Robo-advisers face an uphill struggle in Asia

Automated investment programmes are only just starting to emerge in Asian wealth management, but some are already predicting that the region's independent robo-advisers may prove short-lived.

The traditional banks that these platforms have in their gun sights are not standing still but building up their defences against the threat of technological disruption (the second in this two-part series will look at these developments in more detail).

These efforts mean they look likely to continue dominating the market and fund distribution across the region in the years to come, even if some adopt automated advice technologies to augment the human touch.

Frank Troise, Asia head of digital distribution at Swiss fintech firm Leonteq, argues there is zero chance of independent robo-advisers succeeding. So much so, that he has advised one friend who owns a robo-advisory firm to sell his company – and fast.

“I will go on the record to say that none of the existing robo models as we know will survive. Unlike the US and Europe, where they are overbanked, the Asian market is under-banked," he told AsianInvestor. "By consequence, only firms that have large enough capital and enormous amounts of customers will survive."

Likewise, fund research house Morningstar has argued that many robo-advisers will struggle to achieve the scale necessary to be profitable and will take some years to do so. 

These firms also currently face the challenge of know-your-customer rules in Hong Kong and Singapore that make it hard for them to buy offshore exchange-traded funds.

Unlike in the US, there are only a handful of robo-advisers in the Asia-Pacific region. Most will only start introducing their platforms over the coming few months, including Singapore-based Bento, a bionic adviser (part automated, part human), and Smartly.

Hong Kong’s 8 Securities claims to be Asia’s first-ever robo-adviser after originally launching early last year. However the company has closed its website and will relaunch in a few months' time after a one-year trial period. The company declined to provide details on its AUM and merely said it had enhanced its service and would relaunch soon.

China’s MiCai, launched a year ago, is still adjusting its business model but has so far been aiming at both institutional and high-net-worth investors.

All of them (except Bento) are true robo-advisers and use technology to automate, optimise and develop investment solutions. Their investment decisions are made solely by algorithms, not by human advisers using technology.

Perhaps the biggest selling point is that the fees charged by these robo-advisers, which mainly invest in exchange-traded funds and other passive products, are a fraction of what traditional banks normally charge.

For example, Bento charges 30 basis points a year according to client assets, by mainly investing in long-only exchange-traded funds, with an overlay of strategic and dynamic asset allocation. This compares to the 150-200 basis points typically charged by private banks for similar services. 

However, none have come close to accumulating the kinds of assets built up by the likes of Betterment or Wealthfront in the US, which between them had $6 billion under management as of December 2015. 

Survival of the biggest

Troise believes the rise of robo-advisers is reminiscent of the rise of electronic trading in the 2000s, which at the time was also seen as a disruptor that could put brokers out of business.

“The [robo-advice] technology was novel maybe three to four years ago, but now it’s all about branding. Similar to e-trading, only the big brands will ultimately survive," he said. "Technology is quite a commodity at this point."

Yet that hasn’t stopped start-ups and wealth management firms from building robo-advice platforms. Consulting firm EY said there were about three dozen being developed in the region, including Japan and Australia.

“This [trend] is catching up very quickly and picking up a lot of steam and this is real,” Jeroen Buwalda, Asia-Pacific wealth and asset management advisory leader at EY, told AsianInvestor.

These newborn robo-advisers are all eager to take advantage of the region’s rate of wealth creation. Wealth creation in Asia is running at a compound annual growth rate of 10% compared with 3% globally, estimates EY.  

Robo-advice is usually seen as more suitable for the mass-affluent than the very wealthy. With the middle class in China alone expected to be double the size of that in the rest of the world by 2030, Asia would appear to be fertile ground for the up-and-coming players.

But consulting firms are also advising clients – mainly family offices and some private banks – to provide robo-advice to their high-net-worth individual and ultra-HNWI clients.

These clients want part of their portfolios to be invested in ETF and index funds, which could be done through robo-advisers, allowing for more time spent with relationship managers to discuss more complex wealth solutions.

What that shows is how new technology will work hand in hand with, rather than displacing, more personal forms of wealth management. “I don’t think robo-advice will take away the job of relationship managers,” Buwalda said. "It will augment them."

The upshot is that employment prospects for relationship managers in the region appear to still be rosy for the foreseeable future.

“For Asia Pacific I am not worried that RMs will be out of job in the next decade, because the amount of people coming into the market with wealth that would benefit from advice is unstoppable,” noted Buwalda.

Onboarding obstacles

For regulators intent on cutting costs by bringing in more competition in fund distribution, the continued likely dominance of a few banks isn’t ideal.  

Yet today’s regulations make this outcome more likely. Client onboarding is time-consuming, which is hindering the growth of robo-advisers in the region; they face a challenge as a result of the very electronic medium that imparts them their advantage in the first place.

“It is really hard to onboard clients fully online,” EY’s Buwalda said. “It would be great to understand that there are certain data standards that you can rely on going forward. But that’s not the case; it is a big industry barrier that needs to be overcome.”

EY works with regulators in the region, and Buwalda said many saw the benefits of robo advice to end clients, because they might not be 100% satisfied with how products and advice are sold by incumbents.

What's more, in markets such as Singapore, the opportunity for robo-advisers is stymied by a lack of product.

Singapore's exchange does not offer a wide variety of ETFs, noted Leonteq's Troise. "[So] you can’t have a diversified portfolio, which is a deal breaker.”

The emergence of automated advisers could offer end-investors more competition and cheaper investment options. But the region’s regulators should seriously contemplate how best to encourage their proliferation, and the ETF products they depend on.

Asia’s robots are coming, but they will need the help of the region’s regulators if they are to stay.

This article is an extract from a feature in the June issue of AsianInvestor magazine. The second part will appear in the next day or two.