Robo-advisory platforms: road bumps and silver linings

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on December 30, 2019 - January 05, 2020.
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During the 2008 global financial crisis, investors were burnt by considerable losses in the stock market, prompting them to put their wealth into passive investment vehicles. The popularity of passively managed funds soared with the bull run in 2009, as cost-conscious investors sought cheaper fees and rode the growth of benchmark indices.

It was during this bull run that Jon Stein launched Betterment, the world’s first robo-advisory platform, in the US in 2010. Robo-advisors are defined as digital platforms that provide automated or algorithm-driven financial planning services with little to no human supervision, mainly consisting of exchange-traded funds (ETFs) and passively managed mutual funds.

 According to Stein’s blog, he started Betterment to encourage good investing behaviour. “At a micro level, economics assumes that humans are rational. But they are far from rational, especially when it comes to their money; people heavily discount the future, they withdraw when markets crash, and it is because our emotions drive our decisions,” he wrote.

“I wanted a service that did all of this for me, told me what to do with my money, and then did it. I realised that the only way I was going to get something like that was to build it myself.”

Since then, the US landscape has grown by leaps and bounds. Players such as Wealthfront and Personal Capital have also entered the fray. Later, larger financial institutions such as Charles Schwab Corp and The Vanguard Group launched their versions of robo-advisors.

The US is the leading market for robo-advisory platforms globally, according to a February report by the World Bank Group. There are about 200 platforms in the US, capturing 57% of all robo-advisor investments across the globe, with assets under management (AUM) exceeding US$400 billion in 2018. The figure is anticipated to grow at an average annual rate of 31%, reaching almost US$1.5 trillion by 2023, says the report.

According to a Bloomberg article in August, the assets of US mutual funds and ETFs stood at US$4.271 trillion, having surpassed actively managed funds for the first time, marking a new milestone for robo-advisors, which mainly invest in passive financial instruments.

On the home front, the Securities Commission Malaysia (SC) launched the Digital Investment Management (DIM) framework in 2017 in an effort to provide local investors with more convenient and affordable options to grow their wealth. This saw the launch of three licensed robo-advisors in the country — StashAway, MYTHEO and Wahed Invest.

At press time, two more robo-advisory platforms — Australia-based Raiz Invest Ltd and Thailand-based Robowealth Mutual Fund Brokerage Securities — are expected to be launched in Malaysia in the near future.

Although the robo-advisory industry is considered to be in its infancy, StashAway and MYTHEO have seen healthy growth and performance. “Since our inception, we have grown at an average of 20% a month in terms of our AUM and user base. Malaysia and Japan combined, we have a total customer base of 100,000, managing more than US$480 million,” says Ronnie Tan Tai Ngee, CEO of GAX MD Sdn Bhd, which operates MYTHEO.

The platform was launched on June 28. GAX MD is a joint venture between Silverlake Digital INX Sdn Bhd and Japanese firm Money Design Co Ltd, the creator of THEO — the first robo-advisory platform in Japan.

“Using both back-tested and real-life data up to October, the year-to-date returns of our three functional portfolios were 16.82% for the growth portfolio, 17.40% for the inflation-hedged portfolio and 11.15% for the income portfolio,” says Tan.

“This means investors with balanced risk will see a return of about 15.11%, an aggressive investor that is overweight on the growth portfolio will have a return of about 16.82% and the highly risk-averse investor that is overweight on the income portfolio will have a return of about 11.15%. These returns are very encouraging.”

StashAway, which started its operations in Singapore, launched its Malaysian platform in November 2018. According to StashAway Malaysia country manager Wong Wai Ken, it has more than 100,000 registered users in Singapore and Malaysia.

“Year to date, our lowest risk portfolio registered a return of 13% while our highest risk portfolio returned 16.8%. The market was very rough in Singapore. We had three market corrections in 2018, with the latest in December last year when the markets were down 19.9%. We were just 0.1% shy of an actual bear market,” he says.

“But in January, we really picked up steam. It was the best January in the US market in 15 years. That is a testament to the fact that you cannot time the markets.”

