Robo-advisors: fate or fad?
The growth of robo-advice is correlated with generational change, as younger people look for cheaper and more efficient means by which to invest their savings. Fund Forum Asia speakers acknowledged the existing distribution model does not translate well with a millennial audience that is increasingly digitalised but also hamstrung by reduced spending power and incomes. Robo-advice has been around for a long time now, although the software has undergone marked improvements giving it greater credibility.
Robo-advice allows investors to outline their performance criteria, return expectations, life goals and risk profiles online, enabling algorithms to recommend funds suited to clients’ stated financial objectives. For example, a 30 something investor about to start a family while simultaneously paying off a mortgage will probably have a limited risk profile, and a robo-advisor would suggest they invest into fairly generic or unexciting mutual funds.
This is an inexpensive way of receiving guidance on funds, particularly in Europe as regulations such as the Markets in Financial Instruments Directive II (MiFID II) start to bite. There was even speculation among Fund Forum Asia delegates of similar prohibitions around inducements, which ban advisors from providing “free” advice, becoming the norm in Asian markets. As such, robo-advisors could win more business off the back of this, given they can cost clients significantly less than going directly to a consultant or independent financial advisor (IFA).
This technology may also bring efficiencies to the fund selection market. A human fund selector simply cannot process thousands of potential products and analyse the data sets whereas a robo-advisor can. One panellist highlighted a robo-advisor would eliminate emotional bias in fund selection. Such scalability – especially when dealing with clients possessing limited net worth – will be critical as managers seek to prevent costs spiralling out of control.
Robo-advisers are innovative but some experts at the conference were beginning to acknowledge their capabilities may have been oversold. The distribution market is not going to entirely migrate online and there will evidently be a role for intermediaries in the future. A routine complaint about apps or online tools is that the absence of a human overlay can be frustrating when an issue or problem arises. Robo-advisors must avoid this trap, and many providers recognise a hybrid model, which incorporates human input, will become the norm.
To succeed, robo-advisors need substance. Simply reinventing the way allocators invest by creating a user-friendly online platform is only a partial solution to what is a fundamental problem in asset management, and this is something we feel is particularly important. If the back-end technology infrastructure does not evolve with the front-end systems, robo-advisors will solve few problems. Reducing the cost and risk of operations will be key in ensuring that robo-advisers can remain ahead of the curve.
Distributing a fund in Asia
Robo-advice is clearly going to have a role to play in the future, but Fund Forum Asia speakers also discussed fund distribution schemes, and how these are likely to change. Most managers looking to distribute into the established APAC markets of Hong Kong, Singapore or Taiwan will do so through a UCITS wrap. A handful of firms are, however, testing the waters with other schemes such as the ASEAN Collective Investment Scheme (CIS) and Mutual Recognition of Funds (MRF), a bilateral link permitting fund distribution between Hong Kong and China. The Asia Region Funds Passport (ARFP) will launch later this year.
The prevalence of these local passporting schemes has not gone unnoticed but it is clear that most fund managers are holding back from utilising them. Experts at Fund Forum Asia highlight the limited inflows and adoption rates of the ASEAN CIS can be explained by the lack of joined-up regulation and tax requirements across the markets it operates in. If a fund investor is unable to obtain tax neutrality – as is presently the case under the ASEAN CIS – the attractiveness of allocating into a manager using this structure outside of their home jurisdiction is limited.
MRF has been more successful although it is widely accepted that there is room for improvement. Timings did not help MRF. It launched during a period when the Chinese government was trying to arrest market volatility and stabilise the currency. This distraction meant fund authorisations were very low, but there are signs this is changing as the Chinese economy enters into recovery mode following higher than expected Q1 GDP growth.
Hong Kong is also pushing for its own MRF initiatives with European markets, something that was confirmed by the SFC at Fund Forum Asia. In December 2016, an MRF agreement was signed between Hong Kong and Switzerland laying the framework for cross-border distribution of funds into each respective market. For Swiss funds, the MRF will give them access to Hong Kong investors, while APAC fund managers will gain exposure to the sizeable private banking and HNWI network in Switzerland.
Technology shaping the industry
Distribution channels may be evolving but automation of transactional processes in Asia is well-behind that of Europe, although improvements are being made. These improvements are strongly supported by Calastone. The digitisation of asset management is obviously welcome, with huge advances in areas like robo-advice, but there needs to be greater focus on the automation of operational processes in fund management in order to support these advances.
Opening an account at a fund, for example, is not always simple and investors are frequently obliged to supply documentation and paper-based evidence affirming who they are; where they are domiciled; and confirmation that they pay the correct amount of tax. Fax remains fairly dominant in the transactional process, and changes need to be made otherwise inefficiencies and errors will never be eliminated.
Manual processes such as fax have caused issues in other key areas of the transactional process. Outdated methods of trading and processing funds have significantly increased cost and risk. In addition, manual methods have meant that there is no immediate visibility over these trades. Working towards a more automated transaction chain should be a key priority for the funds industry in Asia, so it is encouraging to see that these topics are being discussed at leading industry events such as Fund Forum Asia. However, if the industry is to succeed in adopting the technology that it needs, effective collaboration with technology companies will be essential.