Comment wire

Analysts at GlobalData Financial Services provide expert commentary, insight and data on the global private banking and wealth management industry that is engaging, actionable and informative

Japan’s Nomura Asset Management announced it is investing in 8 Securities, a Hong Kong-based provider of robo-advice services in April 2018.

GlobalData Financial Services explains that other automated advice platforms will be in the sights of investment managers looking to buy off the shelf as the service quickly becomes a hygiene factor among increasingly digital investors.

The $25m deal gives 8 Securities plenty of new capital. The company has been in the market for a while with Chloe, its robo-advice platform (which in 2016 became the first in Asia to be offered via a mobile app), and currently has a presence in Hong Kong and Japan.

The tie-up with a major international brand such as Nomura means it should be able to more easily establish itself in other markets and can gain enough business volume – a difficult task for all start-up robo-advisors.

Nomura Asset Management operates in 14 markets and had assets under management of $473bn at the end of 2017. Volume and economies of scale are not an issue, but remaining competitive among younger consumers is.

Buying into a proven platform that works in Asia, Nomura is explicitly targeting millennial investors, as the investment gives the company a digital distribution channel to reach out to this demographic.

The strategy is borne out by GlobalData’s research into channels of advice. As per the GlobalData 2017 Mass Affluent Investors Survey, although only 1% of investors use robo-advisors as their main investment channel, in total roughly 27% of millennial investors have used one.

For investment managers looking to cost-effectively develop their own distribution channels without disrupting existing relationships, robo-advisors offer a great option.

They can draw in new, younger clients that want purely digital solutions without cannibalizing the established business of older investors.

Other large-scale asset managers will need to make similar investments in proven robo-advisors if they want to compete for the next generation of investors.

BlackRock, the market leader, has already done so in Europe with a 2017 investment in Scalable Capital, the largest robo-platform in continental Europe. It may become open season on more established robo-advice fintechs.

For more insight and data, visit the GlobalData Report Store (https://www.globaldata.com/store/). Verdict is part of GlobalData Plc.

Cryptocurrencies continue to both attract and repel investors in equal measure. While internet giants Google, Twitter, and Facebook have banned ads for cryptocurrencies and initial coin offerings (ICOs), wealth managers cannot rely upon this to shield their clients. They need to have established policies on how they approach the sector and the advice they provide.

Any investor with an internet connection cannot have missed the explosion of cryptocurrencies and blockchain-based investments in 2017. The rollercoaster ride that is the price of bitcoin (still the most established cryptocurrency) has been extensively covered in mainstream media. It has also prompted a huge number of ICOs, trading platforms, and strategies aiming at getting in on the torrent of money. Investors have stampeded into and out of various cryptocurrencies and blockchain products, ranging from the likes of Ripple’s international transfers – which has real blue chip clients in the financial industry and a concrete business case – to thousands of others that are little more than elaborate scams.

With regulators and established securities exchanges at times rushing to restrict activity or develop themselves as ICO hubs, there is a lot of conflicting information and a fear of missing out among financial firms, regulators, and investors. Understanding investors’ desire to get in on a hot new technology – and that there will be some legitimate investment cases – is the first and hardest step for wealth managers. This is followed closely by how best to protect clients in a nascent market that is replete with thefts and wild claims.

Even with the formal bans on cryptocurrency ads imposed by major social media sites, there remains a great deal of misleading or sensational marketing for investors to stumble upon. All of which means everyone from small-scale retail traders to sophisticated HNW individuals need an authoritative steer on the market, as well as access to specific blockchain and cryptocurrency investment opportunities.

Wealth managers should be the source of cryptocurrency insight (and even exposure) for their clients. They must accept that some clients will want to get in on crypto no matter what. This means wealth managers need research on the sector, access to ICOs and currency trading, and an understanding of the relevant technology and platforms – just as they would for the stocks and exchanges that make up the global equity market. They should discuss the sector’s investment potential with clients, outline how to trade securely in the space, and highlight how cryptocurrency fits in with conventional portfolios and specific financial goals.

If a client really wants to invest in crypto they will find a way. It is best that a wealth manager is there to make sure the risks are minimized, and that the client gains the exposure they crave as safely as possible.

For more insight and data, visit the GlobalData Report Store (https://www.globaldata.com/store/). Verdict is part of GlobalData Plc.

The Financial Services Royal Commission is poised to reveal widespread failure across the Australian financial planning sector, according to GlobalData Financial Services.

The effects could be more than a fine and a slap on the wrist, and a focus on vertical integration; the inherent conflicts also mean the industry has to brace for significant change ahead.

The Royal Commission is in full swing and will shine a further spotlight on an industry whose reputation has already been battered by recent miss-selling scandals, and violations of FoFA’s ‘best interest’ duty, which requires financial advisers to act in the best interests of their clients.

In fact, it has recently surfaced that a stunning 90% of advisors providing SMSF advice failed to comply with the best interests of their clients.

Earlier this year, when the Australian Securities and Investments Commission examined whether advice to switch to in-house products satisfied the best interest requirement, 75% of advisers failed to demonstrate compliance.

A wind of change is blowing through the industry. The reputational damage has already been significant and the bloodbath is not over yet.

CBA is up next; this comes after the Royal Commission learned that AMP’s financial advice business puts profits before customers, at least according to the headlines.

Given the significant media attention the Royal Commission has attracted, customers are likely to think twice about the type of provider they opt for.

This will drive growth of the independent advice market. Even demographics that are not typically drawn to independent financial advisers (IFAs) will find themselves more likely to opt for independent advice when they learn their trusted banking partner has been pushing products that are not in their best interests.

However, that’s not all. On the flipside, financial planners are likely to ditch the big four banks and AMP to set up their own businesses.

In an industry plagued by a shortage of talent, that will be a big headache for Australia’s wealth giants. Our Global Wealth Managers Survey shows that 8 out of 10 wealth managers already agree that it is increasingly difficult to hire new relationship managers or other front-line staff.

Admittedly, the number of financial advisers has increased from 18,000 in 2009 to 25,000 in 2017, but only a third have a university degree.

Addressing this issue, new compulsory education requirements for both new and existing financial advisers will come into effect on January 1, 2019.

While this has the potential to raise the professional, educational, and ethical standards of financial advisers, it will also cause advisers to leave the industry, further aggravating the shortage of talent.

Yet, the most drastic change relates to the viability of the vertical integration model. Australia’s big incumbents engage in both the provision of personal advice and the manufacture and sale of financial products, such as superannuation and insurance.

Transitioning away from the vertically integrated model into a conflict-free model seems increasingly likely. This will be the biggest change to the industry since the big four banks moved into the wealth space more than 15 years ago.

Already at the end of 2017, ANZ announced the sale of its OnePath Pensions and Investments business to IOOF, and CBA divested its insurance business CommInsure Life. Looking to the future there have also been rumors that NAB could spin off its wealth business.

At the beginning of 2018, The Australian Financial Review’s Street Talk column reported that the lender is considering spinning off and floating its funds management business MLC, its corporate superannuation arm Plum, its financial planning arm, and its retail broker JBWere.

One thing is for sure: as the Royal Commission is bound to reveal further failings, the wealth industry, which has previously been on a relentless path of horizontal and vertical consolidation, is about to get a strong push towards fragmentation and divestment.

For more insight and data, visit the GlobalData Report Store (https://www.globaldata.com/store/). Verdict is part of GlobalData Plc.