Innovation Management

Robo-advisors expanding to insurance and vehicle purchases

8 January 2018

Robo-advisors expanding to insurance and vehicle purchases

Comparisons between robo-advisors are often limited to cost analysis. This criterion must be extended to the output and supply of services other than automated management. The market is growing very quickly. Even big traditional international banks are now getting into this segment.

“I think that the simple provision of automated portfolio management that industry players are providing isn’t the future of robo-advisors,” Herbert Moore, co-founder and CEO of WiseBanyan, and specialist in the field, says in the latest Robo Report from BackEnd Benchmarking. And yet, robo-advisors allow for drastically lower down costs for bank customers and savings for financial groups, especially in personnel.

Rather than limiting itself to managing exchange-traded funds (ETF), WiseBanyan believes it is much more interesting to expand its services to other financial products. This American robo-advisor, whose basic offer is free, is now helping individuals find a mortgage, life insurance and refinance student loans. “We are getting ready to offer vehicle purchases. This can be one of the most financially important transactions for younger and less wealthy clients,” Moore says.

Almost 1 billion francs at Swissquote

The U.S. market for robo-advisors is considerably ahead of what’s available in Switzerland, both in terms of size and of diversity of the offer and the innovation. Aite Group predicts that robo-advisors in the U.S. will be managing $166 billion in assets by the end of the year and $1,000 billion in 2020. The evolution of finance in the U.S. is particularly encouraging for Switzerland, given how the deepest trends usually cross the Atlantic. ETFs debuted in 1989 in the United States and in 2000 in Europe. Robo-advisors rely precisely on the cost advantage of ETFs to offer their automated services.

The trend is growing in our country. The robo-advisor used by the banking group Swissquote is expected to reach 200 million francs of active assets by the end of 2017, and 1 billion by 2019 or 2020, according to CEO Marc Bürki. There is, however, limited competition. VZ Finanzportal declares more than 2 billion francs and True Wealth “more than 50 million francs.” Descartes Finance gives no indication.

In the United States, all the major fund managers are getting into it, even traditional banks. Vanguard, the world’s second largest mutual-fund manager, has $83 billion in assets managed by its robot. Betterment, one of the first robo-advisors, now has more than 10 billion in assets. According to the “Robo Report”, T. Rowe Price and Zacks Advantage have also adopted robo-advisors in the third quarter of 2017.

Soon Goldman Sachs too?

Morgan Stanley, Wells Fargo and potentially Goldman Sachs are expected to launch their own robo-advisors before the end of the year. Investment bank Morgan Stanley is expanding digital services for its client advisors (based on profile, demographics or other criteria) and is launching a “traditional” robo-advisor to attract low-income households.

The offer’s extension is leading American players to specialize, innovate or offer particular segments, such as insurance, consumer credit and socially responsible investing (Betterment, Motif, TIAA).

Wealthsimple, for instance, is offering wealth management that’s in accordance with Islamic principles. Betterment, one of the first in the United States, is giving access to Goldman Sachs smart-beta funds. These types of fund invest depending on specific index rules that are different from capitalization-weighted indexes.

Less costly than traditional financial advice

The cost of a robo-advisor matters, but it should not be the only criterion to pay attention to. It is an attractive one though, as the cost is much lower than that of traditional financial advice. For Wealthfront, for example, the only U.S. robot to offer a retirement plan that’s fiscally attractive (529 plan), the cost is zero up to $10,000, and 0.25% above that. For WiseBanyan, it is only 0.1% for the passive strategy, and for Wealthsimple, the largest Canadian robo-advisor, it is just 0.13%.

In Europe, robo-advisors that are opening up to insurance are French, given the weight of life insurance in wealth management. It’s therefore no surprise that the first player in this segment, Advize, has a partnership with Generali for insurance contracts and another with Morningstar for allocation strategies. Another local peculiarity is that robo-advisor there use unit trusts rather than ETFs.

The diversity of costs in Switzerland

It’s difficult to compare the cost of a robo-advisor in Switzerland because of the diversity of conditions. According to the website Finews, True Wealth is the cheapest on the market for a portfolio of 50,000 Swiss francs. Fees amount to 400 francs a year, including a 0.5% fee and 0.3% product costs (Total Expense Ratio).

The minimum charges differ greatly. They go from 500 Swiss francs at VZ to 20,000 francs at Swissquote ePrivate Banking, Descartes Finance and SaxoSelect.

According to a comparison study carried out by Moneyland.ch, the lowest flat fees start at 0.3%. It is, for instance, the case of Descartes Finance’s cheapest strategy, but the cost can rise to 0.8% depending on the one you choose. They can cost between 0.55% and 1.25% per annum at VZ, 0.5% at True Wealth, 0.6% at Investomat, 0.72% at Selma Finance, 0.85% at SaxoSelect, 0.5 % (plus an administrative fee of 0.75%) at Swissquote. The costs for the products are sometimes included in the flat fee, for example at Swissquote, while an addition of 0.18% to 0.28% is required at True Wealth or 0.2% at VZ.

Difficult to compare performances

The performances of robo-advisors are difficult to compare given that the products are recent. In Switzerland, however, Swissquote’s robot has already won the Lipper Fund Award 2016 for the best performance in Swiss equities over three years.

In the United States, quarterly rankings are closely followed and detailed. BackEnd Benchmarking risk-return analysis highlights the performance of Schwab’s robo-advisor, which tied for the lowest standard deviation and ranks second best in the one-year return (11.93%). For Schwab, the Sharpe Ratio, which measures the spread between a portfolio’s return and a risk-free investment, is at a very high level of 3.29

All rights reserved: Le Temps/Worldcrunch by Emmanuel Garessus

 

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