Pioneering Unexplored Areas

Japan has been at the forefront of innovation in the asset management—and the broader financial services—industry in Asia, with a number of new and incumbent players rolling out robo-advisory services. Robo-advisors are online platforms that offer investment advice based on sophisticated algorithms mapping portfolios that can look at investment performance across asset classes in real time.

While there is vast potential in this area in Japan, the gains made by the robo-advisory industry may be limited if it does not strive to improve investment literacy and enhance accuracy and transparency of information.

Current robo-advisor initiatives in Japan are largely tailored to support the sales of mutual funds. As easy-to-use, non-face-to-face services, they are garnering interest from investors comfortable with information technology and a degree of financial literacy.

Moving forward, further advancements that draw on both asset management options and technology are expected in the following areas:

  • Diversity of products. Expanding the range of products offered from general, publicly offered mutual funds to a variety of asset classes.
  • Diversity of services. Online onboarding, portfolio management, reports and alerts. Operation support that is a hybrid approach, harnessing both existing contact centers and face-to-face services.
  • Automation. Automated reinvestment and rebalancing. Supporting small-value and high-frequency trading.
  • Accommodating business-to-business (B2B). Pro-level sales support tools developed to offer the advanced features professionals want. Vendor-supplied cloud services and financial institution-supplied white-label service offerings for other financial institutions.

 

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Robo-Advisory in Japan: A Need to Push the Envelope

Robo-Advisory in Japan: A Need to Push the Envelope

Robo-advisors: Booming in Japan
http://asianbankingandfinance.net/financial-technology/commentary/robo-advisors-booming-in-japan

Fintech and Robo Advisors: Booming in Japan
http://celent.com/reports/fintech-and-robo-advisors-booming-japan

THE FUTURE OF ROBO-ADVISOR SERVICES IN JAPAN

Technology and New Business Frontiers

Megabanks, startups, and dedicated online brokers are all jockeying to leverage their strengths in a way that accords them the most advantageous position possible. The latest iteration in the ongoing battle to be first, to move early, and to outdo the competition is unfolding around robo-advisor services and technology with a key point being which customer categories to target.

Historically, the asset management business in Japan has revolved around the relatively lower-hanging fruit: customers that have both assets and financial literacy. Moving forward, that will change. It will be important for players to expand the market’s reach to include customer segments in the stage of asset creation, namely younger generations in the midst of becoming financially literate and the senior demographic of customers with little experience with technology. Early robo-advisor movers pushing the boundaries of the market and acquiring new customers will be crucial if robo-advisory services are to gain traction and not become a fleeting phenomenon. Many progressive global examples of companies and markets are responding to diverse investment and technology needs and, in doing so, helping to boost financial literacy across the market.

The robo-advisor initiatives that have hit the market in Japan so far largely appear tailored to support the sales of mutual funds. As easy-to-use, non-face-to-face channels, they are garnering interest from investors with a level of comfort with IT and a degree of financial literacy. Moving forward, further advancements that draw on both the asset management facet and technology are expected in the following areas.

  • Diversity of products: Expanding offerings from general, publicly offered mutual funds to multi-asset classes.
  • Diversity of services: Online onboarding, portfolio management, reports, and alerts. Operation support that is a hybrid approach harnessing both existing contact centers and face-to-face channels.
  • Automation: Automated reinvestment and rebalancing. Supporting small-value and high-frequency trading.
  • Accommodating B2B: Pro-level sales support tools developed to offer the advanced features professionals want. Vendor-supplied cloud services and financial institution-supplied white-label service offerings for other financial institutions.

 

Sell Side Business Model

Overcoming the first obstacle presupposes a shift in the competition among firms marketing mutual funds. This would entail a move from the conventional model, under which they vie for short-term sales commissions, to a longer-term model in which revenue is generated from discretionary investment fees. Already, the number of wrap accounts is growing quickly as major players migrate rapidly to a wrap-account approach premised not on sales commissions but on discretionary investment fees (for investment services offered on a contractual discretionary basis that include investment choices, actual purchase or sale, and regular reports).

