Killer Features for Robo-Advisors and
Digital-Assistants in Investment Services
March 2017
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In the last article, 360F assessed the automation solutions in the investment services industry, namely the
Robo-Advisors and Digital-Assistants. The former faces a non-scalable future while the latter an uphill struggle
towards an otherwise viable future. To resolve the automation solutions’ challenges, it is necessary to identify the
required “killer features” in the industry. What are the criteria for deciding if a feature is absolutely necessary and
significant? 360F asserts that the critical criteria must be based on value generation.
Digitalization: Awash in Gimmicks,
Thirst for Value
Chart 1: Revenue and Profit Margins declined from
2012 to 2015
WEALTH MANAGERS ASIA
The digitalization theme in today’s market is awash in
gimmicks and neglects to focus sensibly on value generation for either or both the financial institutions and the
client. This observation is reminiscent of the dot-com
days when “internet” was a buzzword as commonly
abused as “digital” today. Venture Capital (VC) funding
exacerbates the situation. In the third quarter of 2016,
Asia was flooded by US$1.2 billion1 of VC funds, up
from US$800 million in the previous quarter.
64.7
1.8
In 2016, the CEO of ING declared, “Employment in
finance will decrease”3. His statement sums up the
current industry dynamics. Overall, as many as 1.7m
jobs are expected to disappear as banks digitalize
operations4. While automated production dominated the
third industrial revolution, the fourth industrial revolution
creates infinite possibilities, thanks to unprecedented
processing power, storage capacity, connectivity and
access to knowledge5. The fourth industrial revolution
connects the dots among digital, physical and biological
systems and leverages customer insights to create tremendous value for both demand (customer-related) and
supply-side (efficiency and productivity) economics.
What does this mean for the financial industry? Banks
are still trapped in the third industrial revolution, where
automation is synonymous with “digitalization”. Now
that the decreasing returns of automation have set in,
banks in general are not optimistic that their profitability
can rebound to pre-crisis levels. Between 2012 and
2015, the revenue margin in Asia dropped from 64.7
KPMG, The Pulse of Fintech, 2016
Financial Times; Automated advisers: short circuit, 2017
3
Ralph Harmers, CEO ING, 2016
4
Greg Baxter, Global Head of Digital Strategy at Citi, 2016
1.9
TOP LINE
Revenue Margin
(basis points)
The hype will however come to a screeching halt as the
thirst for value becomes unbearable. Take the case of
the market enthusiasm for Robo-Advisors. Autonomous
Research estimates Robo-Advisors spend at least $500
to acquire just one new client. Assuming an average
annual charge of 0.25 per cent on assets of $25,000,
it would take eight years to break even on the cost of
client acquisition alone2. It may have been easy to win
investors’ initial favour but it will be trying to ask for their
patience.
The Fourth Industrial Revolution: A
Value-Generating Digitalization Reality
60.4
67.6
Revenues per RM
($millions)
66.3
21.5
20.9
PROFITABILITY
Cost-to-income
ratio (%)
2012
Pretax profit margin
(basis points)
2015
bps to 60.4 bps. For some (universal) banks in Europe,
the return on equity (ROE) dropped significantly below
10%, which is even below the cost of capital (WACC)6.
To stabilize profits, costs are reduced to a level of
66.3% (Asia)7.
While the world’s biggest banks “digitalize” to cope with
profitability, relatively new players digitalize to mark new
heights of success. Ant Financial, the digital payment
arm of Alibaba, China’s e-commerce colossus, gained
about 100m clients in 2016, taking its total above 500m,
almost 10 times the world’s biggest banks. Positioned
as a digital “ecosystem orchestrator”8, Ant Financial
transcends the gimmicks of digitalization, skips over the
third industrial revolution to focus on value generation
(see Market Sample 4).
