The rise and fall and rise again of robo investing
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Transcript of The rise and fall and rise again of robo investing
Bizzarch.com.au
The rise and fall and rise again of robo investing
EXECUTIVE SUMMARY
In its simplest form, robo-investing is any tool, algorithm or service that helps achieve investment outcomes for wealth investors. At its core are algorithms to determine investment strategies, optimal portfolios and investment ideas aligned with goals, risk and time horizon. Algorithms can range from a simple set of rules that build a single portfolio to complex multi-strategy formula that review thousands of instruments and scenarios in order to construct an optimised portfolio.
Robo-investing took off after the Global Financial Crisis with the emergence of many fintech start-ups (including Betterment and Wealthfront) challenging the incumbent financial institutions. Leveraging easy-to-use interfaces, exchange traded funds, low fees, and industry distrust, they attracted customers (especially younger and middle-aged investors) to their automated investment platforms.
By 2012, robo-investing was starting to gain traction encouraging the established players like Schwab and Vanguard to launch competing services. The industry grew from zero funds in 2009 to a projected $300 billion globally in assets under management at the end of 2015. Some market analysts are predicting the industry could grow to $2.2 trillion by 2020.
As the industry grows, it appears increasingly likely that few of the fintech innovators will end up as winners in the new world as they struggle with the high cost of client acquisition and intense competition from incumbents who’ve responded with copycat experiences, reduce fee structures and the luxury of large customer pools. Regulatory compliance is adding to the cost as regulators around the world adapt their guidelines to cover robo-investing.
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EXECUTIVE SUMMARY
Research also suggests that consumers do not trust fully automated solutions, tending to invest less than 10% of their wealth in robo solutions. Tech-augmented human advisors, or hybrids mixing human and algorithms, are rapidly growing past both their robo-advisor and traditional human advisor peers.
Going forward it appears we are entering a capability and technology arms race between financial institutions, broker-dealers and (surviving) fintech’s as they battle to become the future platform of choice. Personal Financial Management, Financial Planning (robo-advice) and Fractional Investing will play an increasingly important role in the evolution of the industry and AI, machine learning and cognitive computing will soon become a differentiator then standard between offerings.
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FINTECH
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WEALTH TECH
ROBO IS A MICROCOSM OF THE FINTECH ECOSYSTEM
ROBO ADVICE
ROBO INVESTING
LEADING AUSTRALIAN WEALTHTECH INNOVATORS
ROBO INVESTINGSelf Executed Trades
ROBO INVESTINGFully Automated
ROBO ADVICE
No Players
ROBO INVESTINGAdviser Executed
STRATEGY & RESEARCH
TRADINGPORTFOLIO ADMIN
SharesightClassSuper
BGI, CXi
Decimal, Owners AdvisoryAdviserlogic, ProvisioMidwinter, Big Future
Ignition Wealth
StockDoctor, StocklightSimplyWallSt
Skaffold, Investsmart
PORTFOLIO MANAGEMENT
InvestSmart, SharesightSelfWealth, Sharesight
Nabtrade, BellDirectCommSec, eTrade
IG Markets, SelfWealth
Owners AdvisoryMacrovue
SixParkStockspot, Clover
IgnitionWealth, QuiteGrowthAcorns, BT Invest
PERSONAL FINANCE
PocketbookMoneyBrilliantMap My Plan
MIRRORING FINTECHS IN GLOBAL WEALTHTECH
ROBO INVESTINGSelf Executed Trades
ROBO INVESTINGFully Automated
ROBO ADVICE
ROBO INVESTINGAdviser Executed
STRATEGY & RESEARCH
TRADINGPORTFOLIO ADMIN
IsharesTipRanksVectorVestHiddenlevers
Vanguard PAPersonal Capital Financial Engines
SharesightClassSuperBGICXi
DecimalOwners AdvisoryAdviserlogicProvisioMidwinterBig Future
DriveWealthDivyRobinhoodCashworkz
StockDoctorStocklightSimplyWallStSkaffoldInvestsmart
PORTFOLIO MANAGE
InvestSmartSharesightSelfWealth
SwanestSigfig PMTipRanksCoVestor
NabtradeBellDirectCommSeceTradeIG Markets
FutureAdviserMarketRidersMotif
OwnersAdvisoryMacrovue
JemstepForward Lane
Schwab IPFidelity GoBettermentWealthFrontHL Portfolio+Sigfig - NutmegAcronsHedgeable
SixParkStockspotCloverIgnitionWealthQuiteGrowthAcorns, BT Invest
PERSONAL FINANCE
Personal CapDobotMint
PocketbookMoneyBrilliantMap My Plan
Australian International
Sales & Marketing
Customer ManagementCustomer Acquisition
PurchasePortfolio
ReviewRebalance
ROBO INVESTING VALUE CHAIN
Use Case 1 Use Case 2 Use Case 3 Use Case 4
Use Case 1 : Shopfront discovery, the gravity that brings customers to the serviceUse Case 2 : Onboarding [ customer profiling, product review and simulations ] Use Case 3 : Onboarding [ purchase, customer sign up ]Use Case 4 : Portfolio Management
Asset
Allocation
Discovery
Shop front
Customer
Profiling
Product
Simulations
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ROBO INVESTING – BUSINESS MODELS
SELF EXECUTED
Accounts are managed via self-executed trades which means all investment selections, trades, and re-balancing
suggestions are identified via algorithms, but all trades are executed manually by the client through a third party broker-
dealer.
