Large, tech-savvy China is a booming market for robo-advisers. now they’re edging out their less impressive human rivals, as Cybil Huichen Chou reports.
Robo-advisers were not prevalent in China before 2015, but are expected to manage $27 billion of assets by the end of this year, according to Statista, a market research firm. Looking ahead, the market is expected to more than double each year, so that by 2021, roughly 80 million Chinese users will have invested more than $450 billion in these services. China’s robo-advisers will still trail the US in terms of assets, but the gap is narrowing.
Robo-advisers, which create investment portfolios automatically in response to user input, are benefiting from rapid growth in mutual funds in the country. According to Vanguard Group, China has about $25 trillion of personal investable assets, of which around 40% are in savings and bank accounts, 40% in property investments, 10% in stock markets or mutual funds and the remainder in trusts and other products.
As investors diversify and demand a more balanced asset allocation, Vanguard estimates China’s mutual fund market will grow from $1.5 trillion today to $16 trillion in 2025. That is a big opportunity for robo-advisers and the fund companies they serve.
One of the factors driving demand is that human advisers in China are not always well equipped and available.
“There is a large variation in the quality of human advisers,” says Li Ting, chief executive of Yunfeng Financial Group, a financial services company backed by Alibaba’s billionaire owner, Jack Ma.
Yunfeng created a robo-adviser application called Youyu in April, aiming to bring the institutional level of service to China and Hong Kong’s retail public, a segment traditionally neglected by banks and financial institutions.
“Typically, the best advisers tend to congregate towards the ultra-high-net-worth segment due to the compensation structure,” she says. “These advisers tend to be long tenure, cover only a small number of clients, can understand the client deeply and will be adaptive in providing tailored recommendation as the client’s circumstance evolves.
“However, among the broader adviser population, particularly those who serve the mass retail market, they tend to have high turnover rates, a large number of clients to cover and therefore provide inconsistent investment advice based on a limited understanding of the clients.”
Li says robo-advisers can offer two benefits: a high coverage ratio and the consistency to ensure a large number of investors enjoy unbiased, objective and continuous service.
Another factor driving demand for robo-advisers is the need for investors to spread their risk across a range of funds. In China, fund managers change jobs frequently and it is unwise for an investor to entrust all their money to just one or two fund managers.
“It’s not uncommon for Chinese mutual fund managers to seek a greener pasture in the relatively lucrative private equity industry,” says Lian Zhaofeng, chief investment officer of Machinegene Investment, or ‘Mojie’ in Chinese.
Mojie is the robo-adviser app launched in December 2016 by China Merchants Bank, the country’s sixth-largest and the biggest non-state-owned lender. Mojie is by far China’s largest mutual fund-focused robo-adviser with 6.2 billion renminbi ($953 million) under management.
“Chinese fund managers are subject to a stringent annual or biannual appraisals based on fund performance ranking,” he adds. “Once a manager fails to ascend to a relatively higher ranking, he or she might either be demoted or dismissed. Such high turnover of managers hampers steady and outstanding fund performances.”
Lian also identifies poor fund-related services in China as a key driver for robo-adviser growth. “China has more than 4,300 mutual funds as of June, versus over 3,000 stocks. Culling gems from stones is thus a daunting challenge for many investors. Naturally, investors need advice and after-sales services. Unfortunately, fund sellers may turn a cold shoulder to investors once selling them products. Hence investors’ ensuing demands, be they access to investment advice and research reports or redeeming funds, may not be adequately served.”
These views are echoed by Zheng Yudong, chief executive of Xuanji, a robo-adviser launched by Pintec Group, a Chinese fintech solution provider.
“By tradition, Chinese fund houses tend to hard-sell products they seek to promote during various seasons while also encouraging long-term investment in one single fund,” says Zheng. “However, encouraging investors to put all their eggs in one basket may not be in their best interests, as evidenced in the calamity the commodity market has suffered since 2008. Hence, this is where robo-advisers can come into play by providing a bespoke portfolio or fund-of-funds products to better serve investors’ goals to make money.”
China aside, robo-advisers are even disrupting Hong Kong, the world’s fourth-largest financial centre with a mature fund market, where mutual fund and authorised unit trusts together reached $1.3 trillion as of December 2016.
Historically, mutual funds have been marketed in Hong Kong by phone or through financial intermediaries, including retail and private banks, investment consulting and securities firms or insurance companies. In Hong Kong, the required minimum investment for a mutual fund is $1,000, while fees are normally high, with front-end loads of 3% to 5%, which are deducted straight from investors’ subscription amount. On top of that, there’s a fund custodian fee, normally 0.5% to 2% of net asset value. Some funds even charge performance fees. More often than not, financial intermediaries encourage frequent trading to maximise their own commission income, a practice that can deter would-be investors.
With robo-advisers that allow transactions to be completed online, platform providers hope to help customers pare costs and lower minimum investment requirements for mutual funds without having to pay a visit to banks or brokerage houses to complete the transactions.
Another way robo-advisers keep costs down is by investing mainly in passive funds, such as exchange-traded funds (ETFs), rather than traditional, actively managed funds, which tend to have higher fees. Many robo-advisers in China offer to create portfolios of ETFs, giving access to dollar-denominated ETFs from the US, for instance.
However, not everyone agrees that ETFs are appropriate for accessing Asian markets. “Traditional robo-advisers primarily use ETFs as their implementation vehicle,” says Li of Youyu. “While this works very well in developed regions where markets are efficient, we believe that in Asia, using actively managed funds is more appropriate given the less liquid market structure and the lack of ETF options. In fact, if you examine how institutional clients invest in this region, active funds are a key building block of their portfolio construction process.”
Despite their benefits, the growth of robo-advisers in China faces barriers.
“The majority of Chinese investors are not keen on long-term investments,” says Zheng of Xuanji, who says “trendy topics or 100% guaranteed investments” are more likely to attract interest.
The lack of a well-established pensions system is also a problem. “In the US, the 401K retirement plan with tax saving and tax harvest policy is an integral part of mutual fund investments,” says Zheng. “Hence it’s easier for US investors, but not their Chinese counterparts, to appreciate the value of long-term investments via robo-advisers.
“Regulation is a hurdle as well. While it’s clear that a robo-adviser can operate in the US as long as it has a licence under the Financial Industry Regulatory Authority, pertinent underlying regulations remain unavailable for China and Hong Kong.”
Challenges remain, but the direction of travel seems clear. Robo-advisers are on the rise in China.
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