Enter the robo-adviser (Part 1)

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Platforms using powerful algorithms to assign investors diversified portfolios have taken the US and Europe by storm. This technology is now available to Asian investors, with the launch of 8 Now!, a robo-advisory service provided by Hong Kong-based 8 Securities Ltd.

 

THE idea of having computers provide you with investment solutions would have been unimaginable a decade ago. People turned to financial planners, agents or relationship managers at banks to provide them advice on the various investment tools. 

Today, technology plays a big role in financial advisory services. There are now online brokerages that allow investors to easily trade equities on various stock markets and fund supermarket models that make it possible for users to buy and sell units in unit trusts online.

Lately, platforms that use powerful computer algorithms and model portfolios to apportion investments according to the client’s risk tolerance and investment objectives have taken countries such as the US and the UK by storm. Firms that use these platforms are commonly known as robo-advisory firms. Their investment offerings are usually exchange-traded funds (ETFs), which offer diversification in terms of investment class, geographical locations and sectors. 

The key features of these platforms are the affordable minimum investment amounts and how easily investors can track their portfolios online. This technology arrived in this part of the world in late January with the launch of 8 Now!, a service provided by online brokerage firm 8 Securities Ltd in Hong Kong. 

8 Securities founder and executive chairman Mathias Helleu aims to promote this technology in the financial planning and wealth management industry. “Wealth management in general has been protected thus far from technology, from a customer standpoint. Some businesses have been transformed by technology, such as online brokerages, but not in wealth management. 

“Like our competitors in the US, we are using technology here [in Asia] to build diversified portfolios using very powerful algorithms, and then passing on the benefit to the end customers with very low fees.”

This service will allow those with additional savings to diversify their portfolio at a low entry cost. 

“What do you do with your savings? Savings accounts with the banks don’t bring you anything. Keeping money in cash is safe, but you get inflation erosion every year. Obviously, you must invest in different asset classes,” Helleu says in an exclusive telephone interview with Personal Wealth.

“Financial markets are complicated. And quite frankly, the only way to do well is to have a diversified portfolio in terms of geography and sectors. But diversification comes at a price,” he adds.

In order to truly diversify, investors need to be wealthy or be prepared to invest in products that offer high entry fees, says Helleu. “If you are very wealthy, you can have access to the products that are designed for you by the private banks. But they are very expensive and require a very high minimum [investment amount]. 

“Or you can go into diversified unit trust funds. But these products are not very competitive or powerful. With unit trusts, you have an entry fee of 5% [as well as] management and exit fees. This means there won’t be much left for investors [after that].”

Under 8 Now!, the wealth management platform offers investors 16 ETFs that invest in stocks and bonds listed on the US stock markets. Collectively, these funds provide exposure to 300 stocks and bonds from around the world, such as the US, Europe, South East Asia and Japan. The investments are also diversified across various industry sectors, including technology, healthcare, financial services, real estate and consumer goods. 

ETFs are investment funds listed on the stock exchange. They track an index’s overall performance. Consequently, the investment has lower operational expenses. ETFs aim to provide investors with benchmark returns at minimal cost.

8 Securities has teamed up with Morningstar Associates, a subsidiary of the Morningstar Asset Management Group, to offer this robo-advisory service to investors. Morningstar Associates provide 8 Securities with the algorithms that help generate and manage investment portfolios for investors. The portfolios will change accordingly with the economic conditions.

8 Securities has been providing brokerage services for more than two years, and currently has US$750 million (RM2.7 billion) in assets under management. It has more than 20,000 customers, mainly from Hong Kong and Japan. The company also has an office in Tokyo. 

Helleu himself is also no stranger to online trading and do-it-yourself investing. Prior to founding 8 Securities, he was managing director of E*Trade Financial Corp’s international business. E*Trade is a leading online discount brokerage firm.

Before a portfolio can be generated, an investor needs to sign up and answer a set of questions designed by Morningstar Associates. The questions, which are divided into two sections — the Time Horizon Score and Risk Aversion Score — determine the investor’s risk tolerance. Each section is scored separately and then combined to form a total score.

Investors are grouped into one of three categories — conservative, moderate or aggressive. Based on their answers, the investors are assigned a recommended portfolio by Morningstar Associates. 

Investors are allowed to sign up for more than one account. Once a portfolio is created, however, it cannot be tweaked or changed by the investor due to a pre-set allocation of assets that will allow for future automated rebalancing of portfolio. 

“After the portfolio is created, the investor cannot tweak it even if he disagrees with the recommendation. Investors will have to take it or leave it,” Helleu says.

Investors can sell their current portfolio and switch to a different one (for example, conservative to aggressive) at no extra charge. For the time being though, only US-based ETFs are offered by 8 Securities.

However, Helleu says ETFs in other markets may be included in the future. 

8 Securities’ services are not just for the wealthy but also the average investor, whether they are Gen Y or housewives. “In the US, [robo-advisory] companies target more the millennials, who are very IT savvy and don’t want to speak to a [human] manager,” says Helleu.

“In Asia, our product appeals to a different segment because it is simple to use. By lowering the entry point, our services are accessible to everybody.” 

The minimum investment amount is now an affordable US$1,000, compared with the US$10,000 when the service was first introduced by 8 Securities. However, to encourage more participation, the company has launched a promotion to allow investors to participate with as little as US$100.

Investor monies are held in segregated custodial accounts within their panel of banks to safeguard the assets. In addition, Helleu says 8 Securities is a licensed broker-dealer regulated by the Securities and Futures Commission of Hong Kong. 

An annual fee of 0.88% is charged on the total size of an investor’s portfolio. This is the only fee charged by the company. There are no additional fees imposed for getting in and out of a portfolio.

Robo-advisory service providers, such as 8 Securities, offer tech-savvy investors a cheaper option when it comes to diversifying their portfolios. Before their emergence on the wealth management scene, diversified investment products were only offered by commercial banks. They also required a large investment amount and were only accessible to the wealthy. 

But the Internet and technology have been game-changers. With their low entry fees and large exposure to stocks and bonds around the world via their investments in ETFs, these robo-advisory firms have opened yet another door for investors to diversify their portfolios. 

Helleu is a firm believer of diversification. “Take my own portfolio as an example. The number one stock I own is Apple, but it only represents 0.35% of my total portfolio.”

The 8 Now! service is aimed at investors who prefer to have conservative portfolios while growing their savings. “Bear in mind that most portfolios are pretty conservative. This is about saving, not investing 
aggressively,” says Helleu.

Does this mean there are no risks when it comes to investing with these automated investment portfolios?

Of course there are risks, Helleu says, but they are minimised with diversification. “Over the long run, diversification is the best way to protect you.”

 

This article first appeared in Personal Wealth, a section of The Edge Malaysia, on March 2 - 8, 2015.