The digitization of the financial sector has been a widely-discussed topic in recent years. Along with payments, personal finance management and loans, asset management has also been affected by the digital trend.
Along with the numerous software solutions which cater to the broad investment and trading sector, numerous fintech startups which engage directly with the end customer have appeared on the scene.
These include social trading platforms like ayondo, wikifolio and eToro, app-based securities brokers like Robinhood and Loyal3, information services like 2iQ Research, crowdsourcing tools like StockPulse, Sentifi, sharewise and estimize, and trade-mirroring services like Covestor, Alphaclone and many more.
Wealth management 2.0
The past decade has witnessed a sharp increase in the number of fintech startups which provide asset advisory and asset management services through digital channels.
Typically, electronic asset managers work like this:
As a first step, the investor is required to provide details which serve to gauge their risk tolerance and risk capacity. The process used to determine risk tolerance is much the same as that used by conventional asset managers, but is completed remotely via the Internet.
As a second step, a portfolio of passive exchange traded funds (ETFs) is created based on the determined risk tolerance of the investor and other criteria. Conventional asset managers often include active investments based on individual investment vehicles in investment portfolios.
The third step involves the monitoring of your portfolio and the rebalancing of investments to match the market. Compared to conventional asset management, automation play a larger role in the monitoring and rebalancing of investments.
Online asset managers handle the purchasing and sale of investment vehicles from banks and online securities brokers. Online investment advisors only provide recommendations on how to invest, while the customer decides on and manages investments.
The goal of online asset management is to provide as many of the benefits of conventional asset management as possible while eliminating or minimizing its disadvantages. Read the moneyland.ch guide to the advantages and disadvantages of conventional asset management to find out what these are.
Advantage 1: Time savings
Just like flesh-and-blood asset managers, digital asset managers should help you save time and effort. Asset management customers generally prefer to spend as little time as possible dealing with financial questions and handling administrative work. People who prefer to actively manage their investments themselves can just as easily use online trading platforms.
To meet these needs, digital asset management or investment advisory services must be as simple and straightforward as possible. They must be able to offer sound investment advice and handle the rebalancing of portfolios automatically in addition to basic monitoring.
Digital: 1 vs. Conventional: 1
Advantage 2: Financial expertise
Investors generally only consider using the services of an asset manager if they are convinced of their financial expertise.
Various studies have shown that passive investment strategies typically outperform active investment strategies over the long term. This puts digital asset managers which invest in passive investment vehicles at an advantage over the actively-managed investment model preferred by conventional asset managers.
Insofar as active allocation is concerned, however, even passive investors cannot get around active involvement in investment decisions. Paying careful attention to how closely investment decisions match the risk tolerance of investors is at least as important in digital asset management as it is in conventional asset management.
The asset allocation decision process in digital asset management is increasingly being handled by digital algorithms. These digitized processes are often referred to as “robot advisory” or “algo banking”.
Digital vs. Conventional: To be determined
Advantage 3: Integrated offer
Ideally, asset managers should not only be able to invest competently, but they should also be a first port of call for a broad range of financial questions. Financial expertise may, for example, include solid tax advice or estate planning consultation. An asset manager should also be able to fulfill special financial requests from clients and provide custom solutions which match individual financial needs.
In these regards, digital asset management services cannot – as yet – hold a candle to conventional wealth managers. Personal consultation is largely discarded in favor of cost savings. However, conventional, personalized wealth management services are typically offered to high net worth individuals and ultra-high net worth individuals only. All other clients have to make do with standardized private banking solutions.
Digital: 0 vs. Conventional: 1
Advantage 4: Information services
Today’s investor typically wants to spend as little time as possible managing their investments, while remaining well informed. The continued adoption of smartphones has forced asset managers to maintain a constant, mobile presence. Portfolios must be kept up to date and readily available for inspection and investors must be able to receive a number of alerts on demand.
