offer four packages – one for equity investing, another for debt investing, a third for tax saving-based investing and a fourth for gold investing via gold exchange-traded funds (ETFs). You select the preferred package based on your requirements.

- Direct plan-based – In a direct plan-based offering, you invest in the direct plans of mutual funds and are not charged distributor commissions (which are involved if you choose regular plans). This robo-advisory service recommends investment options based on your financial goals. The robo-advisory firm typically levies a modest charge for offering this service.

- Goal-based advisory – In a goal-based offering, considering the information you provide about your financial goals and risk-taking ability and affinity, a suitable asset allocation (proportion of investment between debt and equity based on the investor’s risk profile) is computed. Based on this, suitable equity and debt investments that can help you fulfill your financial goals are recommended. You then have the option to make your investments online.

- Full-service – If you need a detailed analysis of your personal financial situation in terms of your investment risk appetite, your existing investments and wealth, loans, savings and cash flows, you should opt for full service. You will fill in a detailed online questionnaire; your responses will be processed to arrive at a holistic financial and investment plan that is completely customized to your requirements. The plan can, for example, include solutions to fulfill your financial goals, minimize your taxes, achieve an optimal asset allocation mix between debt and equity and cover your insurance risk.

Of course, there is no one best way of doing everything and, hence, you can select one or a combination of offerings depending on your needs.

Robo-advisory benefits

Avoiding human errors: Since robo-advisory involves automated/algorithm-based advice, it is not prone to human error.

Avoiding biases arising out of emotions: Sometimes, just like an investor, even financial advisors get carried away by short-term market movements and end up over-reacting and making unsuitable financial recommendations. Since computer algorithms cannot understand or respond to emotions, their reliance on hard data, mathematics and science frees them from the possibility of making such errors.

Sophisticated platforms: Thousands of investment products are available from which to choose. Assessing each product not only in terms of its historical performance but also in comparison to other products in its category and across categories is not possible without the use of technology. Here is where robotics helps. Using pre-programmed selection parameters, robotics algorithms can select and recommend suitable investment products among the thousands available in a matter of seconds.

Quick and easy: Using robo-advisory services is easy. All you need to do is log in to the app or platform you have chosen and fill in your requirements and necessary personal details. You will receive a report promptly.

Affordable: This sophisticated and accurate service is available at an extremely affordable price. Indeed, it can be significantly cheaper than other available personalized wealth management services. Being affordable means more investors can take advantage of this service.

Access to both passive and active investment management: Robo-advisory offers investment options under both active and passive investment modes. Under active investment, recommendations include mutual funds where the fund management team makes investment decisions based on research and analysis within the fund’s investment objective. Passive schemes include index funds and ETFs where the fund manager does not make any investments based on research. He or she simply replicates the index being tracked. Robo-advisory services offer both these options.

No sales push: The decision to invest or not remains entirely with you. Robo-advisory merely helps you develop a financial plan and recommends investment products. You will decide whether you want to go ahead and make the investment or refrain from investing.

Robo-advisory pitfalls

Limited coverage: Financial services cover a broad spectrum of offerings, including financial planning, investments, loans, insurance and taxation. At present, robo-advisory services in India are available mainly for delivering investment advice. Within the universe of investment products, currently this service is available primarily for mutual fund products.

No human interaction: For those who want the comfort of speaking to an investment advisor and are looking for answers to their specific needs, this service may not be suitable. Additionally, the lack of human interaction means that the finer/more subtle human cues that today’s technology does not comprehend can be missed. This is not usually the case during an actual physical interaction between a financial planner and an investor where empathy and human understanding may play a key role.

Limited customization: Although these platforms can understand your needs and requirements to a certain extent, sometimes you may find that they may not meet the level of customization required by you.

Wealth maintenance and growth needs: Mature investors in the wealth maintenance/growth stage may not find this suitable since their needs can be complex.

Who should use robo-advisory?

Robo-advisory largely implies assessing the recommendations made by a computer and then making investments on one’s own. For sophisticated/tech savvy/DIY (do-it-yourself) investors, robo-advisory is suitable since they have the knowledge to make investment decisions and are familiar with the investment process. However, today this service cannot entirely replace the need for a financial advisor. For novice investors, robo-advisory may not be suitable as they may need to be personally guided through multiple processes.

Documents needed

Applying for robo-advisory services is no different from making any investment or applying for any financial advisory service. When you use robo-advisory for investing only, you will need to be KYC (know-your-customer) compliant. For this, you must submit your proof of identity proof of address and Permanent Account Number (PAN), among other documents, to the robo-advisory company whose services you use. In the case of holistic advisory, you will submit all details about your current wealth, investments, income and expenses in addition to meeting the KYC requirements, not in terms of furnishing documents but in thinking through and providing true information. This information is needed to generate your financial plan and make onward investments on your behalf.

How do robo-advisory platforms earn?

Robo-advisory platforms typically earn just as a human advisor does. So, if you are looking to transact in mutual funds and just need investment advice, you can pay an advisory fee. However, to avoid a double cost when it comes to transacting, your investments in mutual funds can be placed in ‘direct’ plans that do not involve distributor commissions because a lower expense amount is charged from your investment. Hence, in this case, you simply pay for the advice and the use of a transaction platform and fees from that are all that the robo-advisory service earns.

Alternatively, in some models, your investments are placed in the ‘regular’ plans of mutual funds. In such a case, you will not pay anything directly to the service itself but, because you are accessing the regular plan, a distribution commission is involved (even though you may not be the one paying it), which the robo-advisory service provider then collects from the mutual fund company.

There is no standard way in which robo-advisory platforms charge. Different services are priced differently and as an investor (especially if you are investing in mutual funds) you should be aware of whether your investment is being directed to regular plans (higher expenses, but usually no fee needs to be paid to the platform) or to direct plans (lower expenses, but a fee may need to be paid to the platform) and also how the robo-advisory platform actually earns.

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Key Takeaways

  1. Robo-advisory is an automated financial advice platform which uses algorithms to understand your risk profile and financial needs and provides you with a suitable financial plan
  2. There are broadly 4 types of robo-advisory services – Auto-pilot, Direct plan based, Goal based advisory and Full service.
  3. The key advantages of using robo-advisory include the ability to avoid human errors or biases arising out of emotions, affordability, convenience, sophistication etc.
  4. While robo-advisory is a great convenient way of accessing financial planning and investing, it is not advisable to use this as a total replacement for a financial advisor

Disclaimer: All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (‘RMF’). For more info on KYC, RMF & procedure to lodge/redress complaints, visit This is an investor education & awareness initiative by DSP Mutual Fund.