FIG 4: Surge in Wrap Accounts

robo4

This surge in wrap accounts has spurred debate. Observers point to issues in products, service content, and management performance; in concrete terms, this means the fee structure (major firms say that they typically charge a total of around 3% for mutual fund advisory fees, transaction and management fees, and fees related to mutual funds), minimum contract amounts (major players accept contracts from 3 million yen in increments of 10,000 yen), and investment types (wrap account-dedicated mutual funds, programs combining actively managed funds, programs combining index-managed funds, etc.). Celent would like to believe that the proliferation of robo-advisors will enhance product offerings and advice across the investment cycle overall. The advent of mutual fund sales professionals (major banks and securities brokers) adopting robo-advisory technology can be expected to be the dawn of a new technological era not solely for wrap accounts, but also more broadly for the mutual fund business and the asset management business.

Celent believes that Japan’s asset management business sector currently faces two challenges that must be addressed particularly on the sell side.

  • Information imbalance: This refers to an imbalance or asymmetry in the quantity, quality, or use of information related to investment products or services. The market is flooded with investment information. However, there is a shortage of information and advice to cut through the noise to aid in reaching investment goals and to help prospective investors select products that match their risk appetites among the vast array of investment choices.
  • Know-how imbalance: This refers to an imbalance in recommending appropriate investment products and services as well as know-how related to investor management and development. The market is awash in investment know-how. Nevertheless, there is a shortfall of accurate understanding of investor orientation and experience. This is coupled with a lack of help for investors to optimize their portfolio holdings, subsequent follow-up, and advice to achieve investment objectives.

 

Just published the new Celent reports:

Fintech and Robo Advisors: Booming in Japan

 

END DESTINATION OF THE BOOM

Robo-Advisor Services: The Road Ahead

The fundamental essence of financial system services will remain, but with innovation, the inconvenient and irrational elements of the industry will be eliminated, falling by the wayside. The first touchstone for this will likely be the battle among robo-advisor services. With Japan’s highly integrated industry, mutual funds have from the beginning grown in the context of a modular (or unbundled) business structure. In the future, the insurance industry is expected to experience a similar change. It is only natural that bancassurance accelerates such structural change.

On the demand side, robo-advisor offerings are expected to play a supporting role in particular with retail investor asset management in terms of the (PDCA) cycle (which in this context refers to setting fund management goals, selecting and purchasing products or services, post-purchase review “checks,” and ongoing action). On the supply side, expectations are high that robo-advisors will yield benefits in B2B via functions that enable support tools geared toward professionals in the asset management arena. Moreover, observers have even loftier expectations that robo-advisors can play a role in enabling the asset management market to evolve into a sounder and more cyclically sustainable market.

Celent expect that robo-advisors in Japan’s market will work to supplement investment literacy on the demand side, heighten accuracy and transparency related to information (including price, quality, and risk) about asset management products and services, and supply technology that will help to solve the incentive problems that interfere with efficient business transactions on the supply side (and the oligopoly of the value chain).

From a technical perspective, there are three important points that would make the robo-advisor initiatives become widely accepted and profitable:

  • Use of refined smartphones with easy operability and robust security, providing a high-quality user experience.
  • Ability to provide diversity of products and services, low-value and high-frequency trading support, and automation.
  • Ability to (conduct / carry out) traceability and rebalancing, where assets are vigilantly monitored, and plans can be reviewed and revised accordingly.

FIG 7: Expectations for Robo-Advisors

robo7

 

Shift to the Modular Structure

It is incumbent upon the financial industry as a whole to shift to a modular demand structure to meet new demand spawned by new digital technologies and new demand in the digital industry. Institutions should ease their dependence on vertically integrated, direct sales — that is to say, keiretsu sales channels — to establish more dynamic and open delivery models. The demands and challenges of omnichannel transcend choosing an open or closed channel; rather, these demands proffer an ideal opportunity for companies to review and reconsider the optimal delivery model for their needs. Moreover, this means that financial institutions can collaborate with a wide range of non-financial sector entities including startups to broaden access to and the scope of the market that they can potentially claim as their own.

