Recently, we have received queries from a fan who was very enthusiastic about FinTech and the robo advisory industry particularly about its development status, future prospects, potential risks and opportunities. 

 

- Q1：How do robo advisors perform in terms of returns when compared with traditional financial advisors and private bankers?

- Q2：Do robo advisories put clients’ money only in passive investment products such as index funds and ETFs? Can they access worldwide ETFs and index funds or do they have access to only a select number of local ETFs and index funds?

- Q3：What are the advantages of using robo advisors if people can buy ETFs and index funds through online trading platforms like interactive brokers and Td Ameritrade?

- Q4：How can you differentiate one robo advisor from another? Would that be a more powerful algorithm or access to human support? 

- Q5：Betterment and Wealthfront have launched high-yield savings accounts. Will this model be easy to replicate in other countries?

- Q6：Do you think robo advisors have disrupted the traditional wealth management service and why?

- Q7：What have you done in terms of branding and marketing to raise awareness of your company and robo advisory?

- Q8：Do robo advisories appeal generally to a younger crowd with less money to invest? Who are your target users?

- Q9：Do you think most high-networth individuals still prefer getting service from a real person?

- Q10：What are the challenges to robo advisories?

 

We are very pleased to see that more and more people are paying attention to the Robo-advisor industry.  Therefore, AQUMON recorded our answers to this student, hoping to help more readers with similar concerns.

 

 

Q1：How do robo advisors perform in terms of yield if compared with traditional financial advisors and private bankers?

 

AQUMON：It depends on the robo-advisors/financial advisors/private bankers strategy and product offering. Otherwise it's a little like comparing apples with oranges. If the 'advisor' (robo or otherwise) is mainly looking to 'follow the market' then I guess robo-advisors like AQUMON are doing quite well.

 

As a reference our portfolios from most conservative (80% bonds/20% stocks) to most aggressive (80% stocks/20% bonds) are up 8.24%-16.54% as of October 31st. Betterment (US' largest independent robo advisor) as a reference is up 7.17%-16.51%. 

 

For private bankers/financial advisors it really depends. From my understanding for a large handful of high net worth/ultra high net worth clients in Hong Kong missed the big market rally from January-March (since markets pulled back a lot in December and they didn't feel comfortable to invest early in the year) and likely many of them are seeing single digit returns this year as a result. It's not really an accurate comparison but just wanted to give you a little reference.

 

Q2：Do robo advisories put clients’ money only in passive investment products such as index funds and ETFs? Can they access worldwide ETFs and index funds or do they have access to only a select number of local ETFs and index funds?

 

AQUMON：No they do not. They only do so because the DNA of most robo advisors is to keep costs low for clients and their investments diversified/liquid so ETFs are in turn the 'best' solutions. AQUMON and other robo advisors can actually offer investments in both stocks and mutual funds (right now mainly to our financial institution clients). Many of our mainland clients do not invest into ETFs and we construct portfolios investing into mutual funds for them instead.

 

In terms of access to worldwide or local investments it depends heavily on your licensing. Licensing is one of the largest barriers to entry into other markets and even for us we used about 1 to 1 1/2 years to get both our HK and US investment dealing/advisory licenses. 

 

Q3：What are the advantages of using robo advisors if people can buy ETFs and index funds through online trading platforms like interactive brokers and Td Ameritrade?

 

AQUMON：There are 2 main reasons why you want to use a robo advisor versus buying yourself.

 

One, at least for AQUMON we hope our automated and quantitative approach can provide our clients with better returns and better downside risk management through 3 points:

1) during the investment selection process

2) implementing systematic and quantitative orientated diversification (through investment correlation calculations) thereby reducing their downside risk and 

3) 24/7 monitoring and automatically notifying our clients to adjust their portfolios when needed. 

This would be very hard to impossible to do it yourself for almost all investors.

 

Secondly, even if you think your investment skills are better, just because you 'can' doesn't mean you actually should. It's ultimately balancing opportunity cost for your time. Just because you 'can' clean your house doesn't mean finding help is not a better solution...haha.

 

If investors want to do it themselves we highly recommend they follow their heart. We just prefer to be automate our investments so we have time to do other things or spend time with people we love. 

 

Q4：How can you differentiate one robo advisor from another? Would that be a more powerful algorithm or access to human support? 

 

AQUMON：To an individual investor (B2C) it's actually not easy to differentiate one platform from another even if you have a more 'powerful' algorithm or additional bells and whistles. This will be a similar problem to how Hong Kong consumers will have a tough time in 4-6 months time differentiating between virtual banking, mobile banking and e-banking.

 

Ultimately HK consumers will differentiate it by user experience (did you enjoy the experience and did solve their problems easily) and in more shallower terms: investment returns and Marketing.

 

To financial institutions (B2B) they have a much more stringent set of rules that you need to meet when you show them your proof of concept (POC) that will likely assess your algorithms, investment framework, how easily you can integrate it onto their platform, strength of your respective teams, your prior track record with other financial institutions etc.  

 

Q5：Betterment and Wealthfront have launched high-yield saving accounts. Will this model be easy to replicate in other countries?

 

AQUMON：I know of this although I have not explored this in depth in Hong Kong (not sure about other countries).

 

My initial feeling is your biggest hurdle will be scale.

