Asia is becoming a proving ground for innovative robo-advice technologies. Joshua Bateman reports from Hong Kong Fintech Week.
Across industries, headlines call for robots to replace humans. Asset management is no exception.
Robo-advisers, automated systems that provide investment advice based on user inputs, have the potential to disrupt fund distribution by replacing human advisers.
The opportunity is great. BI Intelligence, a research service, forecasts that robo-advisers globally will manage about $4.6 trillion by 2022.
Asian companies are at the forefront of technological change. But they are discovering that different markets in Asia require different services.
During Hong Kong Fintech Week, Yunfeng Financial Group chief executive Ting Li said the funds industry is not adequately guiding customers’ financial services needs at present. Machines can remedy that, she says, adding: “We are trying to provide easy-access, low-cost services to the market.”
In Hong Kong, Yunfeng Financial’s robo-advisory platform offers clients access to a proprietary database with 10,000 funds.
Demand is expected to be particularly strong in mainland China. According to a joint report from China Merchants Bank (CMB) and Bain & Company, China’s private wealth exploded over the past decade to reach approximately $24 trillion in 2016. Almost 1.6 million Chinese have assets exceeding $1.5 million.
Zheng Yudong, chief executive of Pintec Polaris, a robo-advice service based in Beijing, says financial advice in China is an immature industry. Financial services companies specialise in specific offerings, be they liquidity, fixed income, equity, commodity or fund products. “Institutions don’t have the capability for full asset allocation,” he says. Consequently, clients often have accounts across various firms.
Owing to acute market volatility, clients want balanced strategies, which require more investment options. In lieu of carrying out mergers and acquisitions, Chinese institutions are collaborating with third parties such as Polaris, which is product-agnostic and develops robo-advisory platforms for banks, asset managers, brokerages, insurance firms and internet companies.
Several trends support the growth of robo-advisers. One is that China’s high-net-worth investors are getting younger and moving beyond China’s tier-one cities. According to market research firm Statista, China’s robo assets will double annually between 2017 and 2021 to reach $468 billion across nearly 80 million customers.
Robo-advisers may have an advantage over conventional services if they are successful in managing client data. Zheng says many traditional asset management companies push products regardless of suitability because they don’t understand their customers. Institutions have data on customer incomes, savings rates, consumption habits and monthly expenses, but they aren’t applying it.
“Using big data technology, I can actually profile you better,” he says, “to understand your financial situation and provide you a more tailored solution.”
Data facilitates customised, dynamic advice for various events including car purchases, home buying, marriage, gift giving, charitable donations and retirement. For example, an electronic milk powder purchase can alert a robo-adviser that the client has a new dependent and should begin saving for college.
Although some robo-advisers aim for market-beating returns, many intend only to provide cost-effective investment solutions for the masses. “Robo-advisory is trying to build a smart beta portfolio that maximises the risk-return,” says Zheng. “The smart beta comes from understanding your needs.”
Digitised data processing could benefit several parts of the business. It could increase the efficiency of marketing campaigns, know-your-customer enquiries, money-laundering checks, compliance oversight and client account support, for example.
At the conference, Ned Phillips, founder of Singapore-based Bambu Software, a business-to-business robo-adviser, said: “The ability to understand the data going forward will fundamentally change how everything is perceived.”
Technology can make risk profiling more scientific, too. To determine where clients sit on the risk-return spectrum, many firms today employ questionnaires, which are easily manipulated. Phillips, however, says risk questions will become obsolete. Much as Netflix knows the content that individual subscribers prefer, financial institutions will be able to use data to better understand the needs of individual clients.
Daniel Hong, deputy general manager of financial technology at Tencent, a Chinese internet firm, agrees. “We can use big data to dig out the real risk profile for each customer,” he says.
Discrepancies are noted, for example, if a client claims to be an experienced investor but doesn’t read financial articles or follow financial services professionals on Tencent’s WeChat platform.
Client service is also being automated. Tencent’s chat boxes have served more than 100 million wealth management clients. When clients enquire about investing in a particular fund, the chat box responds with research articles, product features and subscription options. “In that way, we extend financial inclusion from just distributing products to providing services,” says Hong.
There are challenges to overcome. In many jurisdictions, electronic risk profiling will take years because, Phillips says, “I don’t think regulators are ready for that today.”
Some say robo-advisers have inherent limitations. When generating investment suggestions, they incorporate biases from their programmers, for example. Some will incorporate extraneous inputs or unreliable sources. “You can have lots of information,” says Li of Yunfeng Financial. “You can have lots of data. But how much of those data are noises?”
One of the touted advantages is that abundant investment information is available, in real time, at the click of an app. Increasing investor acumen ought to have benefits, but the unintended consequences are not fully known. Although studies have shown benefits to ‘buy and hold’ strategies, round-the-clock investment notifications could lead to excessive activity that is detrimental to long-term returns.
Robo-advisers send push notifications with investment ideas, but investors still need to accept or reject those suggestions. On Yunfeng Financial’s platform, one-third of clients accept the robo’s exact advice; the remaining two-thirds tweak asset allocations or select a competing fund within the asset class.
In October, Polaris launched Pivot, a joint venture with life insurer FWD Group, which aims to serve clients in Southeast Asia. Robo-advisory needs differ across markets, according to Zheng. In China, for example, clients have greater influence on their investment decisions. In Southeast Asia there is demand for robo-advisers, but the human element is greater. Private bankers continue to play a crucial role, while robo-advisers are a support.
Globally, there are other divergences. In developed markets, there is greater access to highly liquid, low-cost exchange-traded funds (ETFs), which often lie at the core of robo-advice services. In Asia, however, securities have longer lock-up periods and higher transaction fees. Consequently, Asian investors don’t rebalance as often as their Western counterparts, says Zheng.
He also points out that there are differences in how companies approach robo-advisers. Asian institutions are willing to incorporate third-party robo-advisory solutions in their client-facing product suites, whereas those the West are less open to outside vendors. They either develop the technologies in-house or acquire independent fintech companies, he says.
E-commerce and fintech start-ups have gained traction. According to CB Insights, a research company, private robo-advisers globally raised more than $1.3 billion in deal funding since 2012. Robo, however, is still in its nascent stages. “We are far away from disrupting the market,” says Li.
The user experience is improving, but robo-advisers still have not earned the trust of the general public, she adds. Consequently, traditional financial institutions could retain market share. “If they enhance their services with technology, then there’s no disruption. They will take over the market.”
Incumbent institutions are adapting. China Merchant Bank and Industrial and Commercial Bank of China (ICBC) have introduced robo services over the past year. Like many in the industry, these banking giants are preparing for the robot revolution.
©2017 funds global asia