Financial institutions should strive to become trailblazing purveyors of financial services that leverage digital technology. In the financial services value chain, areas coexist where firms can and should go it alone to generate their unique in-house high-value-added services and products as well as other areas where they stand to benefit by collaborating with other firms to thoroughly drive down costs. Also, if firms thoroughly consider economies of scale and economies of scope, they can possibly parlay their cost centers into new profit centers and play a role in the industry infrastructure by collaborating with other firms. In the actual operation, after deliberating and implementing such initiatives, big-data analytics and automation of all processes will prove key. Here as well, a shift to a modular supply structure will be required, and a critical factor in determining the success of financial institution management will be alliances — namely how adroitly they select and choose to partner with other entities.

Fintech is much more than the application of novel technology in the sphere of financial services. Rather, it portends nothing less than a wholesale structural overhaul of the financial services industry that is an opportunity to envisage anew and redefine the industry’s future. There can be no doubt that Fintech transcends the mere establishment of a digital channel. Instead, it will clearly affect products, services, IT units, and sourcing models and, in so doing, provide the financial service providers of the future a chance to seriously consider exactly what kind of companies they would like to be and the corporate cultures they would like to foster.

FIG 8: Key Transformative Points in the Financial Services Industry

robo8

 

Just published the new Celent reports:

Fintech and Robo Advisors: Booming in Japan

 


JAPAN’S WEALTH MANAGEMENT MARKET

Japan’s wealth management market differs significantly from the global market in a number of ways.

Individual financial assets are managed with an emphasis on security and primarily allocated toward deposits, while potentially highly profitable securities — in particular, equity — are not typically preferred. The asset management emphasis toward savings deposits has persisted through the nation’s deflationary phase, but with the introduction of inflation targets and drastic monetary easing, this approach increasingly makes less sense. This leaves one wondering when the tide will change and who or what will trigger a change.

In January 2014, the government introduced a new initiative to encourage a shift in behavior from saving to investing. Called the Nippon Individual Saving Account (NISA) the program is designed to support the stable growth of household assets while boosting the availability of capital available for economic growth. While a combination of macroeconomic factors — including changes in exchange rates, a rebound in stock prices, and an upturn in the economic environment — seems to have the market headed in a more positive direction, Japan’s investment market still differs significantly from Europe’s and North America’s, particularly in areas such as the diversity of the composition of individual asset holdings, the investment environment for individual investors, and investment literacy.

FIG 2: Individual Financial Asset Breakdown: Japan-US Comparison
robo2

 

Growth in the Mutual Funds Market

Against this backdrop, the growth in funds allocated to publicly offered mutual funds has been particularly prominent. In May 2015, total assets under management topped 100 trillion yen for the first time, driven by an influx of money into open-ended mutual funds. As of the end of September 2015, this had reached 75 trillion yen, up 60% from 2012. This rise has been spurred not only by market value factors (a rise in asset prices) driven by increasing stock prices and a weaker yen, but also by trade-related factors — that is, new inflow of capital. Open-ended mutual funds turned positive in the first half of 2014, and in the second half of 2015, they returned to levels seen prior to the 2008 collapse of Lehman Brothers.

Two core factors are behind the growth in the mutual funds market: increases in channels and products. Channel growth principally signifies a diversification of intermediaries and intermediary types for bringing together mutual fund management firms and investors. The market was opened to banks in December 1998. After an eventful subsequent period, the formidable growth of the banking channel has put it nearly on par with the securities firm channel. As of the end of 2015, banks’ mutual fund sales, including private placements, had reached 64 trillion yen, accounting for 46% of the market; moreover, at the same time, the banking channel has similarly diversified its collective product lineup, including the following areas:

  • General mutual funds: Typical mutual fund sales through traditional channels
  • ETFs: Brokering analogous to listed securities brokering
  • Discretionary investment mutual funds (wrap account): Brokering for discretionary investment services
  • Dedicated DC (defined contribution pension) mutual funds: Dedicated sales for defined contributions to pensions

 

Wrap Accounts

Among these, the inflow of funds into discretionary investment mutual funds wrap accounts has been particularly prominent. Following 2012, the sector saw an influx of 1.4 trillion yen in the second half of 2014, and more than 1.2 trillion yen in the first half of 2015. This flood of funds has been fueled not only by the growth of products that meet consumer needs and more channels offering greater convenience, but also due to a shift in emphasis in sell side strategy from stressing sales commissions to one putting more weight on asset management balance and performance.