 

There is a reason they both did not launch this until they reached US$10B+ in assets under management. From my understanding they are basically created a network of 4-5 FDIC insured banks and these banks 'bid' for their savings cash on a periodic basis so they get the best rates.

 

It's like shopping around for time-deposits in HK, 'new' money rates will be 2% or above while existing 'old' cash will only get under 0.5% for time deposits or under 0.4% for regular savings deposits.

 

If somehow you could achieve scale (where the savings amount in question is quite big and juicy) and construct an automated merry-go-round platform for banks to fight for your new savings deposits then this in theory may work. 

 

Q6：Do you think robo advisors have disrupted the traditional wealth management service and why?

 

AQUMON：In the US and overseas yes they have disrupted the wealth management game by somewhat automating the wealth management experience and also giving access to these services to underserved consumers. In just a few short years we see Vanguard and Charles Schwab accumulate over US$100B which is pretty significant.

 

But for every success case like Vanguard, Schwab, Betterment etc. there are plenty of unsuccessful cases which are marred by a combination of low adoption rates by consumers/investors and as a result high acquisition cost. This is the reality. 

 

For HK, my humble feeling says we have not technically 'disrupted' anything yet. In 2020 and beyond you will start to see more and more banks and financial institutions offer this to their clients (many of them powered by AQUMON) but whether this truly 'sticks' with end users remains to be seen.

 

I have confidence automating wealth management (as at tool) will definitely have its place in the market but HK is a pretty small/mature/conservative market and that combination makes it much harder to crack into versus say mainland China (where buying investments via their smartphones is already quite common). This is the main reason why we are also opening up in other markets. 

 

Q7：What have you done in terms of branding and marketing to raise awareness of your company and robo advisory?

 

AQUMON：We've already done quite a lot but truthfully our Marketing dollars are somewhat limited to result in widespread awareness.

 

However, if a company probably spending HK$3-5M per month on TV/digital/physical ads, they've definitely gained more widespread awareness but not sure this will effectively result in user conversions and them dethroning top market players.

 

We'll probably spend more going forward but this will be a combination of when we secure our B round funding and also what the market will be like now that WeWork's situation has put higher scrutiny of any startup players. Much like Game of Thrones I feel a startup and financial market 'winter' is coming and smart startups need to get back to basics and be more careful with our money. 

 

For HK I feel like adoptions by banks (which already earned consumer's trust versus new brands such as startups/fintechs) will be one of the bigger boosts to help provide elevated Marketing and awareness/branding. 

 

Q8：Do robo advisories appeal generally to a younger crowd with less money to invest? Who are your target users?

 

AQUMON：Looking at our client base and hearing from our focus groups AQUMON's offering's target user age is currently about 30 years old or above although 60% of our clients are aged 25-45. Mostly they male (70%) and are from higher income industries such as finance and IT but this is likely due to targeting bias as well.

 

Why? The combination of 1) our investment minimum is at HK$40,000 (so if you are under 30 you probably don't have that much cash to invest yet) and 2) investing in a longer term stable investment is something we see more people consider more when they are getting/got married or having/had kids. We find many younger investors are not really looking for automated long term stable returns but actually riskier assets with elevated returns and a sense of achievement by doing it themselves. This may change when we lower our investment minimum to HK$8,000 at the end of 2019/early 2020.

 

 

Q9：Do you think most high-net worth individual still prefer getting service from a real person?

 

AQUMON：Yes and no.

 

Yes, because most high net worth and older clients in my 15+ years experience in finance honestly are:

1) a bit 'lonely' and actually look forward to human interaction and

2) not entirely that tech-savy yet and may require the human touch to walk them through things.

Plus at their investment amount they can rightfully request for a human advisor.

 

I also say "no" because even though they may want to get service from a real person part of the service likely is already automated via a robo or similar technology.

 

The numbers don't lie. In HK there are 200,000 high net worth/ultra high net worth individuals but only about 4,000 client facing advisors/specialists. That's a 50:1 ratio if they only open 1 account each (high net worth/ultra high net worth clients likely open multiple accounts across different banks).

 

So if you are trying to expand your market share (which all banks want) either: 1) your client gets lower quality service or 2) you use technology to bridge this or 3) you hire more humans to help out (which is possible but quite costly). 

 

Q10：What are the challenges to robo advisories?

 

AQUMON：There are still manage challenges for robo advisors to see widespread adoption.

 

The top macro challenges include a combination of

1) awareness: what it is and why do robo advisors add value,

2) trust: most consumers still trust banks over newer brands to manage their investments although tech companies such as Alibaba/Tencent is likely chipping away at this and

3) basic education: many consumers honestly have no idea why they even need to invest (let alone use a robo advisor) since they were never taught and also lacked exposure to proper investment tools. 

 

On the micro front for robo advisors it's more about designing a product that truly solves people's pain points and also having the ability to scale up in an efficient manner. Offering zero fees and throwing yours/investors' cash into a giant bonfire to acquire users does not qualify as 'efficient'. Unless you have some creative way to not charge (so substituting visible fees for invisible ones ideally without selling your clients' personal data) I personally am not a big fan of the big race to zero (fees). If you offer value you should be paid. Sounds like a fair trade. 

 

 

Hope this can help you.  Feel free to contact us if you have any questions!

 

[Referral blog] Aqumon Robo-Advisor Breakdown & Performance

 

 

About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1 & 4 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.

AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.

 

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