Robo Advisors & Beyond discusses the growth of robo advisors and challenges they face. Robo advisors (1.0) provide automated investment solutions using algorithms based on passive investments and diversification. While robo advisors have seen significant growth, their assets under management remain small compared to other financial products. Major criticisms of robo advisors include their reliance on outdated optimization models, lack of experience in down markets, inability to provide human care, and focus only on retail rather than high-net-worth customers. The document outlines various business models for robo advisors and challenges they must address to better scale relationships and use more sophisticated quantitative models.

1. Robo Advisors & Beyond
Daniele Bernardi – Barcellona 08/05/2017

2. 2
The Hyper Trend
Sharing Economy
Open Source
Digitalization
Internet

3. 3
The Financial Hyper Trend
Robo
Advisor
Online
Banking
Online
Trading
Social
Investing

4. Fintech in Banking business

6. 6
Robo-Advisors (1.0) are automated investment
solutions which provide portfolio rebalancing
using trading algorithms based on passive
investments and diversification strategies, which
engage individuals with digital tools featuring
advanced customer experience, to guide them
through a self-assessment process and shape
their investment behaviour towards rudimentary
goal based decision-making.
Definition

7. 7
First of all…

8. 8
SafeManagement
Self-management
Application on-line to save money

9. 9
How can I invest on-line?

10. OnlineBrokers
10
Self-management
I’m a trader on my own

11. 11
Sharinginvestment
Self-management
I prefer to track professionals

12. RoboAdvisors
12
Self-management Need Assistance
I need assistance & advisory

13. RoboAdvisors
OnlineBrokers
13
SafeManagement
Sharinginvestment
Self-management Need Assistance
Fintech investment services

14. Robo Advisors analysis

15. One Year ago…
15

16. I più grossi Robo Advisors
16

17. 31 March 2017
17
0,06
0,09
0,12
0,73
0,97
4,04
5,01
8,00
31,20
107,80
0 20 40 60 80 100 120
Hedgeable
Wisebanyan
Sigfig
AssetBuilder
Future Advisor
Personal Capital
Wealthfront
Betterment
Charles Schwab
Vanguard
AUM (billion$)
AUM ($billion)
Source: SEC elaboration: DIAMAN SCF

18. 31 March 2017
18
Source: SEC elaboration: DIAMAN SCF
23,4%
92,7%
27,4%
9,2%
21,2%
92,3%
43,0%
56,9%
280,5%
247,7%
0% 50% 100% 150% 200% 250% 300%
Hedgeable
Wisebanyan
Sigfig
AssetBuilder
Future Advisor
Personal Capital
Wealthfront
Betterment
Charles Schwab
Vanguard
Year Over Year Growth Rate
YoY Growth Rate
Average 46%

19. Fees VS AUM
19
0,0% 0,10% 0,20% 0,30% 0,40% 0,50% 0,60% 0,70% 0,80% 1%
AUM
0,05bn0,10bn0,50bn1bn5bn30bn100bn
Max. Fee

20. Robo Advisors Business Models

21. 21
Robo
Advisory
Copy-
traders
Trading
On-line
Investm
ent Firm
services
Indipen
dent
Advisory
Clients
Bank
services
Too much opportunities…

22. ASCOSIM - 21 Settembre 2016
22
Bank
Account
Clients
Broker
Advisory
Distribut
ion
Product
Value
Chain

23. 23
Bank-centric business model
Broker
Advisory
Distribu
tion
Product
Bank
Account
Retail
Bank Clients

24. 24
Broker
Advisory
Product
Bank
Account
Clients
Advisor-centric business model

25. 25
One example – best in class
219
8,00
36,01
66,35
0
50
100
150
200
250
Employees AUM (b) Estimated
Revenues (m)
Estimated
costs (m)
Betterment
Source: SEC elaboration: DIAMAN SCF

26. 26
Broker Advisory
Products
Issuer
Bank
Account
Clients
Product-centric business model

