This article first appeared in Personal Wealth, The Edge Malaysia Weekly on March 5, 2018 - March 11, 2018

Three players — Main Street Capital Sdn Bhd, Singapore-based Smartly Pte Ltd and India-based Valuefy Solutions — are looking to provide local investors with robo-advisory products and services in the near future. They are currently preparing to apply for a licence from the Securities Commission Malaysia (SC) to run their platforms in the country.

Main Street Capital was co-founded by Julian Ng, a financial consultant, and his partner, a venture capitalist and angel investor, with the aim of offering robo-advisory solutions. The company will be submitting a formal application to the SC soon.

“We are making sure that we tick all the boxes in the application form. We are also looking for a technology partner,” says Ng.

Smartly launched its robo-advisory platform in Singapore last September. Founder Keir Veskivali joined forces with a Malaysian partner last year to get things off the ground in this country. He is also getting the necessary paperwork ready for submission to the SC.

Andrew Foo Wei Xiong, country head at Smartly Malaysia, recently registered the company and hired people for the technology and legal compliance sections to set up a robo-advisory platform that it can present to the regulator. “We have been meeting with the regulator frequently [during this application process] to make sure we meet all the requirements,” he says.

Valuefy is an investment technology provider based in Mumbai, India, where it already operates a robo-advisory platform. Vice-president Shrikant Tiwari says the company is expanding to Southeast Asia, particularly countries such as Malaysia, Singapore and Indonesia. He recently moved to Malaysia to get things going.

The three players see Malaysia as a nascent market with huge potential because retail investors do not have enough access to low-cost financial advice and investment tools. Also, the entry barriers to investing are relatively high, especially for fresh graduates and those in the lower-income group.

Ng says some human financial advisors charge a rather high fee for a comprehensive financial plan, which costs about RM5,000 to RM7,000. This is not an affordable sum for those who are only able to save a few hundred ringgit a month.

Unit trust funds, meanwhile, charge investors a sales fee of up to 5% and an annual management fee of 1% to 1.5%. “That means investors would have already lost 6% to 6.5% before their money is even invested in the market,” says Ng.

In contrast, robo-advisory platforms such as Smartly do not impose a sales fee and only charge investors an annual fee of 0.5% to 1% in Singapore. The platforms also invest their clients’ money in exchange-traded funds (ETFs), which only charge an annual management fee of about 0.3% to 0.8%. “The total investment cost is three to four times lower than investing in unit trust funds,” says Veskivali.

Using Smartly as an example, the minimum investment amount on a robo-advisory platform can be as low as S$50. Ng is expecting local robo-advisors to offer their products and services for a minimum investment amount of RM50 when they launch in the future.

Leveraging experience and reputation

Last May, the SC announced the Digital Investment Management framework, which sets out guidelines for those interested in applying for a licence to launch a robo-advisory platform. It announced later that the first licence was expected to be given out in the first half of this year.

While it is still too early to tell if any of the applicants will be successful, these three players are hoping that their experience and reputation will give them an advantage over the others.

Main Street Capital’s Ng was a radio presenter and producer with BFM89.9 from 2013 to 2017, where he hosted several popular programmes, including the Breakfast Grille, Market Watch and Ringgit and Sense. Before his stint with the radio station, he was a portfolio manager at Public Mutual Bhd and also worked at several banks, including JP Morgan and CIMB Bank.

Ng has been an outspoken critic of the high fees and charges imposed by unit trust funds. His experience as a portfolio manager has taught him that it is very hard for an actively managed fund to outperform the market in the long run.

“Asset management firms incentivise fund managers to outperform the market by giving them bonuses based on the quarterly and yearly returns of the funds they manage. In many cases, this turns out to be unsustainable,” he says.

To prove his case, Ng compared the average 10-year performance of locally managed Malaysian-focused funds, in ringgit terms, to MSCI indices that track the market performances of a country, region and globally. The results showed that as at June 30 last year, the average performance of locally managed Malaysian-focused funds was 5.9% (net of fees), which was lower than that of the MSCI World (6.9%), MSCI Developed Market (7.2%) MSCI Asia ex-Japan (6.7%) and MSCI Asean (7.4%).

Thus, it makes sense for investors to look into ETFs, which are low-cost instruments widely adopted by robo-advisory platforms globally.

Singapore’s first robo-advisor eyeing Malaysia

Smartly has seen a month-on-month growth of 40% in assets under management (AUM) and registered platform users since the platform went live in September last year, says Veskivali.