However, despite the rising popularity of robo-advisory platforms worldwide, the industry still faces several challenges that threaten its sustainability over the longer term. According to a 2018 Morningstar report, titled Robo-Advisor Upgrade! Installing a Program for Profitability, the key issues around the robo-advisor business model are high client acquisition costs, ongoing costs of servicing clients and low revenue yield on client assets.

“Many robo-advisors have failed to disrupt the investment services of the incumbents and are still unprofitable. Many sold themselves to established firms after realising that they could not count on investors giving them money,” says the report.

A 2019 HSBC report says that due to the industry’s low-maintenance fee structure, North American robo-advisors need to manage between US$11.3 billion and US$21.5 billion to break even. However, the only robo-advisory start-ups that have AUM of that size are Betterment (US$16.4 billion) and Wealthfront (US$20 billion).

“Although robo-advisory platforms in Singapore have increased from the initial three players to more than five players now, none of the players has yet to become economically viable and sustainable,” says Ow Tai Zhi, CEO of AutoWealth Pte Ltd, a robo-advisory platform based in the city state.

“The regulatory liberalisation of robo-advisors has resulted in a massive influx of new players. This growth has become somewhat too fast for user demand. We may see some consolidation in the robo-advisory players soon,” he adds.

However, Tan believes that MYTHEO’s 1% annual maintenance fee is sufficient to ensure the company’s sustainability. He highlights that he has no plans to increase the fee in the near future and hopes that the company will become profitable in two years after acquiring a core customer base.

“We do not want to engage in a price war with other industry players, unlike the robo-advisors in the US. It is not that we want to short-change our customers. That is not my intention. It is all about providing value in the end,” says Tan.

“We think it is more important to focus on the quality of the service, produce good products and provide good returns. It is a loss of opportunity to save one dollar and lose money, when you can pay RM10 and make more. That is being penny wise and pound foolish.”

Wong highlights that StashAway has never adopted the “growth at all cost” strategy that has resulted in the sustainability issues faced by the robo-advisory industry in the US. “Like WeWork, the growth model is clearly not sustainable. For us, it is really important to have a path to profitability, even before this post-WeWork funding situation happened. We have always wanted to break even at a certain target AUM,” he says.

“When we started, we heavily invested in tech. Once we have finalised the tech layer, we can serve the people regardless of our AUM. As your revenue continues to climb and your cost remains relatively the same, you will get to break-even.”

 Competition is coming from other fronts as well. Globally, robo-advisors not only have to compete with other wealthtech start-ups but also go head to head with large financial institutions that are moving into the robo-advisory space.

On Aug 23 last year, OCBC Bank in Singapore launched OCBC RoboInvest and became the first bank in Southeast Asia to launch a robo-investment service. Singapore-based DBS Bank opened its DBS digiPortfolio services for early access on Sept 2.

AutoWealth does not see this trend as a major threat to its business. “The robo-advisory space in Singapore was spearheaded by the public launch of three financial technology start-ups in 2017. Incumbent financial institutions only caught up materially in early 2019. We believe robo-advisors should not be overly worried about competition from incumbent financial institutions so long as they continue to innovate and provide more and better offerings ahead of the competition,” says Ow.

StashAway points out that these financial institutions have actually helped the existing robo-advisory platforms by educating the public on the benefits of investing on the platform. “These financial institutions may have better branding and have more capital, but I think StashAway is a better product. So far, our ratings on the App Store and Google Play are higher than those of the robo-advisory platforms of banks,” says Wong.

He is optimistic about the future of the local robo-advisory industry as he believes there is still room for growth. “We are only beginning to scratch the surface because the market is huge. We are in a sunrise industry. So, we are chasing an ever larger, ever growing pie.”

Despite these looming challenges faced by robo-advisors globally, Tan is optimistic about the outlook for the industry going into 2020. “Based on statistics published by the [data management company] CEIC website, the total amount of money placed in savings and fixed deposit accounts in Malaysia is in excess of US$470 billion, which is about RM1.9 trillion. But fixed deposit returns are still relatively low at around 3%,” he says.

“There is a demand for simple and accessible platforms such as MYTHEO for Malaysians to invest in asset classes that offer higher returns. Given the current market volatility and uncertainty, it is the perfect time to venture into robo-advisory platforms, which are well diversified across asset classes and countries.”