When Nitin Vyakarnam wanted to start his personal finance venture, he did not want to offer a piecemeal job to the customers. Advising people just on taxation or insurance or mutual funds was not the solution, he thought. Financial products distributors had been doing it, and the results had been pathetic. In fact, Vyakarnam himself had fallen prey to wrong advice. After a few rounds of surveys, he decided he would to start an end- to-end financial advisory service that can reach out to millions in a few years.
While the idea sounded great, Vyakarnam knew it was quite an audacious one as well. “Millions.... How?” he asked himself. It required immense data churning and analysis. Technology—more specifically, Artificial Intelligence—was the only way he could do it. And, Vyakarnam started India's first robo-advisory service, ArthaYantra—an algorithm-based financial advisory platform. It was 2012, and AI was not a familiar term for most people. People wondered whether something like this could work in India, which was a market dominated by individual agents who called themselves financial advisers.
Six years down the line, however, AI in personal finance seems to be order of the day. “AI has changed the face of several industries—e-commerce, health care, transportation—and we are now seeing wider adoption in personal finance advisory. Till recently, in the financial space, AI was mainly used by banks, payment companies, wallets and peer-to-peer lending startups. However, of late, personal finance advisory companies are increasingly relying on AI to offer meaningful advisory services to their clients,” said Vivek Belgavi, partner (fintech) at PwC.
What necessitated this was the fact that personal finance could not be 'one size fits all'. In a dynamic market environment where a single piece of news can impact billions of rupees, the decision-making has to be fast. It is not surprising, therefore, that AI has challenged the traditional stereotypes associated with financial planning.
“For example, the typical advice from a financial planner to a conservative investor would be to invest in debt instruments,” said Manish Shah, founder of the financial planner Big Decisions. “But that is not how an algorithm would react. It would look at various factors—age of the person, his financial position, likelihood of markets going up or down—to decide on what percentage should she dedicate towards debt instruments.”
Thanks to their sharp focus, AI-based personal finance services are fast gaining traction among investors. According to the statistic portal Statista, the value of assets under management in India in the robo-advisers segment was $7 million in 2017. It is estimated to be worth $100 million by 2021.
Does it make sense for common investors to go by an algorithm's advice? Experts say it is much better than relying on someone whose sole aim is to make money through commissions. “Today, what is missing in customer's psyche and in the financial advisers that offer these services is this concept of goal planning,” said Vyakarnam. “It is a standardised service wherein the adviser will recommend you a set of products based on the same old logic of conservative, moderate and aggressive investor. On the contrary, when AI is applied, the results are very different because it will look at past data and future possibilities before recommending anything.”
And, if investor testimonies are any indication, AI-based financial planning is on a roll. Sarita Mascarenhas, a human resources manager, was initially apprehensive of the fact that computer programmes could decide on her investment options. But then her earlier investments that were made on the advice of friends and relatives had not yielded much. So she gave a chance to AI-assisted investment. “I am a relationship-oriented person and I believe in the human touch. It took a lot of persuasion to come on board. But it has been a satisfying experience. My returns have gone up and I have increased the amount from what I was earlier investing. They took a holistic view of my portfolio and their algorithm is able to diagnose problems and suggest remedies,” said the Mumbaikar.
An AI-based platform has a higher level of proficiency than a human adviser. A human adviser can only look at a certain number of data points for a particular period of time, whereas an AI-led system can study behavioural patterns and investments that have worked or not worked over a longer period of time. “It is a far finer observation,” said Dinesh Rohira, founder of the robo-advisory platform 5nance.com. “Apart from the data given by the investor, our data tools can track social media and other media to come up with several data points, which are then processed to categorise your risk profile.”
In the traditional scenario, one generally looks at the past performance of mutual fund schemes, which is often one year or three years. The AI, however, is capable to look at schemes through different market cycles. A scheme may have performed great under normal market conditions, but only a detailed analysis can show if it has underperformed during choppy market conditions.
So, how does it work? The market today has two kinds of players who use AI—category players and full service players. Category players deal with one type of product—mutual funds or equity shares. Full service players offer end-to-end advisory—from mutual funds and shares to insurance and tax. The full service players have a goal-oriented process which makes sure that there is money available for meeting life's various requirements. More and more investors are aligning towards AI-driven full service players as they understand the value of advice for each financial decision.
“Real life is interconnected,” said Vyakaranam. “How much you pay out on EMIs has a bearing on how much you can invest, the amount of taxes you can save and whether you can take the much-desired foreign holiday. When these things are linked, it wouldn't be correct to look at financial decisions in silos. So, we help people with all the major financial decisions, with their goals being at the centre.”
In an AI-assisted personal finance service, investors give their data online. Their salary, expenses, investment, loans and other details are asked along with some questions to judge the investment behaviour of an individual. Some of the companies also use chatbots to do these tasks. This data is analysed and mapped with their goals to come up with specific recommendations. The advice is personalised for each individual.
“What I like about AI is the fact that it can exactly tell you when to enter and exit,” said Rajesh Kotak, an investor who uses one of the AI-driven platforms. “In the traditional set up, once you invest, you tend to carry on the investment even if it is underperforming. In this case, however, there are triggers which get activated if a certain threshold is breached. This is especially important in the case of stocks. Earlier, I invested on recommendation of my relatives. After holding on for a while, it would eventually give me negative returns. So, these triggers are very helpful.”
It was exactly these kind of challenges that prompted Mohit Batra to start Marketsmojo, an AI-powered stock research engine. “We have some 4,000 listed companies, but only 150 companies are actively covered by brokerages and research houses,” he said. “Rest of them are unresearched, and, therefore, investors have a very small pool of stocks to choose from. Also, India is a growth market—the amount of alpha (returns) that you can generate from a small-cap stock would be much higher than that of a large-cap stock. All these reasons made us look at the uncovered companies through the prism of AI.”
