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How robo-advisers could reshape Thailand’s financial inclusion

Dec 16. 2016
Panawat
Panawat
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By SPECIAL TO THE NATION

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WE ARE living in the era of low interest rates. Given the low interest our deposits receive from banks, it’s no wonder that people are now actively seeking investment alternatives to get higher returns.

They turn to such assets as stocks, mutual funds, gold, and corporate debenture. The problem is that to succeed in this investment game, considerable amounts of time, knowledge and know-how are needed. And these are simply what people don’t have.

Consulting a financial adviser is one way to go. A certified financial consultant will engage directly with a customer in providing insights and personal consulting. But this kind of private wealth management can only be accessed by the wealthy. 

For most private banking, the basic requirement for being categorised as “affluent” is to have about Bt5 million worth of investment products. According to Knight Frank, people that rich account for less than 1 per cent of Thailand’s population. Therefore, 99 per cent of the population would not be qualified for the insightful market information they need for quantitative asset allocation. 

Robo-advisers, however, provide that opportunity for middle-income people. They rely on software and algorithms to allocate your wealth automatically across different asset classes, and require minimal human intervention to serve clients, with cheaper and faster processes. 

There are fewer barriers than for typical private wealth consultancy, for the cost of investing with a robo-adviser is generally a fee of less than 0.5 per cent. This would open up a broad spectrum of investment opportunities to all people, not just the elite 1 per cent.

There are three key concepts underlying robo-advisers. The first is customisability; computers can easily handle huge and complex sets of data. Second is cost-efficiency; since there is very little human involvement, the cost of delivering the advice is minimal. The third concept is the ability to access multiple kinds of advice depending on the objective – investing or tax planning.

The processes are quite similar to general private investment but more automatic. It starts with customer understanding to help determine risk appetite and developing an investment profile. Age, tolerance for market volatility, investment goals (capital gains or income), and investment time horizon would be input to create the customer profile. 

Portfolios will be constructed based on the customer risk profile. In particular, an automated approach – modern portfolio theory – would play a major role in selecting stocks, bonds and mutual funds. Automated approach ensures regular updates to customers and red-flagging whenever a change from economic conditions or customer risk profile is required.

Robo-advisers support the millennial lifestyle. In the US market alone, 58 per cent of millennials do their own financial research, and robo-advisers make that research accessible. It’s widely discussed that millennials tend to embrace technology and automation widely. Their priorities are accessibility and saving time, not having a one-on-one interaction with a certified professional. In this sense, robo-adviser platforms are the natural step.

Although the current robo-adviser approach is still automated portfolio allocation, the recent trend of machine learning should usher in the age of personalised advisers. Beyond the fancy mathematical techniques for allocating portfolios, the ability to recognise risk appetites more accurately by comparing the similar risk profiles of other customers, or by collecting social-networking data, would advance the asset allocator into being a real robo-adviser, or what we could call “Robo 4.0”.

In Thailand, many financial technology providers (fintechs) and investment incumbents such as brokerages, banks and mutual funds are interested in developing robo-advisers to deliver the best value to their clients with relatively low fees, but hurdles still exist. 

According to current regulations, revenue from financial advisory services must be paid to certified financial consultants – investment planners or investment consultants – before transferring it to the firm providing the service. That means fintechs need certified consultants to run their financial advisory business, which is contrary to a robo-adviser business, which needs minimum one-on-one human engagement.

Fortunately, the Securities and Exchange Commission has an initiative to issue temporary certificates to so-called investment advisers so fintechs can receive revenue from the customer directly. Additionally, the SEC plans to create a sandbox for trial phases of robo-advisers and to ease regulations to support this fast-growing business.

With the landscape changing both demographically and digitally, robo-advisers must take off soon in Thailand. The market for wealth management will be expanded beyond the affluent into the entire economy, and robo-advisers will be the first step in introducing financial inclusion to Thailand in the area of investment.

Panawat Innurak is assistant vice president of TMB Analytics. |He can be reached at Panawat.Inn@tmbbank.com. Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives.

 

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