The evolution of fintech firms started with payment platforms trickling down to alternative financial channels and is now spreading into the wealth management industry with the introduction of robo-advising firms. Robo-advisory is an online portfolio management service, which offers personalised, automated financial advice based on mathematical algorithms.
More importantly, it eliminates the need for human intervention and has no restriction on minimum joining requirements unlike traditional wealth management firms. Such services are forcing the traditional wealth management firms to change their business models to remain competitive within the financial service industry.
Robo-advisors are currently managing over $224 billion in assets under management (AUM) globally, which is expected to reach around $8.1 trillion of AUM (approximately 10 per cent of the global AUM) by 2020. Fuelled by venture capital (VC) and private equity (PE) investments, robo-advisors have raised more than $1.3 billion in funding globally since 2012, and are now looking to collaborate with traditional advisors to offer integrated services.
Some of the top players in the global robo-advisors market encompasses US-based Betterment, Personal Capital and Wealthfront, who are three of the earliest robo-advisor firms and also the largest in terms of total funding. Moreover, following the recent trend for financial companies to pair computer algorithm-driven advice with human helpers, major players such as Charles Schwab, Morgan Stanley and Bank of America Merrill Lynch have also joined the bandwagon with their own platforms to compete in a market led by Vanguard Group.
Inception stage in GCC
Although the technology is gaining impetus in developed markets such as the US, robo-advisors in the GCC and wider Mena are still at an inception stage. However, with the advent of technology in financial services, Islamic finance institutions have now started embracing robo-advisory methods through access to Shariah-compliant portfolio management. Thus, several startups are now seeking to capitalise on the pent-up demand for Islamic investment services among low to middle-income investors across the Mena.
The GCC has already woken up to this new trend with top tech firms breaking into wealth management. For example, US-based Wahed Invest Inc, the world's first automated Islamic investment platform, with the aim of providing access to halal portfolio management, recently announced its plans to start operations in the UAE with a potential $2 million funding boost from Dubai-based VC firm Beco Capital.
Similar services are seen springing up in the GCC with the arrival of Finerd, a Dubai-based robo-advisory investment manager, and a planned new robo-service called AES Direct Investment Platform by financial advisory firm AES International. Additionally, several startups are also collaborating robo-investing services with artificial intelligence which will allow them to offer more personalised solutions to customers. Such advancements in the robo-investing space will give a heads-up to the regional investors, especially the millenials, to monitor and plan their customised portfolios.
Given that these firms are recent debutants, the adoption of robo-investing might be gradual as the dynamics within the region are different compared to the global markets. The high net worth individuals (HNIs) and ultra high net worth individuals (UHNIs) in the Mena region, especially the GCC, continue to prefer the traditional wealth management services as it provides direct access to the manager and a broader control over the portfolio allocation.
Further, such technologies have limited capabilities in addressing complex financial planning and wider range of asset classes, such as real estate, which represents a significant portion of the overall portfolio of regional HNIs. However, this new breed of investment advisory services is expected to bode well with smaller investors, especially the tech-savvy millenials. The flexibility of low-cost services and no minimum balance requirements, coupled with access to discretionary portfolio management services makes the platform attractive to a wide range of investors within the region.
Replacing the human touch?
The emergence of robo-advisors in the Western markets is upending a sizeable portion of the wealth management industry; however, it will not be able to replace the human touch associated with the traditional wealth management practices, especially when it comes to personal investments. Such technologies are also suitable for basic financial planning and would need significant enhancement in complex reasoning and interaction with humans to potentially disrupt the investing landscape.
Hence, the new technology should be considered more of an evolution of the industry and an opportunity to tap into unearthed segments for wealth management firms, such as millenials and low and small income groups. Though robo-investing is at an inception stage, the positive developments in the space signify its promising future within the GCC and the wider Mena.
Moreover, digital transformation is the future of the financial services industry and incorporating such technologies within the traditional wealth management model will enhance human performances and attract new customers. Thus, setting up a more hybrid business model to provide attractive solutions will be enticing not only for low to middle-income investors but also for new HNIs within the region. The emergence of such technology will also lead to opportunities for the regional VC and PE players, especially the ones that have existing investments in fintech companies.
The writer is founder and CEO of Al Masah Capital. Views expressed are his own and do not reflect the newspaper's policy.
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