The Emergence of the Robo Adviser in AsiaSenior Analyst, Wealth Management practice at Celent
Rapid digitization and the emergence of a young and growing middle class would seem to offer fertile ground for the development of robo advisory services in Asia. Indeed, while it has led to the emergence of niche players in this space, the incumbent financial services players in the region—including banks—have been slow to respond to the changing dynamics.
What is Robo Advice?
Robo advice is often defined as portfolio construction by algorithm. This definition, while eye-catching, focuses on execution at the expense of a broader and more significant transformation: the automation of an array of front office processes (including rebalancing, monitoring, performance measurement and reporting) that formerly required human intervention.
This definition is simplistic in the sense that it suggests “one size fits all.” If anything, the robo advisory business is remarkable for the diversity of its servicing models, all the more since robo advisory platforms—which manage several hundred billion dollars worldwide, depending on which firms are included—represent a mere quark in the multi-trillion dollar wealth management universe.
While some firms provide bare bones portfolio management, others market tax optimization and financial planning services as core or value-add components. Fee structures and operational capacities tend to reflect the client segment targeted. The placement of the paywall varies, too, although many automated firms offer a “try before you buy” option that allows investors to model potential performance (and compare it to what their advisor might achieve).
Robust digital platforms connecting asset managers to advisors are quickly gaining momentum.
Delivery as Key
Most robos offer their clients a fairly standard basket of exchange-traded funds (ETFs), but in robo world, product considerations are secondary. From the investor standpoint, the major benefit of robo advice is eliminating areas of friction around delivery. Pain points may be personal or subjective, touching on ease of use (“Must I drive downtown to meet my advisor?”) or emotional factors (“Do I really qualify for personal attention from an advisor?”). Or they may center on quantifiable issues such as cost.
The importance of delivery is best illustrated in the sagging economics of the advisory business. Competition for wealthy clients is fierce, and fee compression has made less affluent clients unprofitable to serve. The problem for the advisor ultimately comes down to capacity, for which legacy technology has been an incomplete solution. Robo advice attempts to remove this capacity bottleneck by eliminating (or downplaying, in the hybrid model) the human element.
Robo as Phenomenon
Previously considered a fad for millennials, the first generation of U.S. robo advisors (direct to consumer firms such as Wealthfront, Betterment and Personal Capital) had by the start of 2015 accrued enough headlines (if not actual assets) to influence the strategic direction of firms hundreds of times their size.
Over the last 18 months, however, headlines have taken on a more negative cast, as vertically integrated incumbents Charles Schwab and Vanguard have rolled out their own automated platforms. Today, after a year in business, the Schwab online platform has accrued as many assets as its counterparts, Wealthfront and Betterment, combined. Vanguard dwarfs the field with roughly $40 billion in assets under management; it benefits from launching its platform with an established, affluent client base and a digital infrastructure in place.
Most recently, pure play asset managers such as BlackRock and Invesco have entered the fray, as have next generation robo advice firms operating as virtual hedge funds. These startups (with their multi asset, active management orientation) offer an additional distribution channel to asset managers like BlackRock, Fidelity and Vanguard. At the same time, they signal a trend of disruption in the technologically sheltered asset management business. The first wave of this disruption is now visible in Asia.
Eye on Asia
Robust digital platforms connecting asset managers to advisors (such as Hong Kong-based Privé Managers) are quickly gaining momentum. A more recent development is the emergence of automated fund selection services as an alternative to the qualitative fund analysis performed by bank research departments.
Switzerland-based ifund services has recently made a big push into Hong Kong and Singapore. While these startups are targeting deep pocketed banks, sophisticated investors and their advisors are using similar technology to create their own bespoke strategies or “virtual funds.” At the downstream or advice delivery end of the business, increased capacity allows advisors to tie these strategies to financial planning—including drawdown and wealth transfer—and other activities that drive long-term outcomes.
The emergence of technologically sophisticated intermediaries, such as Privé and ifund services, augurs well for the expansion of robo advice in Asia. To date, growth has been stymied by the fragmented nature of the Asian market (and in some cases, regulatory squeamishness around cross-border investing), as well as limited demand for ETFs.
Startup robo advisors have been most successful operating within their own marketplaces—for example, Dragon Wealth in Singapore, and particularly in those with homegrown tech talent, such as Hong Kong. In the case of Singapore, supportive infrastructure and an environment that is friendly to expatriates and entrepreneurs have played important roles.
A more fundamental obstacle, however, remains mindset: large Asian banks still understand robo advice as just another channel to sell more products, ignoring the importance of delivering consistent advice via digital and face to face interactions. This somewhat willful blindness is compounded by relatively low levels of financial literacy among the general investor population, and does much to explain the resilience of the traditional incumbent focus on the >$2 million investor. This population, of course, tends to be older and has little incentive to adopt robo advisory services.
Increasingly, however, even large, conservative firms are finding themselves at a digital crossroads, as margin pressure and the growth of a large and technologically savvy middle class are forcing these incumbents to take a position on robo. The route that large banks and brokerages in Asia select today will have profound implications on future investment in channels and IT architecture, and will oblige them to define and target customers in new ways. Firms will have to balance the interrelated risks of client and advisor attrition while considering the depressive effect that implementation of a low cost platform can have on overall margins.