Marketsmojo has a set of in-house developed algorithms which analyse 500 data points on every company, such as profit/loss, cash flow and raw material. Fund managers also tend to do similar kind of analysis before investing in stocks, but there is a limit to the data they can get and analyse.
Based on this analysis, the platform assigns dots to each company on three parameters—quality, valuation and financial performance. The dot on financial performance is what investors generally consider before investing in a company, and Batra says that in most of the cases, dots have mirrored returns. Marketsmojo analyses three crore data points everyday. Currently, its algorithm-based research powers brokerages such as Motilal Oswal, Kotak and Geojit. The research is available for free for retail investors. There are one lakh retail investors on the platform, with total assets under management of Rs 15,000 crore.
The platform recently forayed into mutual fund research and will go live with retail investors in next few months. “Our mutual fund algorithms are self-learning; that is, they improvise and detect if there is any abnormality in data. They also do psychometric analysis of the fund manager—essentially how he picks stocks and how has he performed under various market conditions,” said Batra.
While Marketsmojo uses AI for research on stocks, another player, Finvasia, uses AI to bring in innovations in the brokerage industry. It has an AI-based social mutual fund analyser for research and trading. Called SMART, it allows investors to diversify to various asset classes and rebalance their portfolio in case of market volatility. Its robo-advisers act as a personal digital research assistant to an investor, enabling him to manage his portfolio and its risk.
“The idea—to the take the middlemen out of an investor’s portfolio—sprouted from an epiphany,” said Tajinder Singh Virk, founder of Finvasia. “When it does not cost anything to send an email or a WhatsApp message, why does it cost to send a trade over to the exchange? Our mutual fund platform is completely customised, based on a particular investor's requirements.”
While a major chunk of companies in this space are using AI for mutual funds or equities, there are also some who are using AI to give the right recommendation on loans and credit cards. Paisabazaar, for instance, is using advanced AI tools such as voice analytics, natural language processing and image recognition to come up with sharper recommendation for customers.
“A lot of people call up our call centre for their loan and investment requirements,” said Jagmal Singh, chief technology officer of Paisabazaar. “We are analysing their conversations to come up with products that match their requirements. For example, everybody wants the maximum amount of loan with minimum EMI. With AI, which would have already analysed their credit score and financial condition, we can suggest them the available credit alongside indicating chances of approval. We are also working on chatbots to take the consumer experience to the next level.”
Available round the clock, chatbots can make purchase of financial products a lot easier. Also, since the conversations by a chatbot are analysed daily, it gets more intelligent every day and is able to answer more and more complex questions. “Chatbots play a major role in making the whole experience personalised and conversational,” said Satish Joshi, chief technology officer of the robo-advisory platform Happyness Factory. It is like talking to your relationship manager. Advanced chatbots can analyse data and come up with insights in a matter of seconds.”
AI in personal finance uses lot of behavioural analytics. Since investments are driven more by behaviour than anything else, it throws up interesting insights for such platforms. ArthaYantra's behavioural analysis tool threw some important data on customers. Of all the organised workforce, about 58 per cent does not meet monthly expenses. They supplement their expenses with credit cards and personal loans. Customers are uncomfortable when they realise that they made mistakes, and they are more uncomfortable to correct those mistakes. About 71 per cent of the population thinks retirement is important, but does not know how to go about it.
AI is expected to create an army of jobless people in various sectors. Does it hold true for the financial advisory space as well? Individual financial advisers who do not bring innovation to their service may feel threatened. “Unlike other industries, they might not shut shops. They will align themselves with these kind of platforms,” said Rohira.
Currently, the industry is at a nascent stage. The robo-advisory companies are yet to scale up. And, the phenomenon is restricted to the metros. Because of the inherent nature of advisory industry and comfort levels with human interaction, the AI-powered advisory platforms continue to engage certified financial advisers. Also, it is human nature to trust humans more than digital platforms.
Vyakarnam, however, said the paradigm of trust was fast changing. “If you have been wrongly sold a product and suffered negative returns, and your next-door neighbour has benefited out of this platform, you would take a call based on logic, not just trust,” he said. “Today, trust is all about transparency. Millennials, especially, are looking at reasoning and logic more seriously than blindly trusting something.”
Investor Srinivas Kalyan Akkaraju understands this point well. “I have seen banks pushing products of their insurance company. I have also seen agents peddling me a product in which they would get higher commissions. But, if a platform is not looking at making money while recommending products and rather gives me a scientific data based insight, I would trust it,” he said.
Kailash Nadh of the financial services company Zerodha, however, feels AI in personal finance is overhyped. “What people are calling AI is essentially mathematical models which has been going on for a long time. I do not see real innovation coming in there, the way some companies are doing it in the US,” he said. In the US, robo-advisers manage assets worth $182.505 billion. They have many innovations in AI, which includes tools that can track savings account expenses and alert an investor if it is not good for his financial health.
Above everything else, the biggest slayer in the game could be a robo-advisory platforms’ cost advantage. These services are available at a fraction of the cost of independent financial advisers. “One of the reasons people are unable to avail of professional financial advisory services is cost,” said Vyakaranam. “One ends up spending Rs 15,000 to Rs 25,000 on such services, and professional advisory does make a difference to your financial health. Why should it be restricted to few elite people. The AI-led personal finance will democratise advisory.” ArthaYantra has an yearly one-time fee of Rs 1,000 and a premium service for Rs 6,000.
“While there is no substitute for human mind, the business of independent financial advisers will get affected by robo-advisory,” said Balwant Jain, a tax and investment expert. “Smart and knowledgeable investment advisers will still have an edge, but those who are only peddling schemes will lose out and eventually go out of business.”