Value Generation: A New Look at an
Old Concept
The concept of value dates back to the mid-seventeenth century, beginning with the objective classical
Klaus Schwabe, The Fourth Industrial Revolution
Financial Times, How finance is taken over by tech, 2017
7
BCG, Navigating the new client landscape in Wealth Management, 2016
8
McKinsey, Disruption and Connection: Cracking the Myths of China
Internet Finance Innovation, 2016
1
5
2
6
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theory and then overshadowed by the subjective value
theory as the mainstream approach today9. The objective approach determines value by the labour inputs –
a house is 100 times more valuable than a car because
it takes 100 times as much labour to produce as the
car. The subjective approach assumes that individuals
seek to maximize their utilities (satisfaction from acquiring/consuming the economic good) and maintains that
their preferences determine the fundamental value of
economic goods – an individual who must catch the
last flight home to attend a workshop early next morning is willing to pay twice as much as another individual
who has no urgent schedule.
understanding of the customer profile including the
customer’s life goals, investment objectives, fears and
concerns and his/her desired communication method
and pattern with the financial institution. If such insights
are sourced for and analysed systematically, they will
facilitate the development of tailor-made products,
increase cross-selling effectiveness and pre-empt destructive emotional behaviour.
Market Sample 1:
Behavioural profiling generates client insights
After close to 400 years of existence and evolution, the
value concept sits firmly at the heart of modern value
management methodologies, specifically Lean Management and Customer Lifetime Value (CLV). Retaining
the essence of objective and subjective value theory,
Lean Management seeks to maximize customer value
by ensuring that processes are value-adding and result
in output which customers are willing to pay for. Unlike
Lean Management which can be deployed throughout
an organization, CLV is usually applied in the sales and
marketing space. Defined as the “present value of the
expected benefits (e.g. gross margin) less the burdens
(e.g. direct costs of servicing and communicating)
from customers”10, CLV subscribes to the subjective
approach and underpins the importance of not only understanding customers’ profiles but also predicting their
future individual and network behaviour to maximize
effectiveness of marketing expenditure.
Capital Preferences assesses customer preferences in a scientifically valid and reliable way.
The tool allows customers to determine their life
priorities, risk and time preferences within minutes.
Benchmark data enables predictability and supports
product tailoring and customer engagement – while
maintaining full compliance with regulatory requirements.
Considering the pragmatism of Lean Management and
the forward-looking orientation of CLV, 360F proposes
to integrate both methodologies’ understanding of value
to yield an all-encompassing concept – “360 Value”
which is capable of making sense from revenue and
cost perspectives in space and time.
Killer Features
After intensively scanning the market for best-ofbreed-examples, 360F has identified five killer features
which fulfil the “360 Value” criteria.
360 Value Criteria: Understand what the customer
perceives as value
Matching Killer Feature (#1): Customer insights as
currency
Customers are willing to share their personal data – as
long they receive something in return. Effectively creating customer insights will drive the financial institutions’
valuation in the near future. Currently, client preferences
are barely retrievable in a structured manner and hence
not used to engage the customer. In an optimistic
scenario, the financial advisor will have an intuitive
International Encyclopedia of the Social & Behavioral Sciences
(Second Edition), King, J.E. & McLure, M., 2015
9
360 Value Criteria: Capture the excess surplus
Matching Killer Feature (#2): Customization driven
by customer insights
Lean management focuses on perceived customer value while CLV measures the captured value. A potential
gap exists as firms can fail to capture the full perceived
value, leading to excess consumer surplus i.e. the price
a consumer actually pays is less than what they would
have been willing to pay. The airline industry does a
fine job of capturing such excess surplus by engaging
in price discrimination methods - made possible by
offering product and service differentiation supported by
structured client insights. In the investment space, the
motivation to capture excess surplus will be born out of
both push and pull factors. While stiff competition from
passive funds such as Vanguard and Blackrock has
started to erode incumbent Asset Managers’ market
share, availability of customer insights will encourage
these Asset Managers to offer customization.
