Bizzarch.com.au

The rise and fall and rise again of robo investing

enda.mahoney@bizzarch.com.au

EXECUTIVE SUMMARY

In its simplest form, robo-investing is any tool, algorithm or service that helps achieve investment outcomes for wealth investors. At its core are algorithms to determine investment strategies, optimal portfolios and investment ideas aligned with goals, risk and time horizon. Algorithms can range from a simple set of rules that build a single portfolio to complex multi-strategy formula that review thousands of instruments and scenarios in order to construct an optimised portfolio.

Robo-investing took off after the Global Financial Crisis with the emergence of many fintech start-ups (including Betterment and Wealthfront) challenging the incumbent financial institutions. Leveraging easy-to-use interfaces, exchange traded funds, low fees, and industry distrust, they attracted customers (especially younger and middle-aged investors) to their automated investment platforms.

By 2012, robo-investing was starting to gain traction encouraging the established players like Schwab and Vanguard to launch competing services. The industry grew from zero funds in 2009 to a projected $300 billion globally in assets under management at the end of 2015. Some market analysts are predicting the industry could grow to $2.2 trillion by 2020.

As the industry grows, it appears increasingly likely that few of the fintech innovators will end up as winners in the new world as they struggle with the high cost of client acquisition and intense competition from incumbents who’ve responded with copycat experiences, reduce fee structures and the luxury of large customer pools. Regulatory compliance is adding to the cost as regulators around the world adapt their guidelines to cover robo-investing.

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EXECUTIVE SUMMARY

Research also suggests that consumers do not trust fully automated solutions, tending to invest less than 10% of their wealth in robo solutions. Tech-augmented human advisors, or hybrids mixing human and algorithms, are rapidly growing past both their robo-advisor and traditional human advisor peers.

Going forward it appears we are entering a capability and technology arms race between financial institutions, broker-dealers and (surviving) fintech’s as they battle to become the future platform of choice. Personal Financial Management, Financial Planning (robo-advice) and Fractional Investing will play an increasingly important role in the evolution of the industry and AI, machine learning and cognitive computing will soon become a differentiator then standard between offerings.

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FINTECH

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WEALTH TECH

ROBO IS A MICROCOSM OF THE FINTECH ECOSYSTEM

ROBO ADVICE

ROBO INVESTING

LEADING AUSTRALIAN WEALTHTECH INNOVATORS

ROBO INVESTINGSelf Executed Trades

ROBO INVESTINGFully Automated

ROBO ADVICE

No Players

ROBO INVESTINGAdviser Executed

STRATEGY & RESEARCH

TRADINGPORTFOLIO ADMIN

SharesightClassSuper

BGI, CXi

Decimal, Owners AdvisoryAdviserlogic, ProvisioMidwinter, Big Future

Ignition Wealth

StockDoctor, StocklightSimplyWallSt

Skaffold, Investsmart

PORTFOLIO MANAGEMENT

InvestSmart, SharesightSelfWealth, Sharesight

Nabtrade, BellDirectCommSec, eTrade

IG Markets, SelfWealth

Owners AdvisoryMacrovue

SixParkStockspot, Clover

IgnitionWealth, QuiteGrowthAcorns, BT Invest

PERSONAL FINANCE

PocketbookMoneyBrilliantMap My Plan

MIRRORING FINTECHS IN GLOBAL WEALTHTECH

ROBO INVESTINGSelf Executed Trades

ROBO INVESTINGFully Automated

ROBO ADVICE

ROBO INVESTINGAdviser Executed

STRATEGY & RESEARCH

TRADINGPORTFOLIO ADMIN

IsharesTipRanksVectorVestHiddenlevers

Vanguard PAPersonal Capital Financial Engines

SharesightClassSuperBGICXi

DecimalOwners AdvisoryAdviserlogicProvisioMidwinterBig Future

DriveWealthDivyRobinhoodCashworkz

StockDoctorStocklightSimplyWallStSkaffoldInvestsmart

PORTFOLIO MANAGE

InvestSmartSharesightSelfWealth

SwanestSigfig PMTipRanksCoVestor

NabtradeBellDirectCommSeceTradeIG Markets

FutureAdviserMarketRidersMotif

OwnersAdvisoryMacrovue

JemstepForward Lane

Schwab IPFidelity GoBettermentWealthFrontHL Portfolio+Sigfig - NutmegAcronsHedgeable

SixParkStockspotCloverIgnitionWealthQuiteGrowthAcorns, BT Invest

PERSONAL FINANCE

Personal CapDobotMint

PocketbookMoneyBrilliantMap My Plan

Australian International

Sales & Marketing

Customer ManagementCustomer Acquisition

PurchasePortfolio

ReviewRebalance

ROBO INVESTING VALUE CHAIN

Use Case 1 Use Case 2 Use Case 3 Use Case 4

Use Case 1 : Shopfront discovery, the gravity that brings customers to the serviceUse Case 2 : Onboarding [ customer profiling, product review and simulations ] Use Case 3 : Onboarding [ purchase, customer sign up ]Use Case 4 : Portfolio Management

Asset

Allocation

Discovery

Shop front

Customer

Profiling

Product

Simulations

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ROBO INVESTING – BUSINESS MODELS

SELF EXECUTED

Accounts are managed via self-executed trades which means all investment selections, trades, and re-balancing

suggestions are identified via algorithms, but all trades are executed manually by the client through a third party broker-

dealer.

