A Comparison Between the American And Chinese Robo-Advice Market

摘要: Although robo-advice became so popular at the beginning of 2016, the fad for it gradually ebbed away during the course of the year. After comparing the American with the Chinese asset management and investment markets, the author concludes that the Chinese robo-advice market isn't likely to boom in the near future.

(Chinese Version)

When we look back at the development of online finance in China for the past year, Fintech is an inevitable topic. Since most people in the circle are elites, “The Effect of Sheep Flock” can’t be avoided. As long as a “leading sheep” came up with a new concept, others would follow suit. After concepts such as P2P, consumer finance, big data risk control, “smart finance” has become the most popular concept in the online finance circle recently.

Up till now, some of the major players in the Chinese robo-advice market include: Micai, Alibuli, JD SmartInvestment, Qianjingcaifu, etc. However, just like what happened to other online financial services in their development, the Chinese robo-advice market is also fraught with problems such as cheating and homogenization after capital investors keep coming in and the market developed so rapidly in a short time.

Above all, I’d like to give a clear definition of robo-advice. Zhou Wei, a founding partner of Licaimofang, had a complete definition of the concept:

  • Accumulating users’ personalized preference for risk control as well as rules of change through big data;
  • Providing personalize asset allocation plans based on users’ personalized preference for risk control and relevant algorithm model;
  • Providing real-time monitoring and adjustment of users’ personalized asset allocation plans based on the internet;
  • Maximizing users’ profit within the acceptable risk range.

While the Chinese market is still hesitating, several well-known robo-advice platforms (such as Wealthfront, Betterment, Motif, Personal Capital, Schwab Intelligent Portfolio, etc.) have emerged in the overseas markets, especially the American market. Citibank predicted that the overall market volume of the Chinese robo-advice market was expected to reach $5 trillion within the next few decades.

There has to be an origin to explain why something new emerges or booms. Likewise, to understand an industry, we have to understand the motivating force beneath it in different countries.

US: The American robo-advice industry is ready to go whether from the aspect of technological maturity or market acceptance

1. The mature ETF market facilitates smart and personalized robo-advice service

In the US, passive investment is widely accepted. It is becoming increasingly difficult to gain alpha interest and go beyond the market performance. Passive investment products such as etf/fof rise rapidly and have become a common trend in asset management industry. On January 3rd, Investor management firm BlackRock issued a report and pointed out that nearly 375 billion US dollars was “injected” into the ETF fund, setting a new record in history.
The reason why passive financial products are popular is that as long as by adjusting the rate of cash and stock index funds (or stock index futures) in investment portfolios, people can effectively manage their fund, which enables machines to track passive index.

2. Big data lays a solid foundation for development of robo-advice market

Big data for robo-advice can be mainly divided into two types: clients’ behavior big data and asset allocation big data. On the one hand, asset allocation decisions are all based on users’ behavior data in order to achieve personalized and precise match users’ risk preference; on the other hand, the establishment of investment portfolios and the rebalancing process both relied on big data analysis of financial transactions.

Generally speaking, the majority of financial organizations which accumulated big data for financial institutions are traditional organizations, while the majority of firms that accumulated big data for clients’ behaviors are 2C-based internet firms. In the US, individuals are given the right to authorize and utilize financial data related to themselves, which opens up the barriers between flows and enables robo-advice.

3. Hosting service is in dire need due to decentralized pension model

While we never bother to talk too much about the advantages of robo-advice, we have to realize that the reason why asset management industry rise so rapidly in the US has its special social roots: decentralized management of the pension model.

Owing to special tax and social security policies, most full-time workers in the United States have to put at least 3% of their income into their retirement account, and can not withdraw or transfer it before retirement. To some degree, they are "forced" to keep their pension. Although they can’t directly use the pension, the government encourages individuals to independently and flexibly manage their account based on their personal preference, which gives birth to the need for account management.

Take for example Section 401K, individuals are given the right to make personal investment choices and are provided with various investment choices. For most ordinary wage earners, they are lacking in financial management experience and can’t afford professional financial service. Therefore, they can turn to low-cost and low-entry smart financial investment platforms.

4. Asset allocation and re-allocation is highly efficient through robo-advice platforms

As is mentioned above, the majority of businesses dealt with by robo-advice platforms are individuals’ pension accounts. With the change of financial market structure, the maturity of the capital market and the spread of investment knowledge, management of individual’s pension accounts will become increasingly professional.

