This article first appeared in Personal Wealth, The Edge Malaysia Weekly on July 17, 2017 - July 23, 2017
Robo-advisers are typically seen as a more transparent, convenient and low-cost alternative to human financial advisers. However, these platforms have limited options when it comes to shariah-compliant investments due to the lack of investable assets in this space.
To tackle this issue and offer investors who use robo-advisory services another option, Farringdon Group has launched Algebra — Asia’s first robo-adviser to offer shariah-compliant investments. According to managing director and CEO Stuart Yeomans, the company’s Virtual Mutual Fund Technology (VMFT) allows robo-advisory services for shariah-compliant investments to be offered at a lower price point.
“Before us, there were no shariah-compliant robo-advisory services in the region despite the growing demand. That is why we developed VMFT,” says Yeomans.
“Instead of buying into an existing fund or exchange-traded fund (ETF) for clients, we use the technology to create a virtual fund. It allows us to hold various baskets of securities and divide the holdings across different clients — just like a fund or an ETF — but with virtually zero cost. We can do this because we spread out the cost among our clients, unlike our competitors who usually charge every client.”
As VMFT enables the company to handle transactions with almost any brokerage firm in the world, Algebra can offer a wider range of investments and asset classes than other robo-advisory platforms. It adopts a smart beta strategy, which uses algorithms to derive its active equity portfolio before blending with fixed-income ETFs or sukuk funds.
The strategy was developed by Singapore-based Farringdon Asset Management. “The company has been using this strategy for the last 10 years and it outperforms the S&P Shariah Index by about 2% each year,” says Yeomans.
“What we are doing is making it digital. We have done the security checks, upgraded our servers and spent money on the infrastructure. But apart from that, there are no extra costs. All of these are done internally.”
Farringdon Group, a private wealth management and personal tax planning company regulated by the Labuan Financial Services Authority, has mainly served high-net-worth individuals
(HNWIs) since 2007. It has about US$170 million under management.
Algebra was developed to meet the demand for shariah-compliant investments. According to Yeomans, this market is worth US$11.5 trillion. The shariah-compliant strategy used by the platform has been approved by Kuala Lumpur-based shariah advisory firm Amanie Advisors.
As Farringdon Group is based in Labuan, its transactions are done in US dollars. Algebra’s minimum investment amount is currently US$4,000 while its total expense ratio (TER) is about 0.85% per year.
“It is already cheap, but it is possible for us to drive down the cost. Realistically speaking, we may be able to offer our services at 0.4% to 0.6% if our application to be a custodian is approved. As we continue to expand the technology, we may be able to offer our services with a minimum investment amount of only US$100, which we aim to do in the next two years,” says Yeomans.
Although Algebra offers mainly shariah-compliant investments, the platform’s users also have the option of investing in the conventional space. The robo-adviser invests in iShares ETFs and stocks listed on the S&P 500 index.
Enabling the region
Even among HNWIs, there is a growing consensus globally that investment products and services should not be as expensive as they are, says Yeomans. With technological advancements in the industry, consumers expect lower price points for all types of products and services, especially with the commission-based model being phased out.
“I know a lot of financial advisers and private bankers who get large commissions from clients. But their services are really not worth the price,” says Yeomans.
“For example, some mutual fund agents charge about 3%. I have dealt with these people before. They are basically salespeople who ask you a few questions. Why can’t a computer do that?
“We understand that this should stop and we decided to take a step back to develop the platform. It is not something revolutionary. We have been doing the same thing for the past 10 years. It is just that it is a platform instead of human interaction.
“Cost is key here. If we charge just 0.85% TER while other players charge up to 5%, would clients go back [to services with high upfront charges] if we can prove Algebra’s performance?”
Farringdon Asset Management holds a capital markets services licence, issued by the Monetary Authority of Singapore in October last year, but it does not have the licence to offer ringgit-denominated investments in Malaysia. Yeomans says the company is looking to get white label partners for its platform, which is made possible with VMFT.
“Once these players see how many of their clients Algebra is bringing on board, they will think of jumping on the bandwagon. What we can do for our partners is redo the back-end and front-end of the platform, according to what they want,” says Yeomans.
“For example, if the bank is called X bank, then we can call it X bank robo. It is entirely up to them. One of the local banks that I am talking to right now is planning to charge 1.2% TER with the white label, which is still very cheap compared with what they normally charge for such transactions.”
Apart from talking to major banks in Malaysia and Singapore, Yeomans is looking forward to partnering financial institutions in other countries with a high Muslim population, such as Indonesia, India, Qatar and Bahrain. “This will happen eventually and we will get the regulators on board as well. For example, if we see a lot of clients are from Indonesia, we will discuss with the regulators there and ask them to recommend the best party for us to partner to bring back business to their shores,” he says.
The white label product will come with an annual fee of RM100,000 in the first year and RM200,000 in the second year for Malaysian players while for Singaporean players, the fee will be S$100,000 in the first year and S$200,000 in the second. Yeomans says this is three times cheaper than the rate offered by other providers.
“What sets us apart is that we are not a technology firm. We are a financial advisory firm and we build our product by outsourcing to technology firms,” he says.
“The technology firms that are coming out with these solutions are facing huge glaring holes because they have never given advice in their lives. Unlike us, they do not understand financial planning.
“This has been ingrained in us for many years. We understand how financial products work. That is why we wanted to come out with the platform. While it is not difficult to create a product, the solution and strategy will require more than just programming and development.”
Fintech lab
Algebra aims to get 1,000 users on board in the next 12 months. Its target assets under management (AUM) is US$50 million by the end of the first year.
Yeomans says there is a high possibility that the platform will achieve its objectives in the first quarter. He expects to get at least 100 users on board every month.
“We are trying to be as realistic as we can. It probably won’t happen, but I genuinely think that we can get US$100 million in AUM in the first year. We have a strong team, we are advised by Amanie Advisors and we have a good strategy running,” he says.
Farringdon Group will introduce a steady stream of products after Algebra. These include Mercury, a product developed for ultra-high-net-worth individuals (UHNWIs). Yeomans says the product is being developed to cater for the growing population of UHNWIs globally.
According to the World Ultra Wealth Report 2017, published by Wealth-X, the world’s UHNW population grew 3.5% to 226,450 last year. Asia accounted for more than 26% of the total population, up from just above 18% a decade earlier.
“This product will not be the same as Algebra because people are not going to let robots manage US$10 million deals. Our sister company in Singapore is managing clients with up to US$40 million of assets, and we know that they would rather do everything face to face. But I believe that Mercury will be something very beneficial for UHNWIs,” says Yeomans.
To develop its products, Farringdon Group has started building a financial technology (fintech) lab in Labuan and hiring locals to develop its fintech wealth management solutions. It has a 20-year road map to build financial products and services with a digital banking model.
“I think the people who are going to lead this market will be those who set up fintech firms and think like fintech players. For conventional players, we are really thinking outside the box in terms of our products and services. There is so much more that we can build with the platform using our white labelling model,” says Yeomans.
“The possibilities are endless. We will develop the app into something that can be plugged and played such as mortgage financing, bitcoin investing and house insurance application functions.”
In the future, he hopes the company will be able to push the minimum investment amount to as low as US$10 so that the platform will be accessible to the entire Asian population.
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