Robo Advisors – Boon or Bane
For institutional investors only. Further distribution of this material is strictly prohibited
June 2016
Agenda
1
2
3
About Deutsche Asset Management
The rise of robo-advisors
Challenges ahead
01 About Deutsche Asset Management
Deutsche Asset Management
Deutsche Bank Corporate Divisions
4
Corporate &
Investment
Banking
(CIB)
Infrastructure
Deutsche
Asset
Management
(Deutsche AM)
Private,
Wealth &
Commercial
Clients
(PW&CC)
Global
Markets
Deutsche Bank
Regional Management
Postbank
Deutsche Asset Management
With EUR 739 billion of assets under management1, Deutsche Asset Management is one of the world’s leading
investment management organizations. Deutsche Asset Management offers individuals and institutions traditional and alternative investments across all major asset classes.
Innovative products, customized solutions
Our products and solutions provide access to a wide range of investment opportunities across all asset classes.
Products range from pooled funds to highly customized portfolios for a wide range of investors and include:
— active and passive funds,
— alternatives,
— institutional mandates, and
— structured products2.
Our advisers and investment specialists are dedicated to creating asset management solutions for every client need and every risk, return, and liquidity preference.
The Chief Investment Office has overall responsibility for Deutsche AM’s investment platform. It leads equity, fixed income and multi-asset portfolio management teams worldwide, as well as the business’ global research team.
It also generates Deutsche AM’s global investment outlook (CIO View).
Deutsche Asset Management Our profile
Who we are
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(1) Deutsche Asset Management, as of: March 31, 2016 (2) Not all products offered in all jurisdictions
Deutsche Asset Management
Deutsche Asset Management Diversified client base
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— Pension funds
— Corporations
— Insurers
— Sovereign wealth funds
— Central banks
— Endowments
— Foundations
— Not-for-profits
— Financial advisers
— Independent asset managers
— Third-party banks
— PW&CC
Retail investors
Institutional clients
Client segments
Private clients Intermediaries
02 The rise of robo-advisors
Deutsche Asset Management
What can robo-advisors do for you?
8
Deutsche Asset Management
Key Characteristics
Portfolio Management based on pre-set algorithms
Low fees
Targeted at mass affluent
Forecasting Asset Allocation Automated
Rebalancing
Risk Profiling &
Monitoring Stress Testing
Event & Trend
Monitoring Portfolio Transitioning
Product Selection
& Recommendation
Capabilities
Source: Fincite (AnlageFinder Developer) 9
Deutsche Asset Management
High Net-Worth Individuals (HNWI)
High Earning, Not Rich Yet (HENRY)
1.0 5.1
250.0
0.00
50.00
100.00
150.00
200.00
250.00
300.00
2012 2014 E2019
Bill
ion
s
Digital Investment Services AUM 70% of HNWIs believe Robo-
Advisors can improve their
managers’ advice and decision-
making process
Increasing flows to Robo-Advisors Increasing HNWI adoption Increasing wealth in APAC(XJ)
62.5
55.2
49.1
15.5
12.6 7.6 7.6
Global Wealth 2019
North America APAC(XJ)Western Europe JapanMiddle East & Africa Eastern EuropeLatAM
Rise of Millennials in APAC
1.7bn
Millennials in APAC in 2020
Hold one-third of wealth in
Asia by 2020
Millennials don’t believe in beating the market
Lived through 1 or 2 financial crises (AFC & GFC)
Experienced failure of regulations & regulators
Tax Efficient and Low-Cost services
to invest their money over the Long Run
Sources: MyPrivateBanking Research, BCG, Merrill Lynch, Credit Suisse, Ernst & Young, as of May 2016. Past performance is not indicative of future returns.
76%
47% 46%
China Hong Kong Singapore
10
Deutsche Asset Management
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Common robo-advisor approaches
• Client profiling via questionnaires
Age
Family circumstances
Financial standing
Saving goals
Risk averseness
……
• Investment recommendations generated by computer algorithm
Often built on the foundation of Modern Portfolio Theory (“efficient frontier”)
Investment suggestion with a mix of asset classes
Customized solution based on client questionnaire inputs
Focus on diversification
Focus on long-term investment
Use low-cost, index funds including Exchange Traded Funds (ETFs)
Deutsche Asset Management
Com- modities
ETFs as key investment solution building blocks External challenges impact internal structures
External challenges
— Are equities overvalued in today's market environment?
— How likely will investments be loosing value?
— What impact has volatility on investment performance?
— Are interest rates going to rise again soon?
— How do central bank policies affect investment
strategies?
— Can fixed income still produce
attractive returns?
— How do regulatory regimes (MiFID II)
limit an asset manager’s room for
maneuver?
— Limited resources for the build-up of
know-how.
Internal structures
— Effects of currency
movements on the
portfolio.
— How can currency risks
be cushioned?
— Regulatory rules require cost
transparency.
— Costs absorb returns (especially in a
low interest rate environment).
Equities
Fixed
income
Currencies
Regulatory
regimes
Resources
Costs
— The effect of weak oil prices.
