Robo-Advisors : Wealth Management’s evolution or revolution?

Geneva, November 25th 2015

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A way to understand the Robo-Advisors is to partner-up with them. Indeed it could generate new ways to work more efficiently. For example is Fidelity teaming-up with Betterment to offer an Institutional version of Betterment to its independent financial advisors.

The Robo-Advisors phenomenon increases in an undeniable way with vertical integration strategies brought by big US asset managers on the mass-market

AuM still marginal, but an exceptional growth

Rest of the world

USA 87%

Total AuM USD21 Billion

13%

Rest of the Robo-Advisors

12%

8%

6%

0,02%

74%

Global Assets Under Management in 2014:

USD72 Trillion

99,98% AuM by traditional advisors

AuM by Robot-Advisor

Vertical Integration Strategies

Asset Managers are acquiring and/or launching their own automated advisor platforms. Vanguard, for example, officially launched its own on May 2015 after 2 years of Beta testing. It now has USD17bn in AuM (of which USD10bn were transferred from their existing customers).

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Asset Managers are investing in existing Robo-Advisors in order to leverage this opportunity. BlackRock, for example, invested into Personal Capital and Schroders invested into Nutmeg.

Integration

June-12 June-15

Growth trend of the 3 main players

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Avg. AuM / customers

No. of customers

Self-contained Robo-Advisor

8

8

USD 250K

USD 500K

USD 750K

0

USD 1m

Hybrid Robo-Advisor

Sophisticated management +

personalized advice

Creation of Robo-Advisor as part of the digital strategy in conquest or in servicing

Robo-Advisors deployment to Back Office as an support to RM

Support to RM

Administrative tasks completion, especially compliance (client onboarding /KYC)

Market opportunities screening tenfold increased/benchmarking

Robo-Advisors cover two different realities in the market: B2C vs. B2B

Automated alerts Push information for clients

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Speakers

Launching Career Delegates Company

Dr. Serge Kassibrakis

M. Alexandre Gaillard

M. Mourtaza Asad-Syed

CEO and founder of InvestGlass, Alexandre is also the Vice-President and founder of Swissfinte.ch. He has more than 12 years of experience in Investment.

Founder of Yomoni, Mourtaza has approximately 20 years of experience in Financial markets and consulting, especially with SocGen, JPMorgan and McKinsey.

Working for Swissquote since 2001, Serge is head of the Quantitative Assets Management department and a member of Swissquote Bank’s Executive.

2010

2014

2013

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Swissquote’s ePrivate Banking introduction

Swissquote’s ePrivate Banking solution is a platform made for customers whom are interested in a more accessible electronic Private Banking. The platform is very strongly configurable and offers great level of freedom to customers.

All the on boarding process is done electronically. To set up an account, users must, as a first step, fill out a form that will define their risk profile and adapt the management accordingly, like by limiting the market risk accessible to the client if needed.

After this step’s conclusion, the user needs to choose the market risk that he/she wishes to apply to his/her strategy. According to the answers generated during the on boarding phase, an alert indicating that the factor is located too close to the set risk profile’s limit, can be sent to the user. The client can even have his/her access to market risks that are too important removed.

The service enabling now multi-asset classes management Asset Managers can use the Robo-Advisor as a support in their recommendation, particularly introducing their market views. All the risk management, the trade order and the monitoring being delegated to the algorithms.

Les tarifs sont compris entre 0.9% à 1.2% du patrimoine sous gestion sur une année. Tout le processus de onboarding se fait de manière électronique.

A back-test page enables each user to visualise and analyse their strategy behaviour according to the market conditions and especially compare strategies.

To set up an account, clients must have at least CHF 20,000. At present, 1,500 ePrivate Banking accounts have been opened, representing an AuM of approximately CHF 70M.

A “granular” universe is made available: the available detail of the universe increases based on the assets under management. Small portfolios have access to a global EFT universe representing different asset classes, while the biggest portfolios can directly be invested in actions for the Equity class or in more specialized ETF’s for the Fixed Income class.