Good choice for Self Directed investors that need guidance on how to properly manage a portfolio, but who ultimately

want to act as their own decision makers and to remain personally involved in their

investments.

FULLY AUTOMATED

Accounts are managed through a fully automated platform which means all investment selections, re-balancing

opportunities, and trades are identified and executed via platform integrated

investment algorithms.

Good choice for those looking to have minimal involvement and little to no human interaction involving personalised

portfolio strategies.

ADVISER EXECUTED

Accounts are managed via advisor-executed trades which means investments,

trades, and re-balancing strategies are identified by platform-integrated

investment algorithms, but are reviewed and executed by a registered financial

adviser.

Good choice for those who don't meet the requirements demanded by traditional investment advisors or for those who

would like to lower portfolio fees while continuing to receive professional guidance

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…2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

THREE WAVES OF ROBO INNOVATION

Fintech BrokersFin Service Giants

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WHO’S WINNING Brokers & Platforms

>5b

Self Executed Trades Fully Automated Adviser Executed

Launch Q4 2016

Note: zero AUM means data was not freely available, but assume < $300m

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FINTECH B2C ROBO MOVEMENT IS LOSING STEAM

Copyright Michael Kitces www.kitces.com

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ROBO’S LEGACY

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1) THE EROSION OF FEES

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“ALL IN” FEES – SPLIT BY BASE FEE & EXPENSE RATIO

All in fees include management fees and expense rations ( etf fees and trading fees)All fees based on $100,000 portfolio

Self Executed Trades Fully Automated Adviser Executed

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“ALL IN” FEES – BY COUNTRY & the Goldilocks zone

All in fees include management fees and expense rations ( etf fees and trading fees)All fees based on $100,000 portfolio

Australia US Adviser ExecutedUK

Driving fee models down in all regions

2) THE IMPORTANCE OF THE HUMAN FACTOR

There are parts of the client-advisor relationship—such as reassuring clients through difficult markets, persuading clients to take action and synthesising different solutions—that remain the province of the financial advisor for the foreseeable future.

It is therefore essential to develop a unified client-advisor experience that seamlessly brings together the best of human, robo-advice and robo-investing capabilities. Understanding where robo can complement and enhance relationships will be key for most full-service wealth management firms going forward.

Additionally, digital wealth firms are relatable and empathetic. Even though technology is used to serve thousands of clients, the branding, messaging and vision is human. That means the goal is to have an iPhone app, a friendly design and the ability to chat with an advisor online at any time.

In wave 3 we are seeing a shift from technology-enabled human advice to human supported technology driven advice,

the hybrid model”

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3) DIGITAL WEALTH IS AN OMNI CHANNEL EXPERIENCE

Any timeAny whereAny device

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THE RISE AGAIN OF ROBOContinued innovation and new business models are

driving the next wave of robo investing

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1) THE SHIFTING BUSINESS MODEL

Research by Michael Kitces www.kitces.com

Pure play robo-advisers are pivoting their business models as the financial majors respond to the challenge.

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2) CRADLE TO GRAVE RELTIONSHIPS

$

Gifting

Industry players need to consider each customers investing needs as they progress through life stages, or target a specific segment and be the best.

Graphic copyright Decimal

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3) WHOLE OF FINTECH EXPERIENCE

One of the reasons incumbent institutions are winning is their ability to offer services across the full spectrum of banking and financial services, bring budget planning, savings, protection and advice in one holistic experience.

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“Shift from technology-enabled human advice to human supported technology driven advice”

4) BIG DATA & HUMAN INTERACTION

Artificial Intelligence

Advanced Algorithms( eg..stress testing)

Augmented Experience

Cognitive Computing

Predictive Services

MachineLearning

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Revenue : $11 million

5) FRACTIONALISATION IS A GAME CHANGER

Fractional investing is not only challenging the traditional domains of funds management, fractional investing is creeping into innovative plays in capital markets (fractional trading), property (DomaCom) and insurance.

Fractional investing allows a consumer to buy $50 of any collection of shares they want in one simple transaction.

Traditional financial service models across the board are under attack.

Fractional trading