He says the Smartly team operates in a lean and efficient manner. He also points out that despite raising S$450,000 in Singapore and hiring only five people, the company managed to comply with all the regulatory requirements of the Monetary Authority of Singapore and successfully launched its robo-advisory platform.

In Singapore, Smartly allows clients to invest for as low as S$50. The platform helps users assess their risk appetite and determine their investment goals before investing their money in ETFs that track the stock market performance of a specific country or region.

Veskivali says Smartly carries ETFs offered by Vanguard and Blackrock as these are the most popular and liquid ETFs in the world. He adds that the company is expecting to do the same in Malaysia, although he does not exclude the possibility of also offering actively managed unit trust funds and individual stocks in the future.

“We may do so if there are not enough ETFs listed in Malaysia for us to trade or if we have difficulty trading ETFs that are listed overseas. Perhaps we can package the actively managed unit trust funds differently from other market players that also distribute unit trusts online,” says Veskivali.

However, doing so may be a little “risky” from a business perspective as investors may compare Smartly’s portfolio performance with other actively managed funds, he points out. Also, it may require the platform to charge investors a higher fee.

“This is one of the reasons why some of the world’s leading robo-advisory platforms, such as Betterment, only offers investors ETFs even after they have grown so much,” says Veskivali.

An old hand with a focus on portfolio analytics

Valuefy is the most established of the three players. The company, which has been in business for seven years, has more than 200 employees and US$150 million under management.

“We are cash-flow positive and generating profits. We are not a start-up per se, even though our company culture is like one, as we have to keep learning new things from different markets,” says Shrikant.

The company offers its robo-advisory solutions to banks in India, including the ICICI Bank, Kotak Mahindra Bank and Equitas Small Finance Bank. In 2015, it launched its own robo-advisory platform — Wealthfy — to offer retail investors the opportunity to invest online with ease and useful insights.

The platform currently has about 25,000 investors, according to Shrikant. He says Valuefy actually started as a company that provides financial institutions with tools to consolidate their clients’ investment portfolios coupled with analytical insights.

In a typical scenario, a person manages his money through multiple banks and each bank invests the money in different funds, individual bonds and structured products. This poses a challenge for the person and each bank to track the overall performance of the portfolio and conduct meaningful analysis.

To address this, Valuefy provides banks with the digital capability to consolidate all the information into one portfolio, which enables them to find out which investments are performing well. The solution then provides recommendations to investors from an asset allocation and product selection perspective to help them generate better returns.

“We are also able to extract details out of the portfolio such as telling a client how much exposure he has to an individual stock or industry,” says Shrikant.

It is with this capability that Valuefy launched its robo-advisory platform to offer services directly to the public instead of via financial institutions. Today, its solutions can also measure risk and volatility using its own algorithm and monitor investment portfolios on a daily basis, says Shrikant.

However, not all these features are necessarily implementable in this country as it would require the banks to share their clients’ information with each other. “It will depend on the ecosystem in Malaysia. Or we can find alternative ways of doing so, such as allowing local investors to upload their bank and investment statements manually onto our platform and we can help them consolidate their investment portfolios,” says Shrikant.

Collaborating with financial institutions

Some companies are looking at partnering existing financial entities to offer robo-advisory technology and solutions to their customers in the future, instead of directly to retail investors.

For instance, Bambu is in talks with several financial institutions to explore the possibility of offering robo-advisors, according to chief operating officer Aki Ranin. The Singapore-based start-up is a provider of robo-advisory technology and solutions.

“We have been talking to a number of Malaysian banks for more than two years. While they are interested in exploring robo-advisors, there was very little progress in the 18 months that followed. That was because the regulations were unclear and they did not want to take the risk,” says Ranin.

“Now that the guidelines are out, things have taken off much faster. We will be doing some projects in Malaysia this year.”

He also says the company is talking to other local entities such as private banks, wealth management firms and insurance companies, which he does not name. Its existing clients include Standard Chartered Singapore and Crossbridge Capital Singapore, an independent wealth management firm.

Meanwhile, Valuefy Solutions and Smartly is already working with financial institutions in India and Singapore respectively. Valuefy vice-president Shrikant Tiwari says the company is looking at the business-to-business model in Malaysia in the future.

Main Street Capital Sdn Bhd co-founder Julian Ng says it is definitely a space that he will be looking at. “I had the experience of working with financial planning companies recently. All the hours spent on data collection and entering the data into the system to arrive at the appropriate risk-return parameters are long and not easy.

“Robo-advisors could help these companies save time and increase their productivity and efficiency by allowing them to just focus on providing good advice to their clients.”

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