How robo-advice could reshape fund management in APAC
19 Apr 2017
Robo-advice is at the forefront of topical innovative technologies in the asset management sector, something which is likely to drive both interest and concern.
Robo-advice is gaining stature as independent robo-advice firms grow and traditional fund management firms expand their offering. An increasing number of wealth managers – who traditionally focused on very high income earners – are developing robo-advice tools with much reduced AuM thresholds. Data from BI Intelligence predicted robo-advisors would control around $8 trillion in investor assets by 2020, and that $2.4 trillion of robo-adviser AuM will come from APAC.
APAC has a growing pool of wealth. Expanding economies and rising GDPs across the region have created a swelling and educated middle class. Boston Consulting Group reported that APAC would overtake North America in total private wealth after 2020, and will surpass Western Europe in 2017. The derisible rates of interest paid on bank deposits has disadvantaged savers globally, and the Asian middle classes are looking for returns of the kind that are offered by asset managers. However this demographic often finds itself unable to access suitable managers to look after their portfolios because minimum investment thresholds are too high.
There have been other barriers, for example the transfer agent (TA) systems at traditional asset managers are designed for B2B business activities, and may not always be capable of catering to high volume retail orders. In other words, asset managers’ systems and technology are tailored to high value, low volume investments from clientele such as pension schemes or sovereign wealth funds (SWFs). Retail clients regularly rebalance their portfolios, and do not invest significant amounts of capital relative to institutions. Asset managers simply do not have the operational set-up and resources to cope with frequently dealing low value direct investors.
Robo-advisers could well provide the answer, through the supply of economical, online financial guidance. Z-Ben Advisors, a China-focused consultancy, believes more than half of fund sales in China are done online today compared to five per-cent in 2012. The record-breaking inflows into Yu’e Bao (China's largest money market fund) are mainly down to the fact it could be bought and sold on Alibaba’s online payment system. Robo-advisors have sensed an opportunity in a region where technology features highly in people’s day to day activities.
Firms do need to be thoughtful in how they approach the development of robo-advisory software. In the automotive industry for example, if an engineer designs an aesthetic car with industry leading front-end technology, but continues to rely on unreliable or antiquated engine systems, problems will likely arise. The same is true for robo-advice. Creating a robo-advisor which offers an enjoyable visual user-experience, but lacks optimisation in its post-transactional operations, will not redress existing industry problems.
Reducing the cost and risk of operations will be key in ensuring that robo-advisers can remain ahead of the curve. They must look to automation and move towards straight-through-processing (STP) in order to achieve the highest levels of operational efficiency. The huge advances made in creating a straightforward front-end subscription and redemption process will count for very little if fund transactions continue to be processed manually, something which remains a challenge in a number of APAC countries. It also means costs will remain higher than they ought to be in many parts of the transaction chain.
Robo-advisors have also not eliminated the inefficiencies around know-your-customer (KYC) or anti-money laundering (AML) checks. These still exist, and there is limited point developing best of breed apps to facilitate online investing if the end customer still has to supply paper documentation confirming he/she is in compliance with international or local tax requirements, for example.
APAC is, however, moving towards a more automated marketplace in terms of fund transactions. The emergence of multi-jurisdictional, cross-border fund passport schemes such as the ASEAN CIS, ARFP and the China-Hong Kong Mutual Recognition of Funds (MRF), has pushed the industry in the direction of automation. As these distribution and passporting schemes expand, it is probable that robo-advisors will start to become major beneficiaries of them.
Fund automation in APAC is still below global standards, but this is changing. In a region that is highly tech-focussed and where wealth is growing quickly, robo-advisors will make headway, but automation and operational efficiency will be essential if they are to succeed.