Prior to my 2014 arrival in Singapore, one could not go anywhere in the financial trade press without reading about robo-advisor “disintermediation” and/or “disruption.”
In the last three years, despite an avalanche of publicity, and massive VC funding, we have yet to see a robo-advisor put an incumbent out of business. Instead, the incumbents are beginning to adopt the very changes that were supposed to put them out of business.
The DBS rollout of their "DBS iWealth" app is a prime example. To quote Ms.Tan Su Shan, DBS Group head of Consumer Banking and Wealth Management: "Robinhood (a free stock trading app based in USA) had the best, fastest user experience for equity trading... I told my guys about it, and they delivered on the speed and agility of the user experience, of what the best that Silicon Valley can offer."
The same FinTech paradigm applies to what we are witnessing in wealth management vis-a-vis the robo-advisors. Robo-advisors committed the same mistake that most FinTech entrepreneurs made: mistaking the lack of an incumbent response as an inability of the incumbents to compete.
What had occurred was that incumbents were paralyzed by the extraordinary regulatory regime imposed on them following the Global Financial Crisis. Simply put, they could not respond, hence part of the regulatory arbitrage that existed for the entrepreneurs. Therefore, the “FinTech revolution.”
Today, the incumbents have woken up, because now they can compete. In this new, competitive, and realistic environment, a different paradigm is at work.
Robo-advisor entrepreneurs need to be aware of the following:
• Decide now: client acquisition or client retention? This decision alone will define your business. If you are focused on acquisition you will begin a slow, costly, laborious process and you might create some new IP. That IP might draw the attention of a VC, but that is very doubtful now. Conversely, if you are focused on client retention then you are a consulting firm, not a start-up.
• Client acquisition costs will kill you. In fact, they can kill you immediately. Any market new comer who has not prepared a complete client acquisition analysis will lose..
• The robo-advisor IP is not unique, nor is it IP. This is a hard truth many have not accepted. Unlike the math necessary for driverless cars, the math for asset allocation, tax planning, rebalancing, etc. is simply not that complex.
• Only product and/or service platforms will survive. The robo-advisor needs to be a “Blackrock” or a “Schwab.” The robo-advisor needs to be either a business dedicated to creating products (i.e. ETFs) or providing wealth management services. Brand recognition and massive platform scale are the factors of survival
Using the DBS/Robinhood example stated earlier, there are strategic variables that robo-advisor need to absolutely consider. In APAC, there are obvious constraints, for example:
• Can retail accounts buy ETFs in the local market? If not, why introduce a robo-advisor at all? HNW investors in Asia tend to want either separately managed accounts (SMAs) or trading accounts.
• Are there already dominant market participants with sizable market share? If so, what acquisition tools do you have that provide you with a competitive advantage? If the answer is “none,” then you are a software consulting firm.
• Is your design/user experience patentable? If not, it will be copied. Look no further than the brilliant design of Robinhood and how quickly it has been copied, and improved upon, by other trading platforms in Asia like DBS.
There will be a significant weeding out process of smaller robo-advisor participants as the B2C models fail due to exceptionally higher customer acquisition costs. Conversely, the surviving B2B robo-advisors must build scalable bespoke solutions for the incumbents; thereby becoming consulting/service providers and not unique IP only.
Who wins? The very firms that were originally meant to be dis-intermediated and disrupted. As with the fable, the tortoise will win this FinTech race.
Frank is a pioneer and recognized industry expert in Asia for the distribution of investment products to Private Bank and Investment Banks. Over the last 25 years, Frank has managed multi-billion dollar portfolios and developed expertise in Smart Beta, separately managed accounts, portfolio replication, and factor based investing.
He is a frequent co-anchor and co-host of The RunDown on CNBC with Akiko Fujita. Currently, Frank is a Senior Advisor with Synpulse Management Consulting, a leading global financial services consulting firm.