Until now, retail investors in Japan have exhibited a preference for major brands and the stability associated with them, resulting in investors becoming comfortable with an investment environment with a high degree of reliance on the sell side, namely the strategies of major financial groups. Further fueling the current surge in low-cost investing, which can expect high if unstable returns, will require raising investor financial literacy, providing novel products and services, and forging new sales channels that harness technology. There is vast “blue ocean” potential here for robo-advisory services to gain a foothold and thrive in the Japanese market.

 

Just published the new Celent reports:

Fintech and Robo Advisors: Booming in Japan

 

GLOBAL TRENDS IN WEALTH MANAGEMENT

The year 2016 proved a watershed for Fintech. It saw Fintech move from discussion and concept to implementation in the real world. Below are four key global trends in wealth management, the central theme of this post.

  • Fragmentation of retail services: There has been increasing diversification among purveyors of asset management services including major securities firms, discount brokers, and independent asset management companies. These include a rich variety of services and technologies that span online and self-service services as well as technology-based advisory services.
  • Emergence of next-generation investors: So-called Generation X individuals (those born between 1961 and 1981) are comfortable with technology and have adopted an investment style that accommodates schedules with steep time constraints. Meanwhile, millennials (people entering the workforce in 2000 or later, in the US, primarily those born from 1980 to 2000) are gradually becoming the core investment demographic, with more than 80 million individuals of the so-called digital native generation emerging as next-generation investors.
  • A shift to passive investing: There is a broad market shift afoot to index-driven investing from active asset management, which has peaked and is declining. Exchange traded funds (ETFs) are emerging as the next stage of passive investing.
  • Digitalization: Investors, brokers, and asset management companies are demanding applications with greater mobility and automated processes. Key issues here include investor-broker communication, social media, social trading, and crowdsourcing.

In addition, fragmentation is occurring in the asset management sectors of mature markets. Robo-advisor-driven services are gathering greater attention as a technologically advanced, low-cost means of automated asset management in a market that is increasingly crowded with players including traditional brokers (such as banks with domestic and international networks and comprehensive securities firms), independent investment advisory firms, and online securities companies.

 

Automated Advice

The definition of a robo-advisor can be slippery, differing by service provider and analyst. For the purposes of this report, Celent defines robo-advisors as new services from financial institutions that possess the following characteristics.

  • Key features seen in 2015: The three primary features are automation of onboarding and analysis, portfolio management, and reporting. Gradually, in addition to online assistance, human customer response initiatives, such as call centers, are beginning to appear. While in principle a non-face-to-face approach, automated initiatives are increasingly being expanded and coupled with manned support and full-line support a la those conducted by traditional operators.
  • Non-human advisors: Algorithms are used to support investment and portfolio-building based on the risk appetite of customers including tax optimization, all based on a customer profile developed from an online questionnaire.
  • Easy to understand: The process is streamlined to reduce customer anxiety and give customers peace of mind by using simple, typically three-stage processes that support investors from application stage to portfolio creation.
  • Small-value, low-cost options: Caters to small-value amounts in the range of $5,000 to $25,000 with investment (automated robo-advisor) fees in the neighborhood of 0.3%. These small-value, low-cost investments are customized services but automated and do not involve any manual (human) attention.

Robo-advisor services are evolving at a rapid clip, particularly at the cutting-edge of the industry, and much of the effort in this area is being concentrated in the three areas below.

  • Easy-to-use non-face-to-face channels: Eliminate the tradeoff between price and convenience, offering services that are both low in price and highly convenient.
  • Full service investment support from onboarding to reports: Automating services will enable greater processing efficiency that allows industry players to break through existing limits in their capacity to handle small value investments.
  • Hybrid operation support catering to diverse needs and levels of literacy: Online self-help services combined seamlessly with existing contact centers and face-to-face channels.

 

Segment Targeted by Robo-advisors

Initially, the demographic segment targeted by robo-advisors was a fragmented portion of the retail investor market, but this has changed. As noted above, in North America robo-advisor services are most embraced by traditional and active retail investors (individuals around age 50 located somewhere in the mass to low-mass affluent demographic).

