Fintech and Traditional Financial Companies: Best or Worst Friends?

“Robot Advisors” Market is Soaring Thanks to a Well-thought Out User Experience

Some Fintechs have specialized in investment advice, and are commonly referred to as "Robot Advisors". These companies offer savers simple, customized and cheap solutions to invest their savings via Internet. Asset allocation is carried out by algorithms that continuously analyze market weather and define an optimal portfolio allocation according to the objectives and level of risk accepted by the client. The investment vehicles used are mutual or exchange-trade funds.

Asset allocation technology is not new stuff: it has been used for years by trading rooms or Hedge Funds. So what’s new? User experience: web sites or applications are intuitive and understandable for the unfamiliar with financial theories.

The market for these "Robot Advisors" is booming in the United States. 12 billion USD are already managed by startups algorithms and the market growth rate is around 20% per quarter. In the UK, a company like Nutmeg is reaching 100,000 users and has multiplied by 28 its loans between 2013 and 2014! In France, the first "Robot advisors" have been commercially launched in 2014, and the market must still be evangelized. The volume of assets and the number of clients still remain marginal but should rapidly increase with the arrival of new players.

Asset Managers Love “Robot Advisors”

"Robot Advisors" disrupt Wealth Management, not Asset Management: the “uberization” of this sector will thus not come from them. Asset managers are also favorable to their development because it is a new distribution channel for their funds to the "Mass Affluent" investors.

Tellingly, "Robot Advisors" are funded or even redeemed by management companies. In France, Anatec and Yomoni, which are expected to enter the market by the end of the year, were launched thanks to Amundi for the first and La Financière de l'Echiquier for the latter. Blackrock, the world's leading asset manager with $ 4700 Billion in assets, acquired Futur Advisor, a US “Robot Advisor”, in order to make it available to brokers and financial advisors and allow them to better serve their clients.

Asset Managers Jeopardized By Fintechs On Various Asset Classes

Crowdlending platforms (investments made by loans to firms or private individuals) offer investors a better risk/reward outlook while giving them the opportunity to fund directly real economy. Hence, gross interests swing between 5 and 10 % for loans to businesses and between 3 and 6 % for loans to individuals with a default rate remaining statistically reasonable.

Current emerging Fintechs are shaking up access to savings products: their user experience erases the complexity of Financial Markets for the “Mass Affluents”.

They also provide investors with asset classes which were previously considered as specialists’ turf (capital of unlisted companies, loans to companies). However, these new players still need traditional asset managers to operate in most cases. Fintechs development is thus rather favorable to the whole sector. Ultimately, Asset Management “Uberization” is possible. But it is not for tomorrow, and it is not obvious as historical players are ready to evolve their business model to keep serving their customers even better.

This kind of investment however comprises two substantial cons:

  • File adverse selection, as those platforms do not offer any risk pooling with the exception of Prêt d’Union, which offers loans through FCT. Investors have to diversify risk by themselves, and so to fund dozen of projects to mitigate default rates.
  • Illiquidity risk, as it is impossible to resell debt securities. Once the loan is granted, investors have to wait several years before eventually catching back sum loaned in full, until the loan maturity.

Those two disadvantages lessen this kind of investment to a niche market devoted to diversification. One won’t never invest one’s whole financial savings into loans to businesses or individuals. This kind of investment can be equated with venture capital investments. Those lending platforms may be considered to some extent as new entrants in the field of specialty Private Equity or High Yield funds. However this niche positioning inhibits the Lending platforms appeal to uberize Asset Management.

So, What Could Eventually Uberize Asset Management?

We think about two options dealing with Asset Management uberization.

First, consider replacing the asset manager by a robot. The robot would be programmed to follow management constraints imposed by the mandate or the fund and would proceed independently to all management procedures. Such a tender yet does not exist, but AI exponential progress suggests that it will be available by 2020.

The second option would consist in an Asset Management platform opened to independent Asset Managers. Covestor, an American firm, paves the way and already offers “managed accounts” to investors via a web platform, which are managed by individual managers or professionals.

In any case, the leading model in the next years will be the one offering the best possible service to investors. Traditional managers have to prepare for the next battle with Web players, because the battle will occur. This is only a matter of time.

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Raphaël Cretinon Director Péricles Consulting