The origin of the Swissquote ePrivate Banking goes back to 2010. The programme was originally only capable of an automated asset portfolios management. The objective of the investment strategy was to maintain the client’s market risk. If the market suffered a shock and a difference between the client’s risk profile and his/her portfolio risk prevailed, the algorithm would reallocate automatically the portfolio.

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InvestGlass’ introduction

The “Adjust” part allows to visualize to which extent the investments are far from the client’s profile and to decide upon the asset’s eligibility

InvestGlass’ objective is to offer to everyone a personalized service taking into account preferences for each client.

Every client can have specific preferences in terms of investment: thus, the programme takes into account this element in its investment recommendations. It also recommends other investments; this being based on a similar system to that of Netflix: “If you liked this, these suggestions might interest you as well.”

InvestGlass focuses on 3 problematics

The platform has 7 main functions

The platform is a true support to Asset Managers

Any modification, on labelling for example, is stored by the programme

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Yomoni’s introduction

2014

The arrival of Yomoni on the market breaks the traditional value chain. Normally, an asset manager cannot afford to spend too much time on small portfolios (max. EUR 100,000), for profitability issues. Yomoni makes Private Banking accessible to everyone and suggests a limited offer to its clients.

Yomoni targets the French mass-market with clients disposing of a portfolio between EUR 1,000 and EUR 100,000. The platform enables to manage a large asset volume while mobilizing only a few number of people.

The whole subscription process is done digitally. A profile is created in approximatively 15 minutes. The French tax system is commonly complex, however the platform offers much simplicity to clients.

The price is transparent and non-retroactive.

The platform focuses on user experience. Easy to use, the process consists of two parts: first an educational part for the user and the second part on profiling in order to identify the adequate risk profile for each client.

All management is done in a discretionary manner. Yomoni is totally aware that it couldn’t copy the relation between banker and client: this is why the platform focuses on other aspects and offers its added-value elsewhere.

The platform’s goal is to “commoditize” management and to provide “all in one” mandates. For an Asset Manager, this will enable to outsource the part relating to the asset management and to focus on relation with clients.

All-included, the fee is at an annual rate of 1.6% of the total of AuM that breaks down in the following way: 0.3% of commission for ETF 0.7% for management commissions 0.6% for life insurance package

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Co-existence between Robo-Advisor and RM,

what interactions in Front Office?

Which major issues is the market currently addressing?

3 Robo-Advisor and the

bank’s business model, a solution ALSO for Back

Office?

Robo-Advisors, what are the concrete results and

how to look at their performance objectively?

Is there a more “palatable” client profile to Robo-

Advisory (young, senior, new investors, asset

traders etc…)?

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4

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Robo-Advisors, what are the concrete results and how to

look at their performance objectively?

Business Model profitability

Betterment & Wealthfront, 4.2% average return on investment in 2014

The Robo-Advisors represent a 0.003% market share of the wealth management industry

Client satisfaction?

Question 1

Exit barriers?

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The performance of the portfolio managed by Robo-Advisors depends on the risk level chosen by the clients

The Robo-Advisor is free of emotion, but the interaction with the client remains central, which creates a link.

The market risk is a dynamic and ongoing variable. That is why the new reports offered by these technologies represent performances and risks along a time axis. Without any doubt, this is consistent with the legal obligations that push portfolio management to be more and more transparent.

It is difficult to compare performances issued from different strategies in terms of risk of market views and market timing. However, we can notice that they are encouraging. What really matters with Robo-Advisors, is the possibility given to the public to use programs for quantitative analysis. We are living today an algorithmic revolution and the Robo-Advisors enable retail clients to access directly to sophisticated algorithms, formerly made exclusive for the elite. There’s also a revolution at the Big Data level. These two elements combined multiply the opportunities in the management field.

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The most difficult task in the wealth management field is to issue the good information at the right time. Robo-Advisors fill this gap.

