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Banking on Robo Advisors

Banking on Robo Advisors: How to Pick Your Winning Partner

Know thy enemy, know thy self. Let Synpulse’s latest field research guide you to a winning battle by demystifying 16 of the top Robo-advisors in Asia.

Banks are facing a challenge to meet the demands of the modern investor in an increasingly complex investment environment. With investors in Asia slowly turning their interest to Robo-Advisors and Robo-Advisory services, Banks need to re-validate their business and client engagement models to re-engage these investors. It is important to note that Robo- Advisory platforms can serve as the engine driving the advisory process as well as portfolio decisions, however it does not necessitate a fully automated advisory service as; it can also serve as a complement to existing non-discretionary advisory services.

In this article, Synpulse explains the needs of the «re-wired investors», the rise of Robo-Advisors as well as providing insights into the top Robo-Advisors in Asia. Through Synpulse detailed field study of the top 16 Robo-Advisors in Asia, Synpulse aims to help Banks to assess, understand and potentially identify their appropriate Robo-Advisor partner.

Re-wired investors & the rise of Robo-Advisories

The emergence of the «re-wired investor» presents new challenges for Banks. Re-wired investors seek simplicity and efficiency through technology to navigate the increasingly complex investment environment. Robo-Advisors capitalize on the demand of the «re-wired investors» by emphasizing goal- oriented investing and portfolio management automation to reduce the complexity in investment decision making.

This growing demand for cost-efficiency by «re-wired investors» coincides with the bourgeoning trend of investors participating into low cost passive and/or active ETFs strategies; The global ETF market is expected to grow into 4 trillion USD1.

Cost efficiencies and revenue maximization are also driving the wealth management industry towards Robo-Advisory offerings. Many wealth managers are embarking on automation initiatives to reduce costs and activate new revenue streams in order to mitigate declining revenues experienced in the last decade.

Given its low-cost and low-maintenance service model, Robo-Advisory can help Banks capture the fat tail of under-served clients – mainly in the lower asset under management (AUM) segments – thereby unlocking additional revenue pools.

The combination of changing client needs and increasing pressure on margins has propelled Robo-Advisory solutions to the forefront of the wealth management industry. The variety of such offerings is growing exponentially.

By 2020, Robo-Advisory platforms are forecasted to surpass 8.1 trillion USD in global AUM2. Regardless of the provider, be it pure-play Robo-Advisory platforms or traditional wealth management leaders offering Robo-Advisory services, there is little doubt that Robo-Advisory is here to stay.

Robo-Advisory in APAC

In a 2015 survey, Asian HNWI demonstrated the highest propensity to use automated services. As many as 76% consider having a portion of their wealth managed by an automated advisory service, well above the global average of 47%3. Bolstered by this outlook, Robo-Advisors in Asia are confident that their Asset Under Management will grow to 500 billion USD by 20214.

In anticipation, the Singapore and Hong Kong governments, Asia Pacific’s two largest financial hubs, are actively supporting fintech startups, many of whom are Robo-Advisors in order to meet the en-masse growth of re-wired investors and their changing demands.

Nonetheless, the Fintech challengers’ claim of Asian HNWI has, so far, been limited. Success stories have been written by only a few traditional players offering limited hybrid Robo-Advisory services.

Synpulse’s belief is that Banks in Asia are in the best position to capitalize on this opportunity by partnering with mature Robo-Advisors.

To assess and review potential Robo-Advisory partners, Synpulse conducted a review of top Robo-Advisors in Asia based on two key metrics; functionality sophistication and portfolio construction models and the Robo-Advisor’s relative market share.

Synpulse study advisory capabilities & portfolio allocation models

In our latest field research, we interviewed 16 different Robo-Advisors in both Hong Kong and Singapore with varied degrees of committed funding and commercial success. These Robo-Advisors can be mainly segmented into B2B and B2C solutions with a small share in B2HNWI — a segment primarily driven by independent asset management firms and family offices.

The survey covered areas such as definition of the market universe, asset class inclusion within the portfolio, complexity of portfolio optimization methods, definition of risk used for client profiling, and additional improvements on any of the three standard asset allocation models (as shown in Figure 1).