Good choice for Self Directed investors that need guidance on how to properly manage a portfolio, but who ultimately
want to act as their own decision makers and to remain personally involved in their
investments.
FULLY AUTOMATED
Accounts are managed through a fully automated platform which means all investment selections, re-balancing
opportunities, and trades are identified and executed via platform integrated
investment algorithms.
Good choice for those looking to have minimal involvement and little to no human interaction involving personalised
portfolio strategies.
ADVISER EXECUTED
Accounts are managed via advisor-executed trades which means investments,
trades, and re-balancing strategies are identified by platform-integrated
investment algorithms, but are reviewed and executed by a registered financial
adviser.
Good choice for those who don't meet the requirements demanded by traditional investment advisors or for those who
would like to lower portfolio fees while continuing to receive professional guidance
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…2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
THREE WAVES OF ROBO INNOVATION
Fintech BrokersFin Service Giants
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WHO’S WINNING Brokers & Platforms
>5b
Self Executed Trades Fully Automated Adviser Executed
Launch Q4 2016
Note: zero AUM means data was not freely available, but assume < $300m
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FINTECH B2C ROBO MOVEMENT IS LOSING STEAM
Copyright Michael Kitces www.kitces.com
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ROBO’S LEGACY
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1) THE EROSION OF FEES
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“ALL IN” FEES – SPLIT BY BASE FEE & EXPENSE RATIO
All in fees include management fees and expense rations ( etf fees and trading fees)All fees based on $100,000 portfolio
Self Executed Trades Fully Automated Adviser Executed
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“ALL IN” FEES – BY COUNTRY & the Goldilocks zone
All in fees include management fees and expense rations ( etf fees and trading fees)All fees based on $100,000 portfolio
Australia US Adviser ExecutedUK
Driving fee models down in all regions
2) THE IMPORTANCE OF THE HUMAN FACTOR
There are parts of the client-advisor relationship—such as reassuring clients through difficult markets, persuading clients to take action and synthesising different solutions—that remain the province of the financial advisor for the foreseeable future.
It is therefore essential to develop a unified client-advisor experience that seamlessly brings together the best of human, robo-advice and robo-investing capabilities. Understanding where robo can complement and enhance relationships will be key for most full-service wealth management firms going forward.
Additionally, digital wealth firms are relatable and empathetic. Even though technology is used to serve thousands of clients, the branding, messaging and vision is human. That means the goal is to have an iPhone app, a friendly design and the ability to chat with an advisor online at any time.
In wave 3 we are seeing a shift from technology-enabled human advice to human supported technology driven advice,
the hybrid model”
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3) DIGITAL WEALTH IS AN OMNI CHANNEL EXPERIENCE
Any timeAny whereAny device
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THE RISE AGAIN OF ROBOContinued innovation and new business models are
driving the next wave of robo investing
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1) THE SHIFTING BUSINESS MODEL
Research by Michael Kitces www.kitces.com
Pure play robo-advisers are pivoting their business models as the financial majors respond to the challenge.
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2) CRADLE TO GRAVE RELTIONSHIPS
$
Gifting
Industry players need to consider each customers investing needs as they progress through life stages, or target a specific segment and be the best.
Graphic copyright Decimal
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3) WHOLE OF FINTECH EXPERIENCE
One of the reasons incumbent institutions are winning is their ability to offer services across the full spectrum of banking and financial services, bring budget planning, savings, protection and advice in one holistic experience.
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“Shift from technology-enabled human advice to human supported technology driven advice”
4) BIG DATA & HUMAN INTERACTION
Artificial Intelligence
Advanced Algorithms( eg..stress testing)
Augmented Experience
Cognitive Computing
Predictive Services
MachineLearning
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Revenue : $11 million
5) FRACTIONALISATION IS A GAME CHANGER
Fractional investing is not only challenging the traditional domains of funds management, fractional investing is creeping into innovative plays in capital markets (fractional trading), property (DomaCom) and insurance.
Fractional investing allows a consumer to buy $50 of any collection of shares they want in one simple transaction.
Traditional financial service models across the board are under attack.
Fractional trading