— Is gold still hedging inflation?
The successful distribution of investment solutions means
mastering external challenges, while optimizing internal structures.
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Deutsche Asset Management
ETFs as key investment solution building blocks Challenge: Changing landscape in asset class performance
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Equity Europe: MSCI Europe. Equity Asia: MSCI AC Asia. Equity EM: MSCI Emerging Markets. Equity Global: MSCI World. Equity USA: S&P 500.
Fixed Income Europe: Citigroup WGBI EU All Maturities. Fixed Income EM: JPM EMBI Global Div ersif ied. Fixed Income Global: JPM Global Gov ernment Bond.
Fixed Income USA: JPM GBI US Gov ernment Bond. Conv ertibles: ML Global 300 Conv ertible. Commodities: S&P GSCI Commodity . Real Estate: FUX DE Real Estate Europe
Source: Thomson Reuters Datastream (return indices). FERI
2006
Equity Europe
20.2%
Equity EM
18.6%
Equity Global
7.9%
Convertibles
3.8%
Equity USA
3.6%
Real Estate
3.5%
Equity Asia
2.6%
Fixed Income
Europe
0.0%
Fixed Income EM
-1.7%
Fixed Income
Global
-5.2%
Fixed Income USA
-7.8%
Commodities
-24.0%
2007
Equity EM
26.1%
Commodities
19.7%
Real Estate
5.8%
Equity Europe
3.2%
Equity Asia
1.3%
Fixed Income
Europe
1.1% Fixed Income
Global
-0.1%
Convertibles
-1.0%
Equity Global
-1.2%
Fixed Income USA
-1.5%
Fixed Income EM
-4.3%
Equity USA
-4.9%
2008
Fixed Income USA
20.2%
Fixed Income
Global
17.8% Fixed Income
Europe
5.8%
Real Estate
4.2%
Fixed Income EM
-7.5%
Convertibles
-24.0%
Equity USA
-33.7%
Equity Asia
-37.1%
Equity Global
-37.2%
Equity Europe
-43.3%
Commodities
-43.7%
Equity EM
-50.8%
2009
Equity EM
73.5%
Equity Europe
32.5%
Convertibles
32.5%
Equity Asia
27.9%
Equity Global
26.7%
Fixed Income EM
25.8%
Equity USA
22.5%
Commodities
10.0%
Fixed Income
Europe
4.9%
Real Estate
1.7%
Fixed Income
Global
-1.3%
Fixed Income USA
-6.8%
2010
Equity EM
27.5%
Equity Asia
26.0%
Equity USA
23.1%
Convertibles
20.1%
Equity Global
20.1%
Fixed Income EM
20.0%
Commodities
16.6%
Fixed Income
Global
13.8%
Fixed Income USA
13.5%
Equity Europe
11.7%
Fixed Income
Europe
2.9%
Real Estate
0.0%
2011
Fixed Income USA
12.9%
Fixed Income
Global
10.6%
Fixed Income EM
9.9%
Fixed Income
Europe
6.3%
Equity USA
4.5%
Commodities
2.7%
Real Estate
2.0%
Equity Global
-2.6%
Convertibles
-3.2%
Equity Europe
-7.9%
Equity Asia
-13.3%
Equity EM
-15.9%
2012
Equity Europe
18.1%
Equity EM
16.8%
Fixed Income EM
15.6%
Equity Global
14.7%
Equity Asia
14.3%
Equity USA
14.2%
Convertibles
10.8%
Fixed Income
Europe
9.7%
Real Estate
0.7%
Fixed Income USA
0.6%
Fixed Income
Global
-0.3%
Commodities
-1.5%
2013
Equity USA
26.7%
Equity Global
21.9%
Equity Europe
20.5%
Convertibles
11.8%
Equity Asia
8.7%
Fixed Income
Europe
0.6%
Real Estate
-1.6%
Commodities
-5.5%
Equity EM
-6.5%
Fixed Income USA
-7.6%
Fixed Income
Global
-8.6%
Fixed Income EM
-9.3%
2014
Equity USA
29.5%
Fixed Income EM
22.3%
Fixed Income USA
20.8%
Equity Global
20.1%
Convertibles
18.1%
Equity Asia
14.8%
Fixed Income
Global
14.6% Fixed Income
Europe
14.3%
Equity EM
11.8%
Equity Europe
7.4%
Real Estate
0.7%
Commodities
-23.8%
2015
Equity USA
12.9%
Convertibles
12.7%
Fixed Income EM
12.7%
Fixed Income USA
12.4%
Equity Global
11.0%
Equity Asia
11.0%
Equity Europe
8.8%
Fixed Income
Global
8.5% Fixed Income
Europe
2.3%
Real Estate
0.8%
Equity EM
-4.9%
Commodities
-25.2%
Annual Performance 2006 – 2015, descending order
Deutsche Asset Management
ETFs as key investment solution building blocks
ETF-based multi-asset strategies may be an efficient solution for external and internal
challenges: — Broad, easy and diversified access to almost all markets, asset classes, sectors and investment themes.
