HKCSView: Robo-advisory in Asia -- to be or not to be

Sammy Ho Artificial Intelligence (AI) has generated a lot of hype lately with AlphaGo defeating Chinese Go master.  In the world of finance, perhaps the most widely known application of AI (at least to the public) is robo-advisory.

Generally, a robo-advisor aims to construct an investment portfolio that meets an investor’s financial goals in an automated fashion.  The advisory services industry in the US is undergoing significant transformation in the way it is becoming more customized.  Thus, robo-advisors have been growing rapidly and leading new players like Betterment is capturing total Assets Under Management (AUM) that exceeds US$7 billion. The incumbents are also rolling out their digital platforms.

Robo-advisors yet to become popular in Asia

The development of robo-advisory in Asia, however, is much slower. This is probably because many of the factors that contributed to its success in the US are not applicable in Asia. Here are some of the reasons:

Low cost–robo-advisory services can offer lower fees partly because they focus on using low cost Exchange Traded Funds (ETFs) as the investment vehicle. With a limited selection of ETFs in Hong Kong, there are simply not enough products and market demand to automate this process.

Tax harvesting – In addition to the asset allocation feature, some robo-advisors in the US use AI to help improve overall return by applying tax harvesting techniques. Hong Kong’s low tax rate brings a lower incentive to apply tax harvesting with robo-advisors.

Complete investment portfolio overview - In the US, through the use of open API, robo-advisors can access the investors’ portfolios across different firms to develop an overall view of their financial status. Such a view is the foundation for the robo-advisor to offer more customizable financial advice and support transactions across different investment tools and firms.  With the lack of an open API framework among financial institutes in Hong Kong, this limits the full capability of the robo-advisor.

Automated portfolio rebalancing — Based on the current regulatory requirements in Asia, robo-advisors do not necessarily provide a full discretionary investment service for retail investors as compared to the US. This means the portfolio is not always automatically rebalanced based on the portfolio performance and market conditions, resulting in suboptimal risk-adjusted returns. 

Despite these factors, the industry is still bullish on the future of robo- advisory. In fact, the landscape is expected to change rapidly.  

Firstly, many global fund houses are racing to launch their own automated investing platforms, which will eventually be extended to Asia.  Secondly, new startups in Asia also see the opportunities.

According to Ned Phillips, co-founder of Bambu Life, a robo-advisory startup originally from Singapore, “the wealth management market sector is globally a US$70 trillion industry and it is in the midst of its biggest upheaval ever. It is clear that the incumbent financial companies need to re-think their digital strategy, with the advent of robo-advisory being the driving force behind this change. Within Asia, Singapore has a small domestic market but certainly pushes above its weight in terms of assets under management and willingness to adapt regulation to the new environment.”