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Asia a game-changer for robo-advice

Asia a game-changer for robo-advice

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By Frank Troise ·
September 16 2016

Asia a game-changer for robo-advice

Despite offering new, disruptive ways for clients to access financial services, robo-advice is yet to become truly revolutionary to the way business is conducted, but developments in Asia may be about to change that, writes Leonteq's Frank Troise.

We are at a fascinating inflection point in FinTech and our community of entrepreneurs needs to be aware of the change approaching.

The capital markets have undergone a significant amount of stress and the banking system has been under siege as a consequence.

Higher compliance costs and a lower yield curve have dramatically lowered the profitability for these institutions. This was the consequence and result of the Global Financial Crisis.

This momentary pause in the financial services industry allowed all of us to perceive a weakness in the system…and by default an opportunity to innovate and disrupt. But was it really?

The financial industry is certainly going through a unique period of introspection and a crisis of confidence around its own future readiness. Hence, the genesis of robo-advisors and digital wealth.

This particular area is too similar to the Do-It-Yourself trading movement from years ago when disruptors like E*TRADE and Ameritrade pioneered online trading.


The industry then was crowded with copy-cats who we no longer remember. Today, we run that same parallel track in robo-advice.

On a global level, venture capital (VC) backed market entrants are competing against very well established incumbents who have been, for all intents and purposes, competing with one arm tied behind their back - with the choice of compliance versus innovation, compliance will always win.

But the VC-backed entrants did one thing for the incumbents: market validation. Now the incumbents have the data to support that, similar to on-line trading, on-line wealth management is a new channel of distribution.

In the aftermath of that epiphany, we are seeing the disappearance of the B2C models, and the industry's entrepreneurs focus on B2B offerings. As they try to stay one step ahead, entrepreneurs can hear the breath of the incumbents…and not too far behind them, the ultimate game changer: Asia.

Incumbents, especially in the USA, are leveraging large existing user bases to monetise. Given their legacy of established brands this is an efficient path forward for the incumbents. Why? Their constituents are over-banked.

Asia's under-banked markets present another paradigm completely. There the battleground is against enormous mobile platforms (WeChat), where their user-base is in the hundreds of millions.

For these Asian behemoths, client acquisition is cheap and done at massive scale.

How can an entrepreneurial firm compete in this robo-advice space?

They can't, not unless they focus on a new direction.

Robo-advice to date has been focused on providing much of what has been known already. The client acquisition, onboarding, know-your-customer, and portfolio management are all using well known knowledge/information. This lack of unique intellectual property (IP) has always been an Achilles heel for robo-advice.

Robo-advice will likely witness a second transformation that will provide the users a new experience, and more importantly, new data.

The following trends to us are apparent:



  • Portfolio customisation: based on the end users risk profile they should be able to create any portfolio mix. Legacy robo-advisors have pre-configured model portfolios;



  • Smart beta: Static portfolio allocations to market based ETF indices will be supplemented with Smart Beta offerings. These offerings will cause significant debate in terms of market alpha and cost;



  • Insurance: Why not guarantee the performance of the portfolio? Insurance companies are compelled to enter the wealth space given their ability to guarantee returns; and



  • Hedging: structured market participants like us will provide hedging "widgets" to enable robo-advisors to hedge any risk. Therefore, their end clients can have a risk-on, risk-off option on their respective portfolios.



All four of the above are unique IP and scalable. To date the industry hasn't shown the innovation required to make robo-advice a true game-changer but, from the themes we are seeing, in Asia that could be set to change.

Frank Troise is the managing director of digital products at Leonteq


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