27. 27
One example – best in class
659
107,80
323,39
293,84
0
100
200
300
400
500
600
700
Employees AUM (b) Estimated
Revenues (m)
Estimated
costs (m)
Vanguard
Source: SEC elaboration: DIAMAN SCF

28. 28
Broker
Advisory
Product
Bank
Account
Clients
Broker-centric business model

29. 29
One example – best in class
44
31,20 31,20
21,16
0
5
10
15
20
25
30
35
40
45
50
Employees AUM (b) Estimated
Revenues (m)
Estimated costs
(m)
Charles Schwab
Source: SEC elaboration: DIAMAN SCF

30. Major criticisms of Robo Advisors

31. a drop in the ocean
31
a drop in the ocean
Mutual Funds
15 trillion
ETFs
2 trillion
Robo Advisors
200 Billion
Hedge Funds
15 trillion
1

32. Obsolete Algorithm
q 70% of Robo Advisors uses MPT
for portfolio’s optimization
q 20% uses constant mix for
rebalancing the portfolio
q Only 10% uses proprietary
algorithms (es. Risk Parity)
2

33. Market crash
Deficit of trust
↓↓↓↓
Robo Advisors firm haven’t
experienced the impact of a down
market
↑↑↑↑
No human mediation
3

34. Costumer Care
q For many people is important to
listen and believe someone
q An uncertain person ultimately
does not decide
q For HNWIs the asset allocation is
only one of their hundred needs
4

35. Targeting retail customers
Only Nerds
+
Few Affluent
+
No HNWI
5

36. 36
Wealth Pyramid
Needy 69,4%
Retail
22,5%
Affluent 7,5%
HNWI 0,6% 87,5 Trillion (39,3%)
95,9 Trillion (43,1%)
32,1 Trillion (14,4%)
7,3 Trillion (3,3%)

37. 37
HNWI served by Robo Advisory
% HNWI % Asset HNWI
Charles Schwab less than 10% up to 25%
Vanguard less than 10% up to 50%
Betterment less than 10% up to 25%

38. Squeeze of fees
Low fees
↓↓↓↓
Negative cash flow
↑↑↑↑
High Acquisition costs
6

39. DISRUPTIVE INNOVATION
status quo
↓
simplification
↓
commoditisation

40. TRADITIONAL
INDUSTRY
DISRUPTIVE
INNOVATION
SUSTAINING
INNOVATION

41. SUSTAINING INNOVATION
added-value
↑
simplification
↑
status quo

42. Robo Advisors Challenges

43. And the winner is…

44. 44
On line
Marketing
Human
advisors
Products
Best
Robo
Advisor
Robo4
Advisor
Victory’s motivations
Cheep
Robo
Advisor

45. Robo Advisors challenges
q Digitalization of Knowledge
mixed with Human assistance
q More sustainable products to
scale the client’s relationship
q Quantitative models more
adequate to “new financial
world”

46. q Robo 4 Asset Managers since 2002
q Robo 4 Fund Managers since 2007
q Robo 4 Advisors since 2009
q Robo investing since 2015
Who is DIAMAN?
46
Quantitative
Financial Advisor
for Institutional

47. 47
Return Parity™
Target Strategy
Risk Parity
Black-Litterman
Golden Ratio
Markowitz
Constant Mix
Equity Weighted
Relative Strength
Momentum
Absolute Return
Relative Return
Equity Weighted
Relative Value
Quality Growth
Market TimingCurrency Overlay
Tactical Overlay
Strategic Asset Allocation
Tactical Asset Allocation
Long/Short Volatility
Long/Short Equity
Market Neutral
Corporate Bond Analysis
Government Bond Analysis
Risk on / Risk off

48. Thanks for the attention
www.facebook.com/daniele.bernardi2
www.linkedin.com/in/danielebernardi
www.youtube.com/user/danielebernardi
twitter.com/danieleDIAMAN
48
www.diaman.it/blog
daniele.bernardi@diaman.it