The Rise of the Robo Asset Manager

In the serene realm of passive asset management, a tempest is brewing, and with each passing day, the turmoil intensifies. From the ascent of interest rates to the first-ever outflows, from stagnant equity markets to the cancellation of robo advisor acquisition deals, and even the demise and closure of some robo advisors - it's a world rife with chaos. Add to this the woes of a 33% drop in revenue, the cessation of business operations in China, tardiness in conquering Europe, and the shift towards active strategies, it's apparent that the USD 30 trillion passive asset management industry, particularly its top three players, is navigating tumultuous waters despite the growing popularity of passive investing.

This is the quintessential ebb and flow of the business cycle, where sometimes while the income is on the rise, the profitability is on a downward spiral. Rising operational costs have coerced the industry to sprint towards technological solutions, and with the advent of cost-effective AI tools, industry leaders are grappling with the question of how to cut down on their huge workforce. The automation of the asset management sector has set in motion, and it may take a decade for the select few to emerge resilient enough to contend with the looming juggernaut known as the Robo Asset Manager (RAM).

RAM, in essence, is a technological platform that integrates zero-fee execution, zero-fee advisory services, and zero-fee ETFs while comfortably working with deferred management fee. It also offers cutting-edge analytics and user interfaces to investors worldwide, traversing a vast spectrum of asset classes and accommodating diverse customer preferences. RAM nimbly adapts to micro market innovations, including order flow systems, payment systems, fractional trading, micro investing, and low computation systems, all the while outperforming traditional benchmarks. While this may sound too good to be true, it was born from a place of disbelief - disbelief in the tax inefficiency of mutual funds, disbelief in the dominance of index funds over active ones, and disbelief that market benchmarks could ever be surpassed. This incredulity kept the industry fixated on marketing and sales, at the expense of innovation. This paradox of innovation is that it often unfolds right before our eyes, yet remains unnoticed, dismissed as insignificant. It is this perceived insignificance that has ultimately spelled the downfall of robo advisors, which knowingly served as extensions of the asset management industry's sales arm.

Transformation is a formidable undertaking, fraught with pain and discomfort. It necessitates soul-searching, unwavering purpose, and an unyielding spirit, qualities that are difficult to find in well-established institutions. The sheer size of these institutions becomes a burden, hindering their ability to swiftly adapt. Furthermore, there is a dearth of initiative. Three significant vulnerabilities hinder the industry's transformation today.

The Concentration Challenge: Even if you may hear. "We are not concentrated". "This is the best you can get". "This is called diversified concentration". "We did not create this concentration, it was given to us." Passive Investing is concentrated, risky and flawed owing to its 1871 methodology. If the industry could discover Bachelier 60 years after his masterworks, the industry had enough time to talk about Laspeyres. Somehow the German has resisted re-discovery, even if enough has been written about the Laspeyresian bias. The top ETFs from the top 3 managers are concentrated in the top 10% of respective components.

The Duplication Challenge: Many ETF companies peddle variations of the same product, resulting in redundant exposures. Lay investors often receive no clarification, a sign of missing governance. Investors should clearly know that the risks of buying similar investment products and duplication in exposure.

The Stickiness Challenge: In a commoditized world, investors show no brand loyalty. They seek cost-effective market performance and will swiftly move elsewhere if another provider offers the same or better performance. The notion of customer loyalty has lost relevance.

This explains why robo advisors find themselves struggling, with news of their demise making headlines.

"Robo-advisor dream of disrupting Wall Street wealth is not working out exactly as planned". "Robo-advisers struggling to retain investors in 2022, research finds". "Tim Sargisson: Robo-advice is doomed to fail". "What robo-advisors got right – and mostly wrong". "Robo-Advisors Changed Investing. But Can They Survive Independently?" "Why Robo-Advisors are struggling to break even". "Robo-advisor failures show fintech isn’t a panacea". "Robo advisers fail to beat market benchmark."

If these challenges weren't enough, there's the "Shiller's curse" to contend with. As the P/E ratio climbs higher, future returns diminish. The looming prospect of a low-return, high-interest-rate environment doesn't bode well for passive asset managers. While alternatives might appear appealing, they come with liquidity risks and challenges in measuring and extracting alpha. The stage is set for asset managers, with RAM poised to make its presence known. Soon, the once-invisible RAM will step into the spotlight, ready to claim its share of the pie.

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