Sibos Day 2: Are robo-advisors the ultimate provider of financial choice?

By Madhvi Mavadiya | 28 September 2016

Today at Sibos there was a strong focus on the relationship between technology and security and how the two have evolved in recent years and in turn, how entire industries in financial services have also had to transform in order to keep up with emerging trends. Remaining sustainable is proving to be difficult as the funds industry is under pressure to deliver returns at reduced risk and cost. In a session called Enabling the Investment Management’s Next Era: The Rise of the Robo-Adviser, we heard from Nicolas Mackel, CEO of Luxembourg House of FinTech, Matteo Cassina from Saxo Bank, Edward D. S. Glyn from Calastone, Michael Mellinghoff from Techfluence, Silvan Schumacher from Swanest and Paolo Sironi from IBM.

Europe lagging behind

The biggest question for the wealth management industry is why Europe is so far behind when America is so far ahead with services like robo-advice now being mainstream. Schumacher highlighted that there is a revolution in the wealth management space, but it is not all rosy as there are huge difficulties associated with getting rid of a service that is primarily done so manually. “Firms in America like Betterment and Wealthfront are pouring money into marketing and those in Europe do not share their figures, perhaps because of slow growth”, Schumacher said. Glyn said that it is difficult to segment the differences between robo advice and what is defined as distribution. He went on to say that asking yourself questions about progress can also be very beneficial and that is how some providers are now providing much more than others are.

Alongside this, Cassina provided a backdrop to this evolution and explained how in the 90’s, online brokers were responsible for the first digital revolution. However, they were self-empowered and now a substantial amount of marketing is needed as a number of players excel at creative consolidation. While on one side banks and tech companies are talking about collaboration, Cassina believes that “Europe will not become one unified market for a long time,” and this is a common theme that was seen at Sibos this year – that changes can only be made once standardisation is implemented across the whole of Europe.

Sironi stated that there are three big drivers for transformation in wealth management:

  1. Technology
  2. Generational shift
  3. Regulation

He put the question to the audience asking them which one they think is the biggest driver and they picked regulation. Sironi then provided an explanation as to why America is ahead in this industry, and it is because MiFID II has not been adopted in Europe yet, whereas in the US, their transparent framework puts institutions there in a compelling position which also decreases the cost of compliance. What robo-advice is actually doing right now is showcasing that new services can be created that banks can adopt. “By 2020, the way that banks provide services and how they pay for it will be completely different,” Sironi said.

Helping the poor and not the rich

Mellinghoff put forward that in the 90’s, company founders were less cautious because of the interest rate difference in that time. “Today, 1% can be a lot of money for wealthy people,” Mellinghoff said. “Startups saw development before the corporates, but innovation is hard,” but with the disintermediation of financial actors results in no major changes. This questions whether or not technology can do a better job than a human. Alongside this, if everything stayed the same, how could the robo-advisor really help?

I don’t personally see this is a key point here because the advent of client centric solutions was a catalyst for the creation of professional new systems. Particular tools could scare some people, but asset managers are concerned about the future distribution chain, but if we can get it right, people will have choice. Also, I fundamentally disagree that you can do everything online, but you can use new technology to provide choice,” Glyn said.

Schumacher shared a similar attitude and said that tech is “capable of providing personalised advice to the mass” and that financial institutions should keep in mind that “millennials want to understand their investments and what they are doing exactly with their money.” In the developed world, finance is complex. But for countries that are in the midst of developing, providing more information to those who are saving between $20 to $50 a month, but still have access to online services, a simple online tool could help, as Glyn explained. Although the internet provides the consumer with choice, Cassina highlighted that the private banker is the real disruptor and this is where we have seen startups and banks collaborating in the last year. “It is important to develop an internet solution so that the client stays,” Cassina said.

In response to this, Sironi stated that retail banks own the customer on the other side of the business, but asset managers ultimately control the channels. “But when the regulation changes, models need to also and this is where the transformation happens. We are not selling products, we are portfolios and once we understand that, we can start tiering the customers.” According to Glyn, 80% of the business that is being written by robo-advisors is new business, and this is something that needs to be known and is fundamental to the future of finance.

Teenagers in charge

The trend for generations earning more than their parents reversed five years ago and the generation who have a lot of money will peter out. The younger new tech-savvy people will have access to better tools and products at a low cost. The older generation have a better level of education that the younger tech savvy teenagers do not have and we are leaving the future of finance up to those who have no understanding of delayed gratification and could make stupid decisions that you can’t reverse as a result,” Glyn said.

Mellinghoff predicts that the rate at which robo-advisors will grow will be up by tenfold in countries like China that can operate on a lower cost. “Some existing brands will disappear and new players will emerge.”

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