This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 2 - 8, 2016.
Robo-advisory services
In developed markets like the US and the UK, robo-advisory services have disrupted the wealth management landscape and created a new channel for investors, particularly the digitally savvy and do-it-yourself younger generation, to monitor their own investments via their mobile devices anytime, anywhere. These wealth management services, which provide algorithmic and fully automated portfolio management services, are going to be a game changer in the wealth management industry in Malaysia, says Sofiza Azmi, CEO of EdBiz Consulting Ltd, a UK consultancy company that offers shariah advisory and financial services.
Sofiza, who is based in Kuala Lumpur, says due to factors such as the growing Gen Y working population and robo-advisers, it is only a matter of time before the local wealth management industry begins to offer such services.
“We have seen how fintech has become a disruptive force in the financial landscape. The same will apply to the wealth management industry if it does not catch up with the needs of its growing young customer base. In the banking sector, Gen Y are slowly turning away from traditional banking with an increasing number of them preferring digital and mobile banking alternatives,” she says, adding that Gen Y’s preference to do things themselves is a reflection of the DIY world they were brought up in.
“Another issue is trust. In a study I conducted on the financial behaviour of Gen Y in Malaysia, only about 37% of them sought professional advice on financial matters. This lack of engagement with financial advisers probably stems from their sceptical view of the value of financial advice itself as many of them believe they can find this information more easily themselves.”
Sofiza notes that cost also appears to be the biggest hindrance to enlisting the help of a qualified financial planner — 62% of Gen Y respondents said they felt using a financial planner was expensive.
However, robo-advisory services would not meet the needs of every investor. Bill & Morrisons’ Hii says a robo-adviser only offers portfolio management and does not get involved in the more personal aspects of wealth management, such as taxes and retirement or estate planning.
“Like anything, one size does not fit all when it comes to financial advice. I do see this space filling the need of most beginner investors and investors with an uncomplicated financial portfolio. But are they right for you? That depends on your net worth, the complexity of your investments and if you feel comfortable, you can do it yourself.”
Yeo shares Hii’s sentiment. “I think the Malaysian industry may not be ready for robo-advisory for a few more years. While there may be a group of younger individuals who are happy with automated investment decisions, the general Malaysian investor today finds comfort in face-to-face discussions on their investment decisions, whether these are with their friends, relatives, bankers or agents.
“For a robo-advisory model to work, I think the industry needs to significantly improve its usage of big data and complex algorithm development, yet have the robo-adviser model supported by some level of human adviser interface. That said, I believe there will be an emergence of some semblance of robo-advisory capability in Malaysia within the next two years.”
Sofiza observes that the local industry will more likely see a hybrid service: fully automated investment services and advice paired with hand-holding by human advisers.
“Our global survey in the recent Islamic Wealth Management Report 2016 shows that 21% of respondents said they preferred to manage their own wealth, which suggests their openness to the use of robo-advisers in managing their wealth and investment,” she adds.
Interestingly, algorithm-based robo-advisers have been around for many years.
“When you are doing algorithm-based investments, you have barometers and formulas and they run themselves. This has existed in Malaysia for quite a number of years, in the guise of structured products. If you were to look [at these products], there is no fund manager for structured products.
“Now, if you peel the onion further, you must ask how the experience of investors in structured products is. It is hit and miss… with a fair amount of misses. Many have actually got back only their principal and only very few have received profits.
“This is simply because algorithm-based investing is fixed, up front and lets the formula do the work through the period. The formulas don’t change. The problem is, markets change and evolve. We have not really seen how well robo-advisers or robo-designed products can actually perform in today’s circumstances.
“But when it comes to robo-enabled technology, like how to reach out to customers and how to alert them and all that, I see us working closely with the technology to enable us to become more efficient,” explains Whitman’s Neoh.
Increasing demand for advisory services
Asia is expected to have more than 65% of the world’s middle-income earners by 2030. These individuals (generally referred to as the “emerging affluent”) are those with liquid assets of around RM50,000 to RM250,000. OCBC’s Yeo says to meet the financial needs of these individuals, banks have started to focus on the segment, developing relevant products and services.
“For example, the OCBC 360 Account was specifically developed for emerging affluent working adults by rewarding them with ‘bonus interest’ (potentially comparable to fixed deposit rates) monthly for performing common banking transactions.”
Malaysia is a developing market and there is huge need for wealth management services, particularly where HNWI are concerned. According to the RBC Wealth Management and Capgemini’s World Wealth Report 2015, North America maintained its position as the world wealthiest region in 2014 with US$16.2 trillion but Asia-Pacific registered the fastest growth of 11.4% to reach US$15.8 trillion compared with 9.1% and 4.6% in North America and Europe respectively.
Hii cites another recently published study on wealth in Asia by Swiss private bank Julius Baer, which estimated that the number of high net worth individuals would have increased to 68,000 in 2015 while their net worth would have risen to US$329 billion.
In terms of foreign direct investment, more global capital has homed in on Asia — for its tremendous economic potential — than any other region. In 2014 alone, the region received FDI worth US$465 billion, surpassing that to Europe (US$289 billion) and North America (US$146 billion). As a result, there has been a wealth boom for both corporations and individuals. With more business exposure in the region, many HNWI have actively diversified their portfolios into global currency/asset classes.
Whitman’s Yap says one of the most important factors in financial advisory services, whether it is for HNWI or the mass affluent market, is to be client-centric. This can be achieved by firms moving more towards fee-based rather than commission-based services.
“This is the current trend in advisory in the US and Australia. Independent financial advisory firms that adopt a fee-based strategy will not profit fast in the short term but as they gain momentum, they will gain the trust of clients and go from strength to strength from there.
“Independent financial advisory firms like us, and the rest that are licensed by the SC, have the upper hand. First, we don’t have a corporate structure that limits us on what or who we are supposed to listen to.
“We face our clients directly every day. We listen to them and we know exactly what they want. So, if financial planners are client-centric enough to apply what they learn from CFP or RFP [financial planning qualifications] and design advisory service packages for their clients, they will be able to take advantage of the clients’ needs and gain their trust. This is what we are doing at Whitman.”
Clients or potential clients can expect the fees for financial advisory services in Malaysia to range from RM3,000 to RM30,000, depending on their needs, he adds.
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