Rise of the machines: Should you trust bots with your investments?

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The bygone year is etched in our memories for more bad reasons than good. The outbreak of Covid-19 pandemic not only put human lives at risk, but it also influenced our dynamics with the external world in ways more than one. While health has definitely regained priority, our relationship with money also saw potential changes.

A recent study by Oracle and personal finance expert Farnoosh Torabi revealed Indians now trust robots over humans to manage their money. The study of more than 9,000 people, including business leaders across 14 countries including India, found that the pandemic triggered financial anxiety, sadness, and fear among people. It has changed who and what we trust to manage personal finances.

Financial anxiety

“In the wake of the pandemic, financial anxiety has crept in due to 2 main reasons: Firstly, those who have lost their employment or have had reductions in income have become anxious about maintaining their lifestyle and meeting their savings/financial goals. Secondly, there is a lack of, or fear of, not having adequate health insurance to meet medical expenses and more importantly inadequate life insurance in the case of an untimely demise,” Viraj Nanda, CEO at Globalise, a global investment platform, said.

The pandemic has also led to Indians paying more attention to their finances, saving, and investing more, as is evidenced by the number of new demat accounts being opened in India. This has resulted in a demand for more accurate investment advice.

83% of Indians trust robots

“As many as 83% of Indian consumers and business leaders trust a robot more than a human to manage their finances. Almost every Indian business leader (96%) believed that robots can improve their work by detecting fraud (37%), creating invoices (32%), and conducting cost/benefit analysis (30%),” the report titled Money and Machines: A 2021 Global Study stated.

While these statistics may be viewed through various prisms by the industry experts but it does give a vague idea of how our future might look like.

“We believe that recency biases could cause some of these shifts, and one may need to look at this shift over periods of time to draw conclusive evidence from this particular statistic,” Vishal Dhawan, founder at Plan Ahead Wealth Advisors, said.

Nanda, however, feels our increasing trust in robots to manage money is driven by the realisation that robots, by design, are unbiased in making decisions.

“Humans, on the other hand, spend and invest their money mostly based on heuristics, anecdotes and narratives. As an increasing number of investors are looking to minimise these biases, there is an ongoing shift towards trusting robots,” Nanda pointed. 

What are robo advisors?

As many as 67% of Indian business leaders believe robots will replace corporate finance professionals in the next five years as per the Oracle study.

The concept of robo-advisors has become increasingly popular as a cheaper and more accessible alternative to human wealth advisors to get financial planning advice in India. They are digital platforms providing automated, algorithm-driven investment services with little to no human supervision. Some of them include Scripbox, Orowealth, FundsIndia and 5Paisa.com among others. The structure of fee in India is either free or a flat fee charged annually plus the fixed charges per transaction.

Does it threaten the traditional clan of personal finance advisors? The answer is both yes and no. While it is simple for a robot to design a portfolio, it is not that simple to put all the investors into a few buckets based on risks. 

“Advisors should be willing to include an element of automation in the process and at the same time educate themselves in behavioural economics. Asset allocation would still need elements of human involvement while the end product itself can be fully automated,” Nanda said. 

Meanwhile Dhawan mentioned that managing client behaviour and their portfolio along with helping them achieve goals that align with their values will be crucial skills for financial advisors to develop in the times to come.

Limitations and future

Can this newfound love for robots become a potential investment option for Indians? For many individuals with simple financial goals such as buying a house or funding a child’s education, robots provide a simple and low cost way of investing.

“Curated portfolios that are run quantitatively and auto-rebalanced take active decision making away from individuals while working towards financial goals. I see this as a trend that is still in its infancy and is only going to accelerate in the coming years,” Nanda asserted. 

While Vishal Dhawan believes that lower value-adding tasks can be easily automated and thus one may find significant demand for robots for those tasks, whilst higher-end tasks may be more difficult to automate. There are obvious risks attached to it as well.

“Repetitive and standardized tasks can most certainly be automated, but more strategic and complex tasks with contextuality may not be easy to execute with robots. Robots are supposed to oversimplify tasks. However, sometimes oversimplification may be inappropriate. Contextuality and applicability to a specific situation that one may need help with may be more difficult,” he added.

The AI intervention

Meanwhile, it’s true to say that increased AI intervention in our lives has caused investors keen on investing in companies behind this technology. Not just from a diversification perspective but also to take part in the growth of one key theme that is likely to dictate the future trajectory of mankind.

“Investing in AI is definitely within reach of Indians and they are ready more than ever to invest in AI companies. While there are not too many listed companies in the space in India, a wealthy few can get the opportunity through PE and VC funds. For a majority, though, investing in the US is the best way to invest in AI. The US offers ETFs that are tailored to this theme and curated portfolios that invest in the theme, both attractive propositions for those seeking AI exposure in their portfolios,” Nanda explained.