INSEAD, Measuring Customer Lifetime Value: Models and Analysis,
Singh S.S. & Jain D.C., 2013
10
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Chart 2: The rise of passive funds (ETF’s in bn USD)
360 Value Criteria: Eliminate waste which undermine
the whole
Matching Killer Feature (#3): Workflow automation
to orchestrate processes
In Lean Management, waste (“muda”) refers to non-value adding work which not only reduces profitability but
also does not serve the customers. In financial services,
the bulk of waste comes from manual interventions
and passive processes. The growing stringency of
regulations, contributes to at least three types of muda
– defects, over-processing and waiting. Work flow automation eliminates these muda by embedding system
intelligence and flexibility for future adaptations.
2000
1500
1000
Market Sample 3
Workflow Automation
500
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Non US
US
Market Sample 2
Customized Asset Management
With vfunds, Privé Managers offers a unique
solution to the market. The relationship manager
has the flexibility to adapt the Asset Management’s house view (or external strategy) without
losing the inherited strategy. All underlying assets
and adaptations are automatically replicated,
whenever the Asset Management adapts the
house view. In other words, the customized portfolio is not static but follows through the life cycle
of the client’s interaction with the relationship
manager automatically.
11
A Risk and Complexity Rating Framework for Investment Products, 2014
Appway focuses on workflow automation:
- Users may not have expert knowledge and
experience. “Intelligent” system will compensate for any lack of experience or knowhow.
- System-induced guidance is non-invasive
and collaborative.
- System learns autonomously from an open
world environment, seeking continuous
(self-)optimization.
360 Value Criteria: Co-create value
Matching Killer Feature (#4): Customer empowerment made possible
When customers are helped to understand their products, they are more likely to stay loyal and give repeat
business. This empowerment is especially critical as
financial institutions do not have simple products. Even
if complexity is seemingly eliminated by skimming on
details, the products remain fundamentally challenging
to understand. Selling such products to poorly informed
customers creates the “Lehman-Bonds-effect”11, permanently staining not only the reputation of the affected
financial institutions, but also the whole financial services industry.
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Market Sample 4
User experience drives client retention
BhFS creates a meaningful user experience by
incorporating self-discovery exercises to raise
the customer’s financial literacy and financial
self-awareness. It improves the retention rate
substantially as it puts the clients through adverse
market simulations to help them anticipate their
behaviour gaps and adopt prevention strategies.
with each component of the ecosystem to fulfil their
daily needs12 (banking, insurance, driving, shopping,
etc.), creating a digital footprint which reveals not only
personal preferences to support customized offerings
but also opportunities for cross-selling. In contrast to
traditional financial service companies, clients’ needs
are identified at an early stage with the help of information acquired from adjacent players in the ecosystem.
Easy social share functions strengthen the network benefits and thus value of a customer.
Market Sample 5
Eco-system integration maximises share of
wallet
360 Value Criteria: Scale for lifetime and network
value
Matching Killer Feature (#5): Ecosystem integration
Scalability is possible via network effects and cross-selling powered by an ecosystem. Customers will interact
Alibaba offers full integration with Ant Financials.
The businesses are fully complementary – leveraging a large client platform and offering targeted
financial solutions. A loss-averse customer (i.e. he
tries to avoid the frustration loss) is likely to overprotect himself – even though it does not make financial sense. He is recognized on the ecosystem
when he purchases protection plan for a relatively
inexpensive mobile phone. As he is predicted to
overreact in any loss situations, financial protection with guarantees will appeal to him.
A basic tenet of the 360 Value is knowing the customer’s insights. In the next newsletter, 360F assesses how
mature the Asian financial institutions are in understanding and predicting their customers’ needs.
12
BCG, Insurance and Technology – The disruptive force of insurance eco system, 2015
About 360F
360F aspires to empower financial service institutions
to move to the next advisory frontier by eliminating
complexity and inefficiencies.
For further information, please contact:
Michael Gerber
[email protected]