China's pursuit of sophisticated artificial intelligence algorithms in its investing industry could help the country offer widespread investment advice, helping fill an area that is sorely lacking when it comes to human expertise.
The country has been engaged with the US and other major countries in a dash to improve its AI capabilities, in finance and other areas.
It's a top priority. In October 2017 Chinese president Xi Jinping stated in his three-hour opening address to the quinquennial Party Congress that the country needed to promote deep integration of the internet, big data and AI with its real economy.
This followed the State Council, China’s chief administrative authority, vowed in July to become an AI superpower by 2030 by building an AI industry worth Rmb1 trillion ($151.15 billion), up from the more modest near-term goal of Rmb150 billion by 2020. It’s made this declaration despite admitting lagging other developed economies in AI research.
“In 2030, AI theories, technology and application should reach world-leading level and the country will become the main AI innovative centre in the world," it said at the time.
As we have reported, China has certain advantages in doing so, primarily the availability of data. Large amounts of data is vital for AI evolution, because it is used to train and modify the algorithms on which the latter operates. The bigger the data set, the quicker the algorithms can be trained.
And China boasts unrivalled consumer data troves, courtesy of a lack of privacy rules about the storage and usage of such information.
“China, in the long run, has a massive data advantage. If you are looking at big data and the analytics that are used [for] AI, it’s the one region that I am the most bullish on,” said Beijia Ma, thematic investment strategist at Bank of America Merrill Lynch (BAML).
The abundance of data in China should mean that its AIs develop fast. That should, at least in theory, accelerate the bespoke investment products created and offered to the country’s populace.
The national agenda
Rolling out AI products is particularly important for China’s financial services industry, because so many of the nation’s 1.38 billion are underserved.
A decade ago, only wealthy people in the nation enjoyed personalised financial advice, said Zennon Kapron, founder of Kapronasia, a Shanghai-based fintech research firm. Even today the country’s penetration rate for wealth management is far lower than in developed markets.
“Traditional banks [in China] are seen as offering homogeneous, uncompetitive, unimaginative financial products that are pushed out to customers, rather than responding to customers’ needs”, according to a collaborative report by DBS and EY in November 2016.
But robo advisers can help solve this need, allowing companies to reach individuals who historically would have been underserved because they are not wealthy enough, said BAML’s Ma.
“If you imagine someone that only has $5,000 or $10,000 of wealth to manage, no wealth management company would give them a real-life, or human financial adviser.” AI-enabled solutions are generally viewed as a cheaper solution than having a real-life human adviser. The fees for the former can be as low as 50 basis points for the assets under management, she said.
In contrast, the head of wealth management and private banking at the Shenzhen branch of a Chinese bank, who declined to be named, said clients must have at least Rmb30 million to get a specialised account, and the management fee is about 1%.
For clients with less funds, the bank offers investment products, which it then makes money on via service and subscription fees. The subscription fee for a mutual fund can range from 1.2% to 1.5% of their investment.
Added to that, companies that can reach more people who want to sock away money into investments have a much higher chance of servicing future family generations when the wealth gets handed down. This is a given in developed countries, but “in China, you don’t have that yet, because the market doesn’t exist, or it does exist, but it’s not as well-developed,” Ma said.
“Given China is an underpenetrated market, this [AI-powered solutions] is actually a good way for the wealth manager to make inroads with the potential clients,” she added.
This is the first of a two-part feature on China's advances in artificial intelligence in wealth management, which originally featured in AsianInvestor's December 2017/January 2018 magazine. Look out for the second part in the coming days.