Helping Asian Wealth Management Communities interact

Digital & Technology

Challenging the traditional investment approach


Jun 13, 2017

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Digital platforms to consolidate and automate the investment process are slowly gaining ground in Asia, but there is no ‘silver bullet’ and advisers will still play a role.

Panel speakers

Will Lawton, Co-Founder, Eigencat
Charlie O’Flaherty, Partner, Crossbridge Capital
Michele Ferrario, Co-Founder and Chief Executive Officer, StashAway
Vineet K Vohra, CFA, Director & Practice Leader, Arete Financial Partners
Mark Nelligan, Chief Executive Officer, Pershing Singapore
Duncan Klein, Head of Product Management, BondIT

A big topic of discussion in Asian wealth management continues to be how to consolidate and automate the investment process.

For the time being, there is a question around any real disruption to the investment approach. While the hedge fund industry is utilising big data in decision making, for example, private banks seem more focused on increasing efficiency rather than disrupting the existing approach.

What’s needed, it seems, is greater clarity over what robo-advice is and its real potential to impact the investment function – not just distribution.

These were among some of the most important conclusions of speakers at the annual flagship Hubbis Investment Solutions Forum in Singapore in June.

Change needed

The majority (37%) of poll respondents to the query over time before robo-advisers make a real impact, opted for three years – with 12% saying it will take a decade, and 9% choosing ‘never’.

Two of the most important areas to drive change include how financial advice is created and how it is delivered to the client.

Practitioners believe that the combination of these two changes makes it possible to bring really sophisticated investment frameworks to the retail market, at very low fees.

Potentially a higher percentage of retail investments are going to be advised versus pure self-directed trading through brokerage platforms – with Schwab’s and Vanguard’s moves in the US seemingly going in this direction

But the impact may even go one step further, believe practitioners, to product manufacturing, with reference to BlackRock’s shift towards automation, even for active funds)

In terms of the delivery of financial advice, the effect of digital disruption is more likely to be prominent in the segments below private wealth, which is currently incredibly under-served.

In Singapore, for example, only 19% of household financial holdings are invested in ‘securities’ (in comparison with 51% in the US), and 36% in cash (versus 14% in the US).  As a result, more innovation in delivery has the potential to significantly change a households’ asset allocation.

At the same time, more broadly, a dramatic change needs to happen on fee structure. 

Today, the retail market is served by a system where incentives in most cases are completely misaligned – with distributors charging the product manufacturers, rather than the clients, and therefore having a strong bias towards certain higher-margin products.

Clarity over robos

Another of the challenges, say industry specialists, is that robo-advisory is an oft-misunderstood term.

An automation of the investment process from goal setting and portfolio strategy, to security selection, transaction execution and servicing, can be digitised and has been called ‘robo-advisory’.

In the context of discussions on the investment process, however, robo-advisory here is taken to refer to an algorithm-based, asset allocation portfolio, executed through ETFs with automated rebalancing, and some manual oversight.

The moot point, then, is whether robo-advisory can add value, and how it should regulated and audited.

Instead, robo-advisory needs to be a solution for clients seeking a delegated quant solution. 

From an investment standpoint, it is not a silver bullet for all market conditions, and arguably works better in trending markets, or over the very long term, when compared with active models. But setting the matter of alpha aside, its primary value addition can be seen through the same lens that is used to settle an active versus passive debate – by recognising its risk-reducing role, as a complement to other solutions. 

Also, it should be regulated and audited like any other discretionary portfolio offering, subject to fiduciary standards and duties of care.

For a digital approach to be innovative for the investment engine – and not just be about distribution – there is a growing view that the second or third generations of robo-advisers will have far better investment processes and utilise a wider range of products.

As a result, it will become more meaningful as artificial intelligence improves. For the time being, however, digital is more about distribution.

Lessons so far

To date, several approaches have been used to help clients overcome various investment biases – from offering disciplined regular investing plans that take away the emotion of investing in down markets, to automated rebalancing programmes that make it easier to take profits and double-up on what’s cheap, to index investing that takes away the fear of falling behind, to life-stage investing that offers glide-paths to those unable to make asset allocation shifts in time, to closed-ended products that help resist the option of getting out too soon.

Seeing the huge flows into closed-ended products, they do appear to have greater merit than is recognised, believe some practitioners. 

They bring discipline, put the risk-mitigating effect of time to work and keep transaction costs – a big detractor of returns – down. 

It may well be distributor reluctance to forgo attractive revenue streams from short-term investing that keep these from becoming more popular. Or it might client avoidance of regret that keeps them from making a commitment.