Since individual pension accounts are generally opened and managed by American financial organizations, robo-advice platforms can help manage the account very conveniently once they are authorized by the client, which enables them to efficiently manage clients’ accounts.

China: It's unlikely the robo-advice market will boom in the near future

After we've figured out why robo-advice works in the US, let’s look back on the Chinese market. If we look at the above four aspects, we might find that the Chinese capital market is still immature and full of uncertainty, so it’s impossible for smart investment market to boom.

1. The lack of mature investment products

The Chinese capital market is lacking in passive financial tools. According to Wind’s incomplete survey, there are only around 120 ETFs as of March, 2015, and the total scale is less than 200 billion RMB (around $28.9 billion). Besides, the majority of these ETFs are traditional index ETFs, not bond ETFs or commodity ETFs.

In China, financial products that can often be bought and redeemed and have diversified interests are various types of public offering funds. However, it’s still hard to find a public offering fund for long-term investment. China's fund industry is still in the stage of product marketing competition, and personalized products developed based on investors’ preferences and resources are yet to be developed. At the same time, intense competition forces fund management companies and fund managers to focus on short-term performance indicators while ignoring long-term development and innovation, which leads to serious product homogeneity.

In addition, the Chinese capital market is too volatile. It’s hard for active investment to outperform average return rate, so it’s even harder for active investment to turn out good and continuous performance here in China.

2. Multi-dimensional and frequent data accumulation is incomplete

The development of the Chinese financial market, including quantitative investment, the predecessor of smart investment counseling, has been tepid. There aren’t various types of products, as well as many participants, while the majority of them are high net worth customers. That is to say, the Chinese robo-advice market hasn’t accumulated an adequate amount of users’ data, let alone providing personalized investment management services.

At the same time, immature data management systems also create significant barriers for data sharing. At present, Chinese banks all “fight” for their own business and won’t easily share customer data, data flow with each other. Now that data can’t be shared effectively, it is even more difficult for robo-advice to rise and develop.

3. Low-entry and low-cost are not enough to attract Chinese investors

While American investors are in dire need of financial management for their pension accounts, Chinese investors don’t have such need. In this case, how can Chinese robo-advice platforms attract investors? At this point, there a typical paradox:

The core of robo-advice is providing investors with the “optimized” asset allocation solutions. Therefore, robo-advice platforms have to strike a good balance between risk and return and provide investors with a little more return. That is to say, no matter how smart the platform is, the improvement of return is limited.
In this sense, investors aren’t convinced enough of the benefits of robo-advice. This may explain why it is caught in a very awkward position in China.

4. Asset allocation and re-allocation efficiency through robo-advice platforms remains to be improved

While robo-advice and asset management can be seamlessly connected to make robo-advice highly-efficient and inexpensive in the US, they are separate here in China, which makes it difficult to robo-advice platforms to take full charge of individual accounts and provide high-efficiency asset allocation and adjustment service.

The Present and future of robo-advice in China

To conclude, although robo-advice became so popular at the beginning of 2016, the fad for it gradually ebbed away during the course of the year. How to the business be regulated by law? How should users be nurtured? How can huge differences in investment culture and habit between the American and Chinese market be minimized? These questions make it impossible for robo-advice business to boom in China along with the boom of tech and online finance.

“There’s no such thing as wrong, but it’s probably just not the right time,” Chinese billionaire Chen Tianyao once said, “Nobody knows what’s the next burgeoning business, but it’s always worth a try.”

However, one thing is for sure: humans will be increasingly replaced by machines, not only in the manufacturing industry, but also in robo-advice. Ma Yongan, author of FOF Management Manual, wrote that investment counselors should be able to figure out what clients need, what’s their bottom lines and make sure their investment portfolios work above the bottom line. However, to accurately manage and control the risk, there’s no other way than artificial intelligence.

In the article “Why The Future For Robo-Advice Isn’t Bright?”, the author mentioned that although robo-advice rose owing to various special market conditions, there was still huge room for innovation, since it tapped into the need of traditional financial organizations for reform.

Still, what can robo-advice platforms do to stand out? Since they can’t directly prove their algorithm is more advanced or their return is higher, robo-advice platforms should focus more attention on improving user experience.

For example, they could try to change the traditional long-term investment rule, add liquidity of their products and expand investment targets. At the same time, they could combine artificial and human robo-advice service together, lower the management fee through simplifying procedures as well as adopt more flexible service charging modes.

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[The article is published and edited with authorization from the author @AliciaZhong, please note source and hyperlink when reproduce.]

Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.

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