However, this demographic is not static. With age, experience, and increases in investable assets, the need for investment advice rises. In addition, advancements in technology and investment literacy are blazing a trail to undeveloped market areas for robo-advisor services. Indeed, investor segments such as seniors and the affluent, which have until now been largely untouched by robo-advisor developments, can be expected to increasingly hop on the robo-advisory services bandwagon.

FIG 1: Automation of Advice Market Segmentation (US)

robo1

 

Just published a new Celent report:

 

ロボアドバイザー3.0の時代

Robo for blog 2014年12月に発行した弊社レポート「ロボアドバイザーをめぐるディスラプション」では、ロボアドバイザーのもたらす脅威に対し、伝統的なウェルスマネジメント会社がどう取り組んでいるのかを記載しました。 その後今日に至るまで、ロボアドバイザーの世界は大きな変化を遂げました。 ロボアドバイザーの黎明期(「ロボアドバイザー1.0」の時代)は、Charles SchwabやVanguardといった、多様なビジネスを手がけるアセットマネジメント会社の独自ロボアドバイザーの登場とともに終わりを告げ、「ロボアドバイザー2.0」の時代へと入りました。また最近では、より純粋なアセットマネジメント会社であるBlackRockやInvescoの参入も話題となったところです。 こういったアセットマネジメント会社の戦略的意図や将来性について、セレントは独自の分析を行い、先日発刊した最新レポートでその見解を示しました。本レポートでは、富裕層をターゲットとする証券会社など、伝統的な投資サービス提供企業への影響や示唆についても考察をし、さらには「ロボアドバイザー3.0」にも触れました。潤沢な資金を持つIT企業や、イノベーティブな心をもった既存金融機関による、より高機能で、より多くの投資家層に適用可能な「ロボアドバイザー3.0」の誕生に対し、アセットマネジメント会社の参入がどんな影響を及ぼすのかを分析しています。

From the Celent Innovation Forum, Tokyo

At Celent we have been focusing on financial services technology since our inception. Now of course all eyes are focused on fintech, which we might inversely call the use of technology to disrupt (traditional) financial services. Investment in fintech startups is significant, and the financial markets involved are huge – US$218 trillion annually in the capital markets alone. Celent recently held our latest fintech event in Tokyo to a full house, an indication of the intense interest in fintech in the Japanese market. The day consisted of two Celent presentations on fintech in the retail and institutional securities industries, followed by a discussion panel. Celent senior analyst John Dwyer presented on blockchain technology and its potential use across capital markets. Smart contracts powered by this technology could conceivably replace existing means of executing market transactions, and by enabling direct ownership might displace custodians and other intermediaries. As if this weren’t food for thought enough, governments including the US and UK are taking a serious look at putting the dollar and the pound on blockchains. Talk about fundamental disruption! Senior analyst Will Trout provided an analysis of how automated advice (robo advisory) is reshaping the wealth management industry. After the financial crisis many individuals quite naturally want to manage their assets themselves, but also require investment advice. Robo advisory, which perfectly suits the self-service, mobile lifestyle, is an answer to this dilemma. SoftBank, Nomura Asset Management and The Bank of Tokyo-Mitsubishi UFJ joined the panel discussion, bringing their respective views on cognitive computing; the potential of fintech to lure Japan’s famously reticent retail segment to participate in the markets; and how to mobilize a large organization for innovation. A fundamental question about fintech is who will ultimately derive value from these innovations: fintech startups; technology giants like Alibaba and Google; or the incumbent financial institutions? Due partly to the regulatory stance, in Japan more than in most markets financial institutions may be in the best position to end up in the winner’s box. Only time will tell, for Japan and for markets across the globe, but you can rely on Celent to continue to provide our clients with insights in the rapidly developing world of fintech.

