Asia is Experiencing a Slump
By 2030 the world’s middle classes will number 4.9 billion and 66% of them will be in Asia. Boosted by the rise of income levels, Asia is poised to be the leader in the asset management industry, as evident by the six consecutive years of growth, at an average of 15% CAGR.
Unfortunately, those golden years soon came to a pause. In 2018, the AUM growth was only at a paltry 5%; a drastic 10% decline in just one year.
So what happened?
Well, there are a few potential causes, namely:
- A decline in market performance by an average of 3.2%
- The weakening of Asia’s equity market is highly volatile
The profit pool only grew by 3%, a significant decline from 14%
Source: McKinsey
But of course, that’s not all. Analysts have identified five major disruptions that can potentially have a bigger impact on the asset management industry if not contained soon.
- Increasing Cost Pressures – costs have risen swiftly by 25% over the last two years
- Margin Pressures on Traditional Products – firms are slowly moving to non-traditional offerings with a focus on passive investments
- Increased Demand for Pension and Insurance Products – Regulators across Asia are pushing for more mandatory/voluntary pension saving programs
- Increased Demand for Cross Border Products – Clients are demanding for broader global access, putting pressure on firms to find the best solution to meet their needs
- Progress of Digitalization – Adoption of digital channels has been slow; only 30% of firms say they are using or are installing digital tools.
Navigating the Disruptive Environment
These five disruptions will have a major impact on the economy and industry as a whole. Any failure to adapt to these changes will have major implications on firms, to the extent of possibly closing down the business.
In order to navigate through the disruptive and uncertain landscape, Asian wealth managers must equip themselves with the right set of capabilities. There are two priorities that wealth managers must focus on: gaining scale and digitizing operations to enhance productivity and optimize costs.
There are many ways to achieve both priorities but there’s only one that targets both concurrently. And that solution is integrating Robo-advisors as part of their service.
Gaining Scale
Scale can be referred to as either the size of the business or the number of clients served. Robo-advisor addresses the latter.
It can do so by opening the opportunity to reach out to an untapped segment in the market- millennials.
Millennials, millennials, millennials. They’re everywhere now and are mentioned in nearly every article, research paper, blog, etc. Are they overrated? Definitely not.
1.42 billion millennials globally, 62% of them are in Asia – 880 million to be exact. They are the emerging middle class of Asia but due to their lack of assets, millennials often do not qualify for traditional wealth management and services. A good example would be the US – there are 92 million millennials but only 30 million are currently investing. Despite being the largest generational population, the number of investors are the lowest compared to Gen X and Baby Boomer generations.
Source: Accenture
Millennials are often known as digital natives; Millennials see innovative technologies as necessary in all scenarios, including investment. Now, if we break down the statistics of millennials relationship with finance, here’s what it shows:
- 60% are keen to learn about how to manage their cash flows and budget better
- 60% feel that they have a good understanding of their investments
- 67% want computer-generated recommendations- Robo-advisory services
- 66% want self-directed investment portals while retaining access to an advisor
- 65% want access to platforms that will help learn more about investing
- 63% want a mobile platform
In summary, there is no separation between millennials and technology; they come as a set. This makes it inevitable for firms to implement digital services into their offerings to serve future investors. Not only that, but millennials are keen learners, always on the lookout for new knowledge. It is no wonder that they are more financially prudent than previous generations and make them the ideal clients for Robo-advisors.
Digitize Operations to Enhance Productivity and Optimize Costs
The idea of optimizing cost and enhancing productivity through automation is nothing new. It was mainly associated with manufacturing and front-end customer engagement. However, the extent of automation is no longer limited to just those two aspects.
Digitalization and analytics have unlocked the full potential of wealth management offerings- both front-end and back-end processes.
Traditional wealth managers cannot compete with Robo-advisors when it comes to fees. According to a database of more than one hundred Robo-advisory providers, they charge an annual management fee of between 0.02% to 1% of the AUM. In contrast, traditional wealth managers charge a fee of about 2% to 3%. It is just impossible to compete with the low prices of Robo-advisors, mainly due to the nature of the service.
Then that poses the question of, how is it possible for Robo-advisors to charge such a low fee? Technically, the services offered are the same, so the cost differs in the investment process. It is most evident in these three business pillars, personnel, operating expenses, and digitalization.
- Personnel
It is of no surprise that personnel is one of the contributors to the high costs, wealth management has often been defined as the client relationship business. The advisor-client interaction is highly time-consuming, meaning that each advisor is only able to serve a very limited number of clients, a maximum of 150 clients to be exact. Additionally, each advisor must oversee approximately €100 million to generate enough revenue to cover the costs. Not only is it costly but it is also restricting the type of customers that advisors serve.
Personnel costs can be drastically reduced with Robo-advisors. Since most processes are fully automated, the traditional role of a financial advisor is no longer needed. Advisors will only need to oversee the process and intervene with more technical support personnel than a financial advisor.
From 150 clients per advisor, Robo-advisor has increased to 20,000 clients per advisor- more clients served with fewer advisors. Even in more established Robo-advisory firms like Betterment, there are about 130 employees– still a fraction of the number of employees in traditional wealth management firms.
- Operating Expense
So what are some operating expenses? Rent, equipment, inventory costs, payroll, marketing, insurance, and resources for research and development are all operating expenses. Traditionally, wealth management firms require a representative building in significant cities for meetings with clients. But now that everything’s online, there is no longer a need for that.
Most Robo-advisors either work remotely or use co-working spaces with other firms, reducing costs of rental and increasing work motivation. There’s also no need for fancy equipment; all they need is a desk and computer. And since everything is done digitally, marketing activities have migrated there as well. It is more cost-effective, but it has allowed firms to reach a broader range of clients regardless of geographic limitations.
- Digitalization
With Robo-advisors, everything can be digitized. Everything.
The front-end customer interaction is fully automated with user-friendly experience features. Clients can easily navigate through the platform on their own with support- live chats or chatbots- readily available if they need it. As chatbots are limited to the predefined answers that are available to them, most platforms have also provided clients with detailed FAQs to refer to.
As for wealth managers, they can now focus solely on customers. They are ensuring that customers receive the best service and highest satisfaction. With more clients and a seamless investment process, wealth managers only need to manage less than half the AuM prior- €48.8 million to cover costs and operate viably.
Source: Deloitte
Overall, Robo-advisors can help cut down 60% of traditional wealth management’s costs, mostly due to its lean organizational structure.
Starting the Engine Again
Despite the sudden slowing of growth and challenges that may come in the way, Asia is a leader in the global wealth management scene.
Compared to the more developed regions like North America and Europe, Asia has a more substantial profit margin – 22.5 basis points (bps). It is double the margins of both North America and Europe, 11.1 bps, and 12.3 bps, respectively.
Although it is a dominant region right now, Asia has yet to reach its peak. Integrating solutions like Robo-advisors will propel the region to even greater heights.
The opportunity is here, let us help you grasp it.
At Bambu, we specialize in developing Robo-advisory solutions for the financial services industry, from smaller RIAs and wealth advisors to some of the largest banks in the world. We help our clients work through the above key considerations to implement solutions that truly benefit their wealth management business.
To find out more, check out our product here or contact us at sales@bambu.co for more information.
