Why AM Firms are buying robo-advisors.

Robo-advice is all the rage, both in private banking and asset management. While some experts believe the trend is inescapable, others believe robo-advice will struggle to take off in Asia.

Martin Young, CEO of Farringdon Asset Management, an external asset manager, tells Citywire Asia about the challenges and possibilities of robots influencing the region’s investment landscape.


Do you believe robo-advice will take off in Asia?

Financial technology is moving at a rapid pace. But the interaction between tech and regulation isn’t keeping up. Technology is far ahead of what regulatory authorities are comfortable with.

In the case of robo-advice, which is essentially a North American or European idea, I believe there will be challenges in the quest to conquer Asia.

Robo-advice can take off in Asia but it will probably be on the insurance side. On the stock or bond market side, it might not be as effective as it could be.

Unless passporting takes off in a big way, or there is an expansion of the secondary markets in Asia, I think robo-advice will struggle to make a mark.

We don’t have big stock markets in the region, there is not enough depth and the fund selection market is very small.

Increasingly, exchange-traded funds (ETFs) are also being used, although regulators still consider this a high-risk proposition, in contrast to how ETFs are viewed in the West.

Platforms in the US or the UK can have more than 80,000 funds; in Asia, most platforms have around 300-400 funds.

What challenges does robo-advice face in Asia?

The financial planning industry in Asia is still at a fledgling stage. The needs of clients here are very different from those in more mature markets.

Robo-advice works best when it has the capacity to select from thousands of options. This is not the case in Singapore, where options are limited to just a few hundred.

Both Asian fixed income and Asian equities are considered too risky for the average investor, since they come under emerging markets.

I think robo-advice is best suited to younger clients – millennials – who have anything from $10,000 upwards to invest. They are more digitally savvy and are definitely more price conscious.

However, most wealth firms that look at clients with investable assets of $2 million or more will have to focus on accredited investors. These tend to be older – 50 years or above – and less tech savvy. These are not people looking for robo-advice.

With robo-advice models, clients also have to fill out questionnaires that decide your risk profile. Most investors don’t always answer accurately and might not have an accurate perception of what their risk tolerance levels are.

Overall, fragmented markets, stringent regulations and a model that might be suited to a younger set of clients will pose challenges to the pace at which robo-advice is adopted in Asia.

Why are asset management firms snapping up companies that have created robo-advice?

Asset management firms are simply trying to gain another channel with this trend. They are probably trying to bypass banks, which have historically been quite expensive for them.

Are there any trends we should watch out for over the next five years? One of the trends to watch in fintech is security. This seems to be the biggest area of concern for fintech experts.

The challenges of data security are not confined to emerging or new markets; they are also relevant to developed markets.

Another trend is related to the increasing product acquisition costs for institutions. At the same time, regulations are also increasing.

So anything that helps institutions sell better to people directly will assume importance. In that context, big data could be very relevant.

Source from citywireasia.com/