Asia wealth managers beware: the robot revolution is entering its next phase.
Over the past two years the region’s wealth management industry has witnessed the advent of the robo-adviser, which uses computer algorithms to provide financial advice to end investors for a fraction of the cost of advice provided by a human being. That was followed by the bionic adviser, which combines algorithms and a human touch to build investment portfolios.
Now the region’s wealth industry is bracing itself for the rise of the robo fund selector, or companies that use automated tools to select the best funds for private banks and family offices to distribute.
Swiss start-up iFundServices provides what appears to be the first robo-fund selector in the Asian market. Chief investment officer Mathias Weber was in Hong Kong and Singapore in August to market the company’s ware to clients.
He told AsianInvestor that its product, called Digital-Advisor, automates fund selection based on quantitative and qualitative factors. It uses its database of 2,000 actively managed and liquid alternatives funds and 1,000 passive funds to automatically score funds based on indicators such as performance, company profile, or manager quality. Weber boasted the company could even select funds based on a bank’s investment views.
The tool could perform the role of a fund selector, only do it faster and cheaper. Weber said fund selectors react to the product in two ways: they either worry they will be replaced; or see it as a tool to enhance their selection process.
Economies of scale
The impact of robo fund selectors might particularly interest some of the biggest private banks in Asia, including Credit Suisse, Citi and UBS. These banks employ decent-sized fund selection teams in the region, which decide what products are included in their funds platform. In contrast, mid-sized private banks typically centralise fund screening and selection in their headquarters in Europe or US.
Citi and Credit Suisse seem reluctant to discuss the potential impact of robo fund selectors on their operations. They declined to comment about the subject. However UBS, the largest global private bank, was willing to talk.
James Fava, head of product development & management funds in APAC at UBS Wealth Management, told AsianInvestor that its approach to fund selection couldn’t be replicated by robots.
“Our approach is very qualitative. There’s a lot of emphasis on meeting the managers, getting a feeling for the way they manage money and getting the information systematically. We take views on the meeting we have and on the information we gather. It is still very much qualitative at heart,” he explained.
UBS’s Asia fund selection team is comprised of five people based in Singapore and Hong Kong, who are supplemented by fund selectors in local markets such as Taiwan, Japan and China. The team also works closely with the fund selection team in Zurich. As a result, it has the advantage of economies of scale compared to most other institutions.
Smaller banks or family offices that lack the Swiss bank giants’ resources to screen, analyse and select funds for distribution may find robo fund selectors to be more appealing. Even Fava admits there could some benefits by automating some of the fund selection process.
“Every institution needs to think through what the value-add [offered by a robo fund selector] is to their business.”
Smaller player selection
One big potential limitation for robo-fund selectors? Their qualitative analysis processes.
By their very algorithm-based nature, robo fund selectors are very good at assessing the historical performance of funds based upon certain data sets, which is a quantitative process. But it’s likely that some robo fund selectors will want to add their own intuition and views about fund managers, strategies and potential market conditions into their fund choice. These are qualitative factors.
Jimmy Ng, director of investments at boutique private bank Bordier & Cie, said automated fund selection rests on the assumption that due diligence places a higher weighting on quantitative rather than qualitative due diligence. He noted that this type of portal would likely be embraced by users who want a quick and easy way to fund selection based on past performance.
Consulting firm Mercer, which provides fund research and best-of-breed fund selection to wealth management firms, is sceptical about robo-fund selectors claiming to provide a qualitative approach to fund selection. It noted that robots lack the ability effectively make judgements, which is essential to a qualitative approach.
“The ideal qualitative analysis is done through face-to-face meetings with fund managers and correlate the information we get,” said Steven Seow, head of wealth management practice for Asia at Mercer.
Mercer’s fund ratings use the four-factor framework, comprising idea generation, portfolio construction, implementation and business management.
“We pick a manager who is better than others in the same peer group,” said Seow. “I don’t think this can be automated.”
Asia’s robots may be rising, but their ability to offer more than quantitative services appears limited. The industry may be evolving fast, but the place of humans remains secure – for now at least.
Look out for part two of this AsianInvestor October magazine feature article in the coming days.