Bento bionic advisory

07 Jun Robo: the new Dodo … enter Bionic Advisor!

Mombie is born:

Eight months ago, I quit my day job as a MD and Head of Managed Products Sales and Advisory with a regional private bank to focus all day and all night as a mother. I learnt a new word, Mombie – a mother who so enjoys the quiet at night after her children sleeps off that she refuses to go to bed. In my case, it was peace at wee hours of the morning. As a pre-dawn Mombie, I found time to read and contemplate what to do next as going back to a banking job wasn’t an option I was about to exercise.

Fintech is an industry and Robo is the panacea … not!

I read as much as I could, attended a couple of conferences (one in HK), met some very interesting people and realized that Fintech is not an industry. Then, I started to quickly chalk out a plan to launch a robo-advisor. As I started to write up the business plan for retail robo spanning multiple jurisdictions in Asia (and beyond!) it reminded me of my days running internet marketing for small start up in Singapore in early 2000 which had heady dreams to make a handheld reader (way before Kindle was born) and a one of a kind web browser with flip technology. Those were “Reckless” days and that was my “Summer of 69”! I ended up with stacks of paper called stock grant which I was unable to put to any use, but the learning did stay. Those concepts, such as pay-per-click, pay-per-view, where revenue didn’t matter and eyeballs did, came back to me.

At that stage, I decided to give up on the plan for retail robo-advisor as I was able to forecast number of clients (corollary: eyeballs) but I was unable to forecast for net profit. The key issues that I was grappling with were the high costs of client acquisition, meeting diverse and onerous local regulatory requirements and getting clients to trust me and change custodial arrangements.

Robo is the new Dodo!

bento-bionic-dodo

I couldn’t foresee building a business by taking away the human and handing over an iPad backed-up by a clever algo. I did read about the millennials having distrust for the banks, transfer of wealth, etc but still wasn’t able to see the case for robo-advisors, retail or otherwise. The data around the US-based robos – Wealthfront and Betterment with about $3billion of assets, 30 bps gross revenue, $1000 cost of acquiring one retail client that culminates into $30 million of burn rate per annum further killed my intent.

Enter Bionic – the human, the iPad and the algo

While the case for a pure robo may be flightless, the technology that exists today is incredible and that, combined with a human touch, may make magic and change the investment advisory space for good. Engaging with the right technology at every leg of client engagement makes it possible to deliver better solutions at a small fraction of the 200 bps that clients are paying to the banks and their not-so-independent advisors today.

Client service:

There are many efficient ways of engaging clients, with largely automated onboarding and service model aided by necessary human touch points, while not changing the custodial arrangements.

Investment engine:

Humans drive markets (at least large volumes of it) and therefore auto-rebalancing is counter-intuitive. Assets can be cheap for a good real reason and shouldn’t indicate that we buy them whilst they can be expensive, but not overvalued. An auto-rebalancing Robo algorithm will not factor in such nuances of the market. Hence, we like fundamentally-driven asset allocation that factors in market technicals and we also like the efficiency that a well-constructed, custom-built portfolio optimizer (the Robo-element) brings to the plate.

Portfolio performance: Bionic > Robo > Any active balanced fund!

bento-portfolio-performance

Source: Bento, Bloomberg

Bottomline: Robo and Dynamic Asset Allocation portfolios outperform broad equities with 40% less volatility. As per our back tests, a well-executed fundamental dynamic asset allocation model beats 60-40 quarterly rebalancing Robo model by a good 1% per annum. Even a basic 2-ETF quarterly rebalancing robo, beats every active allocation / balance fund that I can think of in the long run just by saving fees of close 2% per annum, leaving aside the front-end load.

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Image Credits:

Dodo Robot: dodo robot sculpture by Ann Smith, constructed out of broken electronics and machines.

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