Digitisation has always two faces:
Automation will turn recurring work obsolete. Computing makes automation easier and rediculously cheap. As a result, many processes will be replaced by processes and machines. Competition drives efficiency – not a new phenomenon. And it also creates standards. In the asset mangement industry, automated and passive investing as well as standardised risk management with big data will change the face of the lives of many employees. It also affects B2B distribution of investment funds.
The ongoing rise of mobile and digital communication changes the way financial services providers interact with their clients. The asset management industry is based on trust, and this is why things move much slower then many Fintech-enthusiasts have anticipated. The new robo advisors seem to solve a problem people don’t have at the moment. A lot of venture money is being burnt by trying to establish new brands in a very conservative environment.
The enthusiasm about new robo distribution models is on the downturn. Some lessons learnt from projects I have been involved in:
- Current regulation for the distribution of retail products is from the 70ties. The risk models that have to be applied in robo consulting are outfashioned.
- Holding of financial products requires an infrastructure. Fund distribution infrastructure is mostly tied to local frontiers and prevents the massively VC-backed robo projects from scaling.
- The outdated fund distribution and platform infrastructure makes the new robos very expensive. ETFs can only be processed on fund platforms at high costs dur to their construction. Costs are not far from classic distribution and wealth management fees.
- Robo advisors tend to use ETFs because of their positive image in the press. It is often overseen that still most investors in Europe don’t know anything about ETFs and their advantages over classic active funds. Many even think that passive products are missing out opportunities in the markets.
- A new brand requires a lot of investment in marketing and the risk of failing is very high – as it can be seen at all current robo advisors in Europe. Only in combination with a big brand robos will be able to gain traction.
- The investment models of the robo advisors are new and do not have a track record – apart from simple buy&hold models. It is difficult to explain why the process of the robo should be better then the process of an experienced asset allocation model with a long track record.
German readers might like to hear my opinion in Handelsblatt.