Wealthtech Musings: Will Robo Mark 2 fare better? How far can alternative investing go?

Overview

In recent months I have noted two trends in wealth management that I thought warranted further dialogue and discussion.

First, there has been some revival in interest in investing in new on-line digital asset management platforms, even while others are shutting down, or have pivoted to try their luck as B2B solution providers for banks, and insurers.

Second, there has been continuing underwriting of solutions seeking to extend distribution of alternative assets, even while the current climate has seen a rollback and potential mean reversion of the return profile.

Digital Asset Management 2.0

If we take the first trend first, there are three drivers that seemingly are generating investment interest, clearly supported by some degree of traction and asset growth. The first of these is related to a shift in the asset allocation design, and a broader overall allocation to a wide range of alternative investments, often through listed asset management, investment trust, and closed end fund vehicles, rather than direct subscriptions.? The hope with this approach is that this will both prove attractive with more higher net worth prospects, as well as with advisors who have clients seeking a wider form of diversification. The second is related to firms deploying more a sophisticated portfolio management approach in order to be able to support optimization of more attributes as well as handle more specific client preferences.? Firms are marketing this as a higher form of personalization at a more attractive price points than private banks, and more sophisticated RIA/IFA firms.? Finally, there are some new players that are even going further than this and seeking to order investment styles, such as direct indexing, as a complete alternative to using fund wrappers or model portfolios. In this strategy, new entrants seem to also be trying to deploy AI tools to support quantitative trading, as well as predictive analytics, and thus are seeking to take advantage of the excitement surrounding the potential of AI systems in the pattern recognition arena.

When I ponder whether any of these “new wrinkles” will drive faster and more sustainable AUM growth vs. robo advisor 1.0, my gut response is “no”. I can appreciate that with an extremely lower entry point, as well as reduced onboarding fees, each of these types of value added investment approaches offers the potential for a savings of around 0.75% per annum vs. the traditional advisor model. Nevertheless, from the interaction I have had with the target cohort these firms are often targeting, my impression has been:

1)???? Adding complexity into the portfolio design and portfolio management process doesn’t translate into the guarantee of better returns,

2)???? Bringing more quantitative capabilities to bear doesn’t inspire additional trust, and often brings additional explainability challenges into the conversation with the investor or their advisor,

3)???? New approaches require a significant educational dialogue, a requirement that many new firms do not build into their engagement model, particularly to support consistent inflows as opposed to one-off investments,

4)???? Firms don’t pay significant enough attention to creating simulations for stress testing situations where prospective clients clearly suffered negative returns.

5)???? Investment propositions have the maximum chance of success when they seek to build both a direct as well as intermediary option for investment day 1, supporting the later with a broader set of tooling to support a narrative and proposal structure built around the quality aspects of the offering.

In other words, while it is encouraging to see a reboot and upgrade in the proposition taking place, it is not clear to me that the right lessons have been learnt from the failures of 1.0 and thus the results are I fear less likely to be encouraging than discouraging.

Alternative Asset Platforms

Moving on to the second theme, I would surmise that venture backing for alternative platforms, with or without additional innovation in a blockchain, smart contract, token, and stablecoin design has remained because of the fragmented ecosystem of investment and financial advisors in many countries, and the large cohort of independent players in the US, Canada, the UK and Australia in particular.?

At the same time the breadth of investment options that are open to different types of complex and sophisticated investors seems to be growing all of the time, even without any surge yet in the tokenization of different types of physical assets due to regularity ambiguity.? New Fintech firms are continuing to find new ways of marketing alternative products with high recurrent income, while at the same time, bringing new transparency and transaction efficiency to the value chain.? Platforms are also able to exploit a significant diversification of strategies within the private market, structured finance, and exchange traded markets, thus introducing access to solutions that on the face of it offer non-correlated returns against traditional portfolios.

I sometimes wonder whether or market the alternative platform market will quickly become saturated, but I think it is fair to say that since both the intermediary participant and the Issuer are deriving benefits for the platform in a manner that reduces the number of agents trying to control access to the registry, one can clearly see scenarios that support local, regional, and global platform designs.

Conclusion

As a final comment, within these two spheres we are by no means seeing significant innovation yet emerging. Digital solutions are still by and large adhering to institutionalized market conventions, and thus are mostly trying to take advantage of the basic benefits gained through web technologies and infrastructure, as well as advances in chip and memory design. There are no doubt, cost, efficiency, and scalability benefits that are derived from these things, as well as benefits in terms of product availability and aggregation, but I wonder if these are “disruptive” enough to displace well-funded and resourced incumbents.