Markowitz Modern Portfolio Theory (MPT), Black & Litterman and pure risk standard asset allocation Models

In terms of portfolio construction maturity, we categorised the Robo-Advisors into one of four groups, «Enterprise», «In- House», «Stochastic», and «Historical». In terms of functionality sophistication, we evaluated the players based on common advisory stages: «onboarding», «understanding the client», «defining an investment solution», «acting on the solution» and «monitoring the solution». Based on the survey and in person demonstrations of each Robo-Advisor’s functionalities — both front and back — we derived a market ranking in terms of portfolio construction maturity and functionality sophistication.

Figure 2 below shows the individual Robo-Advisors’ portfolio construction maturity based on responses to the survey. Each Robo-Advisor is represented by an alphabetical ID. The distribution of the Robo-Advisors across the different portfolio construction maturity radar chart is relatively even. Banks looking to partner with a Robo-Advisor need to understand the type of portfolio construction approach adopted and assess whether it is aligned to the bank’s internal investment approach.

Historical, Stochastic, Enterprise and In-House portfolio construction maturity categories

Using Synpulse’s proprietary scoring framework, the functions and features offered by the Robo-Advisors were reviewed and classified into three groups: sophisticated solutions, intermediate solutions and basic solutions.

Figure 3 shows the functionality sophistication in the corresponding steps of the advisory process. While players in sophisticated and intermediate solutions were not far apart in terms of their functionalities,players in basic solutions showed significant lags in the «onboarding», «monitoring» and «defining the solution» stages of the advisory process. Players in basic solutions lagged the most in the «defining the solution» stage of the advisory process.

Mapping of the functionality sophistication in the 5 steps of the Robo-Advisory process

We observed markedly less dispersion and more cohesiveness in the offerings of most Robo-Advisors. Not surprisingly, top players in the portfolio construction maturity category were also best-in-class in terms of functionality sophistication. Banks looking to partner with a Robo-Advisor need to be aware and ready to address any potential gaps by leveraging their existing internal functions or creating new processes.

In Figure 4, we plotted the two key metrics of our assessment as individual dimensions on a graph and included the relative amount of committed funding received for each player. We also categorized the players into B2B, B2C and B2HNWI based on their primary market perception (although most players do not restrict themselves to only one of these categories).

Mapping of portfolio construction maturity, functionality sophistication, committed funding received and client focus.

In our survey, four players emerged as clear leaders among the 16 Robo-Advisors. Led by industry veteran founders, they have built advanced portfolio models and other features based on clear insights into client needs and solution delivery. This is relatively aligned to the investors’ confidence in these Robo-Advisor solutions.

The right Robo for you

Identifying which Robo-Advisor to partner can be an arduous and time-consuming process. Banks need to assess and identify a Robo-Advisor which not only offers a competitive and efficient service offering but that can also be easily integrated into to the bank’s existing offering.

Through our research, we have analyzed and identified the different strengths and capabilities of the most popular Robo-Advisors in Asia through direct engagement and hands-on demonstrations.

We found that Robo-Advisors with the most sophisticated portfolio construction maturity also tended to offer a wider coverage of services compared to the competition.

These Robo-Advisors are ideal for Banks looking to implement a full-suite of Robo-Advisory services. Nevertheless, Banks with more bespoke needs and offerings may benefit more by considering Robo-Advisors with distinct strengths to structure tailored solutions.

Our latest field research has given us deep insights into the relative strengths of the different Robo-Advisory players. Together with the SPEEDmethod® — our project methodology for vendor selection, project implementation and extensive project expertise in Private Banking — Synpulse is in a unique position to help banks identify and define the appropriate client advisory offering, select and integrate it.

Author Acknowledgement

We would like to specially thank Elena Okhonko, our lead field researcher for her contribution and co-authorship of the article with Shannon Aw (Manager) and Yash Shah (Senior Consultant)

Besides the authors, Michael Benz and Patrick Otto have also contributed to this article.

To understand more about our survey and its insights, please approach the contact person at the end of this page.

References

  1. Deutsche Bank Market Research, «ETF Annual Review & Outlook» — Jan 2017
  2. BI Intelligence, «Forecast: Global Asset Under Management by Robo-Advisors» — 2017
  3. IDC Financial Insights, «Robo-Advisory: Changing the Face of Wealth in Asia/Pacific» — 2017
  4. Capgemini, «Evolution of the automated Advisors» — 2016

Shannon Aw
Manager
shannon.aw@synpulse.com
 Shannon Aw
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