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The Tussle Between Robo Advisers and Human Financial Firms It then becomes a question of measuring the extent of human involvement with a particular piece of technology to class something as "robo", which is impossible to quantify.

By Kailash Nadh

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The advent of the so called "robo-advisors"—software that algorithmically generate investment allocations and advice—has breathed a new life into the Indian fintech industry following their rapid rise in developed markets, where not only startups, but legacy behemoths have started offering robo-advisory services. These services have given rise to new business models and have made financial portfolio planning and creation accessible to the masses. For now, Indian regulators, following suit of their US counterparts, consider human advisors and robo-advisors as one, with the same fiduciary responsibilities.

Robo advisory firm versus human firms - who wins?

Robo-advisors pose some interesting questions, perhaps, more so for the regulators who are working on structuring and creating legal frameworks around them. Is it really possible to distinguish robo-advisory from human advisory? While it may seem straight forward to describe the former as advice generated automatically by software, they are still algorithms crafted by humans who infuse a multitude of assumptions, or rather, financial models, into them. Such systems are also continuously tweaked by humans to keep up with the changes in the markets and behaviour of customers.

Given that human advisors have been using software tools for decades for doing research and producing financial advice—including everything from complex spreadsheets to sophisticated software—what exactly then is the distinction between a piece of advice generated by a robo-advisor and advice produced by a human operating a complex spreadsheet that has the same underlying principles? It then becomes a question of measuring the extent of human involvement with a particular piece of technology to class something as "robo", which is impossible to quantify. Considering that, in reality, the proliferation of robo-advisors have been a function of their speed, mode of delivery, and the underlying cost structure, the term may suddenly seem like an over-appropriated marketing label. This does not, however, undermine the efficacy or credibity of robo-advisors. Just like human advice, the performance of robo-advice is ultimately linked to market conditions, and may very well be on par with, or better than their human counterparts.

Given that new robo-advisors with increasing sophistication are hitting the markets, some have claimed the incorporation of Artificial Intelligence (AI), subtly hinting at a performance advantage over their peers. Really though, such a system cannot be considered any more "robo" than a non-AI robo-advisor. While all of this can be traced to the industry's need for evolving business models, the philosophical questions robo-advisors pose are a thing of great intrigue, where one can draw certain parallels with Searle's Chinese Room argument. Today, robo-advisors affect people's finances, tomorrow, they may extend to other areas as well. How the legal and regulatory apparatus adapts to such innovations is to be seen.

With financial robo-advisors, for a customer, it should not really matter where the advice comes from, a human advisor or a robo-advisor. Ultimately, it boils down to the ease of access, the customer's comfort level and risk appetite, and of course, cost, which has been the biggest driving factor behind the growth of robo-advisors.

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Kailash Nadh

CTO, Zerodha

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