Innovation and Legacy Modernization in Japan

As a regional unit, Celent Asia covers all of the industries under Celent’s purview: Banking, Insurance, and Securities & Investments. So it can be a bit of a challenge when we put on a Celent conference in Asia to find topics that resonate across all these verticals. Our recent (and sold out) Insight and Innovation Day in Tokyo hit the target by examining two interrelated themes of vital import to many financial firms today: strategies for innovation, and legacy renewal to support these strategies. The event was anchored by not one but two surveys Celent carried out this spring in Japan. A survey of 1,000+ Japanese consumers initiated by Celent’s CEO Craig Weber suggested that highly digital consumers are the best targets for innovative financial services. The challenge, as this survey revealed (and contrary to popular belief outside Japan), is that digitally savvy consumers are still just a tiny minority in Japan. This implies that financial institutions in Japan must not only innovate, but also educate and lead their customers into the digital financial future. The second survey, organized by Celent Senior Analyst Eiichiro Yanagawa, looked at legacy modernization trends at more than 60 banks, insurers and investment firms in Japan. Core system replacement is in full swing, with a majority of firms either planning or in the midst of their legacy transformation initiatives. Significantly, survey respondents indicated that the primary driver for replacing the core is to improve customer service and satisfaction. Which increasingly will require digital support for the customer experience. In a word, innovation. These surveys were modeled on the Celent reports Targeting Innovation: How Your Customers Might Respond and Tracking the Progress in Core Systems Replacement (Global Life and Global P&C editions). We’ll be publishing our analyses of the Japan surveys shortly. This is what our team does best and, I believe, uniquely: apply our global experience to the markets here in Asia to help firms deliver value.

On the cusp: regional integration in Asia

It’s 2015, the mid-point of the decade and a good time to start looking at major trends in Asian financial services over the next five to ten years. One of the major themes will be regional integration, which is another way of saying the development of cross-border markets. There are at least two important threads here: the ongoing internationalization of China’s currency, and the development of the ASEAN Economic Community (AEC) in Southeast Asia. RMB internalization is really about the loosening of China’s capital controls and its full-fledged integration into the world economy. And everyone seems to want a piece of this action, including near neighbors such as Singapore who are vying with Hong Kong to be the world’s financial gateway to China. The AEC is well on its way to becoming a reality in 2015, with far-reaching trade agreements designed to facilitate cross-border expansion of dozens of services industries, including financial sectors. While AEC is not grabbing global headlines the way China does, we see increasing interest in Southeast Asia among our FSI and technology vendor clients. From Celent’s point of view, both trends will open significant opportunities across financial services. In banking, common payments platforms and cross-border clearing. In capital markets, cross-border trading platforms for listed and even OTC products. In insurance, the continued development of regional markets. Financial institutions will be challenged to create new business models and technology strategies to extract the opportunities offered by regional integration. It’s the mid-point of the decade, and the beginning of something very big.

Quotes from the Innovation Roundtable

They said it couldn’t be done, but we held the latest installment in Celent’s series of innovation roundtables in Tokyo recently. Our innovation roundtables put the focus squarely on interactive discussion among the participants. This is a relatively untried model in Japan, where events typically take the form of conventional conferences with presentations. We’re glad we tried it though, because we got a very interesting line-up of firms. Participants included the whole spectrum: banks, capital markets firms, and insurers; Japanese and foreign firms; traditional mega-institutions and alternative new entrants. The discussion was lively; below are some quick notes I took of some of the more interesting comments made, to capture a bit of the flavor of the day. Why Innovate? “Innovation is not the goal, it is a method and a tactic.” “We need to innovate because it has become difficult to differentiate us from our competitors.” “In today’s environment, innovation is necessary if you want to stay profitable.” Paths to Innovation “Incremental innovation is an axymoron. You can’t innovate by increments; innovation requires a big bang change.” “It might be possible to rearrange existing elements to create something new.” “When to innovate? If our clients think a new service is interesting, we try and create it for them and see if it succeeds.” “Innovation needs to be business driven.” “Financial institutions need to have an innovation division; an incubation unit that accumulates ideas from throughout the company.” IT and Innovation “IT is not the impetus for innovation, but because IT inevitably evolves, that creates need for innovation.” “Legacy is a barrier: it is hard to throw things away.” Cultural Challenges “We need to justify ROI on any investment each fiscal year. It is hard to show this on an innovation project.” “If you think about it, financial institutions don’t even have R&D departments.” Quote of the Day “Changing company culture is really about changing oneself. I personally enjoy innovation and change. Innovative culture is about getting a bunch of people together who enjoy change.”