The value proposition consists in identifying where the value loss is situated for the client. Over the past 30 years, the S&P index has increased at an 8% average annual rate while the average investor benefited only from an approximate 4% average annual rate during the same period. The goal is, thus, to understand where this difference comes from while the portfolios try to do as well as the market (as opposed to try to outperform the market).

A better performance involves 3 steps: Management mandate, based on the risk profile established when

the client filled the form Reduced costs Indexation more efficient than the management with assets

In general, the client has a bad performance because the timing wasn’t optimal (i.e. a market exit at the wrong time). The platform tries to protect the client while preventing exit from positions. The goal here isn’t to have a paternalistic relationship with the client but rather to restrict his/her choices.

One cannot judge Yomoni’s performance yet as the platform has been launched only recently. The criteria for success are certainly ambitious but they don’t aim to beat the market nor the “Hedge Funds for everyone”.

The objective is not to do better than the market, but to make sure that the clients can do just as well while avoiding any loss.

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Is there a more “palatable” client profile to Robo-Advisory?

Millennials?

Technophiles? Baby Boomers?

HNWI?

Question 2

Institutional clients? Entrepreneurs?

Desire to benefit from automated investments: HNWIs < 45 years : 67% HNWIs > 45 years : 38% Source: World Wealth Report 2014

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Each portfolio must be personalized as a consequence of the attributes to every person

The majority of the ePrivate Banking comes from the trading platform SwissQuote. The others are simply a new customer base.

By observing the age pyramid of the ePrivate Banking customers, we can see a large proportion of seniors. It is not so surprising… these people were able to accumulate capital during their whole life: it is at this point that they need to manage it.

The ePrivate Banking platform analyses the risk profile of each client and allows it to compare this to the rest of the population in order to establish the portfolio objective risk.

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The clients conventional segmentation relative to their age bracket is no longer fully relevant

The behavior toward investment, or even technology, can vary within the same segment.

A segmentation more appropriate in the case of Robo-Advisors should follow the archetypes of Jung and focus on the user behavior.

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The most important segmentation criteria is the attitude toward investment

The client’s risk profile is established from the start. For each risk profile corresponds a different portfolio. The risk profile is nevertheless totally dependent on the events during the client’s life. A single young executive will not have the same risk profile (and subsequently the same portfolio) as a pensioner. The risk profile as well as the portfolios are scalable and will not stay the same eternally.

Yomoni’s target is the “mass market”, so far without access to investment consulting.

The people just looking for performance are not the main target. There are truly only two reasons for changing profile: the market has changed or the life situation of the client has changed.

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Co-existence between Robo-Advisor and RM, what interactions in Front Office?

Who gives directions to Robo-Advisors?

Different interaction with Robo-Advisors according to different types of managers?

New market opportunities

Help or competition?

Question 3

Combine the best of both services?

Managers mistrust?

Allow the RM to focus on the relational aspect

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Robo-Advisor and the bank’s business model, a solution ALSO for Back Office?

Compliance monitoring?

Automated trade orders?

Question 4

Digital onboarding?

ETFs? Robo-Advisors, limited range of financial products?

Back-office consistency need Data availability

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Question 3 and 4 – Co-existence between Robo-Advisor and RM, what interactions in Front office? Which opportunities for Back Office ?

InvestGlass

InvestGlass does not undermine bankers but quite the contrary to help them. Especially, the platform can ease complications coming from the multitude of new regulatory requirements that will come into force over the next few years, like for example the MIFID 2. InvestGlass seeks to change the nature of the relationship between the client and his/her adviser which is actually made of 80% administrative and 20% human to 20% administrative and 80% human.

SwissQuote believes in the benefits of the relationship between the Asset Manager and Robo-Advisors because the solution would allow the advisor to focus only on the relationship with the client and let the engine take care of the heavy part of the portfolio management.

SwissQuote

Yomoni aims at “commoditize” the portfolio management and make it more straightforward. However, we are aware that for high-net-worth wealth problems become more complicated and require an entry into a business relation and a more sophisticated planning, which is not Yomoni’s priority so far.

Yomoni