Conventional asset managers have moved towards providing online and mobile solutions. One example of this is the UBS Advice asset advisory service. But online asset managers generally lead the way in information delivery.
Digital: 1 vs. Conventional: 0
Cost advantages of robo advisors
The biggest disadvantage of conventional asset managers is the high cost of using these services. Most clients underestimate the impact of fees and charges on the success of investments.
Robo advisors offer a direct advantage in this regard. For example, Swiss digital asset management service TrueWealth charges just 0.5% in annual fees, Investomat from the Glarner Kantonalbank charges just 0.6% and SaxoSelect charges 0.85% - well below the average fees levied by conventional wealth managers.
On an international level, average fees are even lower: For example, Sigfig and Wealthfront charge just 0.25% per year plus ETF fees (average 0.15%). No additional fees are charged for transactions.
Internet entrepreneur and fintech investor Marc P. Bernegger describes the cost benefits of digital asset management as notable. “Streamlined structures allow robo advisors to offer passive investment services similar to those offered by conventional private banks for a fraction of the cost. That ability will pose a serious challenge to established wealth management services in the future.”
The cost is still higher than that involved with purchasing ETFs directly, but investors do not have to manage ETF purchases themselves.
Digital: 1 vs. Conventional: 0
Robo advisory business model
Online asset managers normally do not charge additional fees for transactions, nor for the opening and maintenance of custody accounts. Retrocession fees are not currently widespread. Digital asset management services primarily profit off administrative fees.
Because fees are low, the business model requires a broad customer base to achieve profitability. Swiss service providers estimate that around 1 billion Swiss francs in assets under management (AUM) is required for an asset management service to turn a profit.
The large number of assets required presents service providers with a challenging hurdle to overcome. “From an investor standpoint, the robo advisory sector is very challenging because over the long term, only a handful of service providers will achieve a substantial level of profitability.” says fintech investor Marc Bernegger.
But Bernegger is still convinced that robo advisors will have a sustained impact on the private banking sector in much the same way that ETFs impacted actively-managed funds.
Robo advisors in the U.S. and European countries
A plethora of online asset management services have vied for attention in recent years. These include Wealthfront, Sigfig, Betterment and FutureAdvisor in the U.S. Most of these service providers also offer automated tax loss harvesting (tax optimization) services.
European countries too have delivered numerous robo advisory services including Nutmeg (UK), Moneyfarm (Italy), Swanest (international), Cashboard (Germany), Money on toast (UK), Ginmon (Germany), Vaamo (Germany), Quirion (Germany), Whitebox (Germany), Easyfolio (Germany), Indexacapital (Spain), Marie Quantier (France), Feelcapital (Spain) und Easyvest (Belgium).
Other services like Personal Capital (U.S.) have specialized in delivering services to demanding, wealth clients and offer individual consultation and custom services.
Software developers like Jemstep, which create online and mobile solutions for conventional asset managers, are also on the rise.
Robo advisors in Switzerland
A number of digital asset management services have begun operating in Switzerland in recent years. An article outlining Swiss robo advisors is now available on moneyland.ch. A detailed overview of the costs and services provided by Swiss robo advisors is available in PDF format. Please feel free to request this PDF using the relevant field at the foot of the article.
Online asset management services offer two distinct advantages over (actively-managed) conventional asset management services in the way of passive investment and low costs.
Online service providers will likely become more present in the future – whether as services provided by banks or as stand-alone financial service providers. However, banks currently have little incentive to invest in solutions which will ultimately cannibalize their conventional asset management business.
Over the short-term and mid-term, acquiring customers will continue to pose a challenge to digital asset management services which are not backed by established service providers.
Mixed solutions, which combine the benefits of digital asset management with conventional, personalized services like phone consultation, offer a promising alternative.
Swiss robo advisors compared
Passively managed funds vs. actively managed funds
Interactive online broker comparison
Interactive private banking comparison
TrueWealth: Information and free demo account