SUMMARY
Understanding the wealth management industry in India will aid in decoding the robo advisory industry in India
This disruption in the development of robo advisors that intelligently converse like human advisors could come from anywhere
Creating value is key to building a viable business model for the robo advisory industry
Understanding the wealth management industry in India will aid in decoding the robo advisory industry in India. There are three critical and inextricably linked factors that support the case for robo advisory in India. But first, let’s understand the current scenario.
Understanding The Scenario
The Demography
The ultra-high net-worth individuals in India are served by private banks, wealth management firms and boutique wealth firms. Given the minimum wealth management ticket size of $1 Mn, they have diverse requirements that go beyond commoditised products.
India’s bulging Indian middle class, on the other hand, is served by public and private sector banks, mutual fund distributors, and insurance agents. The industry has a low entry barrier, and anyone who passes a basic exam is qualified to work in wealth management. Both a lack of sufficient knowledge and a low revenue margin on a small ticket size contribute to the poor quality of advisory services.
Reduced Revenue Margin
As a mutual fund distributor, one can only manage a limited number of clients. With the reduced margins following the entry load ban and now the SEBI cost structure, the total expense ratio decreases as the fund size increases. As a result, the higher-quality wealth managers (including more prominent mutual fund distributors) are less interested in serving individuals with very small ticket sizes.
Lower fixed deposit rates
India has historically been a traditional fixed deposit market. When fixed deposits offered high interest rates, most people did not see the need to chase higher returns in equity investing. In the past, the money experienced a 12% annual growth rate and doubled in value in just 6 years.
Falling interest rates and higher inflation made it a compelling case for individuals to begin investing in direct stock markets or equity mutual funds. Unfortunately, there are no high-quality mutual fund distributors or advisors available to the mass and affluents.
The Challenges
A robo advisory platform perfectly fills the void. After a brief series of questions, they offer the end-users the automated solution. One also has the option of conducting business from the comfort of their own home. Nonetheless, they face numerous challenges, to the point where their business model is frequently called into question. Some of these challenges include:
- Plague of Low Ticket Size: The average SIP per month of a robo advisory platform is very low, resulting in poor revenue and an extended gestation period. Client acquisition costs are frequently much higher than the customer’s lifetime value.
Individuals with slightly larger ticket sizes prefer to consult with human advisors before investing their hard-earned money.
- Poor Revenue Model: The majority of robo advisor users are financially literate or knowledgeable investors. According to the S&P Financial Literacy Survey, as much as 76% of Indians are not not financially literate. As a result, the majority of investors lack the financial education required to use a robo advisors platform.
However, increased financial awareness does not solve the problem. Informed and financially literate investors prefer to invest in direct mutual fund schemes, which creates a problem of negligible to no revenue. As a result, many robo advisory platforms have begun to provide free direct mutual fund platforms.
The Future Of Robo Advisors
In the future, high net-worth people will be catered to by private banking and wealth management companies. While, the mass and mass affluent segments are already served by robo advisors. There is an urgent need to address two critical issues:
- To increase the average ticket size
- Create a sustainable revenue model
Build Trust
The majority of current robo advisory services are based on robotic process automation. In the future, there will be robot advisors that will hold your hands like real human advisors do. I believe that these robo advisors will be developed using artificial intelligence and the data that has been gathered over the years.
This disruption in the development of robo advisors that intelligently converse like human advisors could come from anywhere. In fact, in the future, the following advisors could be working on your behalf: Alexa, Siri, or Google Assistant. Both the informed and less financially literate audiences will benefit from this.
Business Model
The above developments can assist the platform in a variety of ways in order to build a sustainable and robust business model. This will encourage users to increase their average ticket size. Furthermore, the enhanced value-addition will allow mutual fund distributors to seamlessly cross-sell multiple products to earn more revenue.
For a subscription fee, the mutual fund platform that distributes “direct” mutual funds can provide these value-added services. However, the cost of client acquisition will play a crucial role in building a good business model and deciding the subscription price point. Creating value will result in a viable business model.
“Value is more expensive than price.” – Toba Beta.
