Is There Enough Money To Be Made In The Indian Robo Advisory Space?
What Is A Robo Advisor?
A Robo advisor is nothing but an online financial advisor which automates the whole investing process with minimal human intervention. There has been a lot of interest in this space lately with the backing of VCs.The recent acquisition of Clearfunds (Harvest fintech Pvt Ltd) by Mobikwik is a testimony to the interest in this space.
How Does It Work?
A prospective investor is presented with an online questionnaire. Based on the answers to this simple questionnaire, the Robo advisor makes suggestions on how to apportion the funds among different asset classes. And once the investor funds the account, the Robo advisor automatically invests in the money in the respective funds as per the advisory algorithm.
In reality, most Robo advisors in India are primarily mutual fund distributors. So they earn a commission as a percentage of the AUM. There are a few players who operate on a flat fee model. The increasing interest in the direct route, where the distributor does not earn commission might prompt other players to look at the flat fee model as well.
Mutual funds investors could be broadly divided into three categories viz. Corporate, HNI’s (Investors with a portfolio size of more than five lakh Rs) and Retail Investors. We believe that corporates would not opt for Robo advisors as they usually have an in-house finance department and they would almost always opt for the direct route.
To assess the market size I assumed a best case scenario, where 80% of the mutual fund subscription for retail investors would be through Robo advisors and a worst case scenario of 50%. For HNIs, since they prefer using traditional financial advisors, my assumption for this category for the best and worst cases were 50% and 25% respectively.
Scenario Analysis- Revenue Potential for different levels of market penetration
Based on this assumption and data points such as commission percentage, direct route penetration, the estimated market size in terms of revenue is anywhere between INR 3700 crores and 6500 crores. In a state of maturity, the PAT would be around INR 640 crores to 1300 crores. Taking a P/E of 25 times, the current value of the industry is anywhere between INR 16000 crores (~2.2 billion USD) and INR 32500 crores (~4.5 billion USD).
The key metric to assess any kind of financial advisor is the performance of the investments made based on their advice over a period. Since this is a new concept, there is no credible data on the track record for Robo advisors. Also, even in the future, we don’t see that would be a deciding factor as performance data could be manipulated and presented in multiple ways. In such a scenario, what differentiates one platform from the other is the user experience and the different investment options available on the platform.
Moreover, even these features can be easily replicated by the competitors and we don’t think any of the platforms can develop an enduring competitive advantage. Mutual fund investments are definitely more sticky than other consumer products/services sold over the internet. Hence it would make sense to spend more on customer acquisition as compared to a cab aggregator or food delivery business.
Therefore, as in the case of the Indian B2C internet industry, it boils down to a fundraising and marketing game. The company which manages to raise the most funds would acquire customers by splurging on marketing and by giving massive discounts (in this case by waiving fees). Using this strategy, they would try to kill other less funded competitors or acquire them.
Some of the leading players are Fundsindia, Scripbox, and Clearfunds. Fundsindia and Scripbox follow a commission-based model, whereas Clearfunds follows a flat fee model. Hemista, a Robo Advisor designed especially for NRIs charges a percentage of AUM as fees.
The current major mutual fund distributors such as Banks could easily adopt a Robo advisor model for their wealth management division. This would be a threat for the upcoming standalone Robo advisors.