Why robo-advisors need to pull their weight if they wish to succeed in Asia ______

/ 14 Sep 2021

Leo Chen, Managing Director - Head of Asia, Calastone

With significant inflows expected within the next five years, the robo-advisory market has a promising future. And while many are predicting Asia to grow significantly, important barriers remain. Interestingly, the Covid-19 pandemic has unearthed huge appetite for digital investing but more needs to be done by asset managers to spread the word and improve services.

Assets under management (AUM) in the robo-advisory marketplace is expected to hit more than US$1.4trillion by the end of 2021 reaching more than double that ($2.84 trillion) by 2025, according to Statista. In context, this would require an estimated 480 million individual users adopting the investment method within four years with an average AUM per use of just less than US$5,000.

In brief, robo-advisors are designed to automate the process of investment via the use of sophisticated software algorithms. As such, most robo-advisors are content with charging lower fees than conventional financial advisors because they invest in established portfolios typically made up off low-fee exchange-traded funds. There are plenty of examples where robo-advisors provide a more bespoke service, but this is usually reserved for more sophisticated investors.

What is interesting about Statista’s projections is that US-based investors are expected to account for around two thirds of the expected AUM by the end of this year. Many may have expected to see a more even spread globally, especially given the accessibility of the service. However, adoption of robo-advisors has remained stubbornly low in Europe, for example.

One potential reason for that could be the reach of robo-advisory providers themselves. The four largest asset managers by AUM who offer these services – Vanguard, Charles Schwab, Betterment and Wealthfront are all US-headquartered; it makes sense their home territories are prioritised to maintain and grow market share in terms of AUM.

The right demographics

Where the battle really lies is in Asia. Adoption for the service continues to grow and many are predicting the Asia Pacific market will experience the most significant growth in terms of individual adoption between 2021 and 2026. According to a recent Deloitte report[1] – The rise of robo-advisors in Asia Pacific – users in the regions totalled 17.9 million in 2018, approximately double that of North America and Europe combined.

So, while a user in Asia may have a smaller wallet than their US counterpart, their appetite for the service is strong. To understand why, it’s important to understand both the development of robo-advisory itself and the demographic development of the Asia pacific region.

In 2008, robo-advisory came into the wealth management industry as a means for investors to manage passive, buy-and-hold investment through a simple online interface. The potential to offer lower fees and allow users to work with fairly low investment amounts matches the emergence of a class of consumers very comfortable with interacting with digital services – millennials and Generation-X, especially – those who have more money to tuck away and who have an aspirational outlook.

To underline this, in 2020, an estimated 2 billion Asians were considered as middle class. That number could increase to 3.5 billion by 2030, according to the World Economic Forum[2]. It seems unlikely the traditional private banking market will be able to support this level of growth alone.

Hurdles to jump

It should not be considered given that robo-advisory will become the dominant force within investment. Many challenges remain for the sector. As Deloitte has flagged, these include data privacy and cyber threats, as well as issues related to “the size of investments and the deep expertise required to develop and manage robo-advisory competencies in an environment with many legacy IT systems”.

These are not insignificant hurdles to jump. And on the front end, there is also still a need to develop both the suite of product offerings and the means by which to interact with customers. As markets remain both challenging and volatile, investors need effective advice on how to manage their money, not to be left alone to their own devices. According to a Calastone report[3], 79% of respondents believe robo-advisory will expand as the funds industry seeks new mechanisms for delivering investment advice. Robo advisors take note.

The opportunity unearthed by Covid

The wild card in this story has been the Covid-19 pandemic. Utterly disrupting almost everything in its path, one very obvious consequence has been the lack of close contact interaction and increased financial volatility. As a result, there is emerging evidence that younger investors could gravitate towards robo advisory adoption as a means to supplement existing savings. However, financial planning education and understanding of the financial markets is potentially holding them back.

A recent study in Malaysia points to this issue. According to Financial Planning Review[4], which published the study, analysis from 2020 shows that consumers with higher financial knowledge are disposed to using digital services have a “greater tendency” to adopt financial robo-advisors in times of crisis.

Malaysia is a useful example to use here. Financial technology and wealthtech has gained in popularity among Malaysian investors underlined by the increased online investing as social restrictions forced people to stay at home. Millennials aged between 26 and 40 comprised 68% of those using online investment platforms last year, according to a survey conducted by Rakuten Insight Malaysia last year. The research company also found that among digital retail investors who chose to trade in equities, the highest volume of trading activity was reported by the 26- to 30-year-olds.

However, although investors are becoming more digital savvy and conscious of their futures, the opportunity robo-advisors present is not well understood in Malaysia. This may be partially down to product marketing and distribution but, at a more fundamental level, many Malaysians lack adequate financial planning advice to understand the importance of investing for the future. Worryingly, more than four in 10 Malaysians have only the employee provident funds as their primary savings for retirement; this is not a dissimilar situation facing many other countries within Southeast Asia.

The point here is that government and regulators have an opportunity to support the development of more retirement pillars to supplement core retirements funds in a way that is cost effective and can reach a large swathe of the population – robo-advisory could well provide a perfect solution to boosting savings, but it’s clear that the fund management industry has to pull its weight, also.

[1] https://www2.deloitte.com/content/dam/Deloitte/sg/Documents/financial-services/sea-fsi-robo-advisers-asia-pacific.pdf

[2] https://www.weforum.org/agenda/2020/07/the-rise-of-the-asian-middle-class

[3] https://www2.calastone.com/asiafundsglobal2020

[4] https://onlinelibrary.wiley.com/doi/10.1002/cfp2.1127

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