— High transparency and liquidity due to continuous pricing and tradability.
— High flexibility thanks to continuous enter and exit option to the market.
— Cost efficiency.
Equities Fixed
income Currencies
Regulatory
regimes Resources Costs
Com- modities
ETF
Multi-asset strategies require in-depth analysis across countries and asset
classes, systematic interpretation of data as well as consistent translation into
investment recommendations.
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Deutsche Asset Management
Simpler and
lower-cost process.
Access to an ETF platform.
Wide range of
strategy implementation.
Experience and know-how
across the entire Deutsche
AM platform (specialists,
analysts, etc.).
Sample model portfolios offer
ETFs as key investment solution building blocks
Expertise
Benefits for
asset managers
Focus on in-house expertise:
Advice on and distribution of
financial products.
Portfolios can be adjusted to
suit your particular
client segments.
Cost benefits
Deutsche AM – a strong partner
at your side.
Focus on solutions
Efficiency
Flexibility
ETF-model portfolios such as the one from Deutsche Asset Management can
provide asset managers with turnkey solutions.
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Deutsche Asset Management
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Advantages vs. traditional advisory models
• Investment threshold
Robos - as low as zero
Human advisors – USD 500k – 1m is very common
• Advisory fees (% of Aum)
Robos - as low as 0.25%
Human advisors – 1~3%
• Transaction cost
Robos - automated trading and portfolio re-balancing is more scalable and reduce average cost as more clients and
assets are added
Human advisors – more expensive to execute trades and maintain ongoing support; maximum number of clients per
advisor needs to be capped to ensure sufficient advisor attention
• Investment tools
Robos – low-cost investment products, often using ETFs
Human advisors – often leaning towards mutual funds and other higher-cost financial products
Human involvement
Robos – makes investment recommendations based on client risk-return preference and product merits
Human advisors – can be biased due to bank & fund provider affiliation and influenced by rebate / trailer fee level
Deutsche Asset Management
Significant growth ahead
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AuM Online Investment Management
Worldwide (in bn, US$)
AuM +2,250%
in five years
$452bn
$20bn
Significant growth rates of global AuM of
automated online investing/advisory expected:
― MyPrivateBanking Research, March 2015
Global AuM to grow from $20bn in 2015 to ~$452bn by 2020
― Deloitte Consulting, Dec 2015
Global AuM by 2025: $5 trillion to $7 trillion
― Goldman Sachs, Future of Finance (3), March 2015
Charles Schwab sizes the automated advisory opportunity as $400bn
― Ernest Young, Advice goes virtual, Dec 2014
Estimate the current opportunity for digital advice to be above $10tr in investable assets
Current estimated market share of digital wealth firms is just 0.01% of the $33tr industry
Millennial assets estimated to rise from ~$2tr in aggregate net worth to ~$7tr in five to seven yrs
Only 20% of mass affluent in US have a financial
advisor
This information is intended for informational purposes only and does not constitute investment advice, a
recommendation, an offer or solicitation
Deutsche Asset Management
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Source: Ignites Europe, data as at Q4/2015 / Jan 2016
Asia playing fast catch-up…
This information is intended for informational purposes only and does not constitute investment advice, a
recommendation, an offer or solicitation
03 Challenges ahead
Deutsche Asset Management
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* Illustration f rom economist.com article. For illustrativ e purpose only .
Just how smart is your robo?
Deutsche Asset Management
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* Images are f rom v arious inv estment firms’ websites including Micai.com and f utureadv isor.com
Varying levels of sophistication
VS.
Offering as few as 8 ETFs covering
differing asset classes and allocate client
investments depending on a few questions
answered by clients.
Taking a holistic view of a client’s financial
life by linking all external investment
accounts and managing overall allocation
based on client risk tolerance, investment
goal and family circumstances.
Deutsche Asset Management
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* Pure robo-advisor players only, excluding large traditional managers getting into the robo space such as BlackRock or Vanguard
Many other factors influence the success of robos
• Regulatory environment
Licensing requirements
Client on-boarding / KYC rules
Fund registration requirements – onshore products vs. offshore
• Local wealth distribution models
Existing banks / advisors dominance
Selling incentives – mutual funds vs. ETFs, AuM-based fee vs. advice-based fee
• Client demographics
Wealth distribution – levels of wealth often determine the sophistications of advice required
Financial savvy – how much hand-holding is needed to understand client needs?
Internet / technology adoption rate – how comfortable are clients with technology and automated investment?
• Scale matters
Much larger AuM is needed for low-fee robo-advisors to be profitable – combined robo-advisor assets* estimated to be
USD 20 billion, vs. 17 trillion for traditional asset managers.
Robo-advisors were doubleing their assets every few months but how long can they maintain this growth rate?
Deutsche Asset Management
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Robo-advisor or robo-terminator?
• Privacy concerns
Are we giving away too much personal information?
Are the servers safe and hacker-free?
• Financial advice soundness
Biased advisors? - Open architecture vs. bank affiliated robos
Who’s teaching the robos? - Garbage in, garbage out
Bugs in the codes?
Deutsche Asset Management
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