Ebook: Financial advice with robo advisors (English)

ROBO ADVISORS ENTER THE SCENE

FINANCIAL

MANAGEMENT 01

04

02

Startups to conquer Wall Street INTERVIEW

Jos茅 Diego Alarc贸n (Serfiex)

FINTECH SERIE BY

05

Could we have robots instead financial advisor?

INF0GRAPHIC

How they work robo-advisors?

innovation edge

03

How should you manage your fortune?

01

Startups to conquer Wall Street A walkthrough of the fintech trends looking to revolutionize financial advice ( ).

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They are young and seek to change the traditional model of the financial world.

Storming Wall Street. A dozen startups are looking to compete with long-standing companies or fill the void of the traditional models. A pioneer in the United States, Wealthfront has moved more than $2 billion in managed assets in only three years, with an average shareholding per customer of about $115,000.

Its competitor, Betterment, nears $1.5 billion in assets.

These figures are a far cry from the large banks – Bank of America is close to $1 trillion – although they are attractive to young people ( ). Dubbed the "Henrys" (high earning, not rich yet) by Goldman Sachs,

these customers do not plan to go to a bank branch in their lives and want to move their money with just a click. The study by Accenture and Partnership Fund for New York City highlights that investment in Financial technology has tripled from 2013 to 2014.

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Fintech companies are characterized by removing or replacing banks and financial institutions as intermediaries, promoting cooperation or establishing new schemes for more accessible commissions.

Fintech trends that entice young customers

Digital Crowfunding: Hybrid between Blockchain technology – database that records transactions with cryptocurrencies and, as the BBVA Blockchain technology: The ultimate Disruption in The Financial System report explains, it removes the need for intermediaries and significantly reduces costs for banks, – and crowdfunding.

Companies are making offers of digital stocks. The US company Ethereum stands out as it allows developers to create distributed applications, define custom currencies, contracts and even intelligent

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crowdfunding platforms (collective microfinance). To be able to run programs in the network, you need to have a certain amount of Ether, the platform's "currency". Another platform is the European Crowdcube , which allows you to create a "portfolio of startups" with a minimum value of ten euros, and then keep track of what happens to each of them.

As explained on its website, "many investors contribute small or large amounts of money to entrepreneurs and businessmen to carry out their project. In exchange, investors receive shares in the company and become its partners accompanying the company in its future growth".

Payment services with low-cost investments The star of services-based investment is Robinhood, the broker backed by Silicon Valley investors, including Google.

The broker with no commissions or spreads aims to democratize trading. It is very easy to use and you don't need to have a minimum capital to open an account. Instead of charging fees, Robin Hood charges interest on the use of margins and charges for the use of "leveraging" (increasing a company's level of debt).

Robinhood allows developers to create trading applications such as graphics, signals or

fundamental analysis. Payment products based on services to attract the traders who are most experienced with Robin Hood.

Robo advisor (

)

As indicated above, Wealthfront and Betterment stand out in these types of services that create automated low-cost portfolios based on our profile, by eliminating the commissions of a managed portfolio. A model that prevails in North America and is coming to Europe. In 2014, about 73,000 customers contracted such services in the United States.

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Some trends that confirm that the growth of startups continues to increase: In 2014 the assets of startups dedicated to consulting in the US reached $5 billion. And forecasts suggest that this figure will have tripled to exceed $15 billion by the end of this year.

02 Could we have robots instead of financial advisors?

The rise of so-called robo-advisors is changing the traditional financial management landscape in the US and they are slowly being incorporated in Europe. ( )

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Could a robot manage my money? Without a financial advisor acting as an intermediary? Little by little socalled robo-advisors are changing the way money is being moved in the US and are beginning to reach Europe. This model means customers do not need financial advisors. They just have to turn on their computer and fill out a questionnaire. Customers report their risk tolerance, goals and investment and their money is managed automatically ( ).

A model that, according to the consultant from GVC Gaesco Albert Enguix, has experienced "spectacular

growth of around 10 to 15% increase each year in the US. Around 73,000 customers have contracted these services with a volume of 14 billion euros in assets under management at the end of 2014. This figure is expected to rise further." Enguix explains that the model guarantees "absolute return investments.

It sets controlling return and risks as its goals". Through robo-advisors investment portfolios of customers who move amounts of between $50,000 to $100,000 can be controlled." The money is invested in EFTs (ExchangeTraded Funds) and volatility is controlled; the goal is absolute return. This is about making portfolios under the famous

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VVMSQ - volatility-valuemomentum-size and quality of the composition of the holding", explains Enguix.

The advisor stressed that the process is very simple, "You access the platform from your computer in the same way as if you wanted to make a transfer. Analysts, statisticians and economists have created financial strategy models beforehand using thousands of pieces of data. Algorithms and statistics to design programs that manage your money."

What are the risks? "The same as in the traditional market.

Machines cannot foresee a financial crash. They cannot guess the psychological component that can change the entire financial picture of a market in minutes just as advisors are unable to do so.

It's not an exact science," Enguix explained who added that with this type of platform companies "save costs by not having to hire financial advisors".

Customer profile (

)

The profile of customers who opt for this technology to move their money "is around 35 years old and with a high purchasing power," Enguix explained. The millennial generation uses this model the most. The end result is similar to what a traditional consultant would do for them but at a lower cost.

The US consulting firm AT Kearney said that "these services will become a trend over a period of three to five years," according to this article from Bloomberg. In 2020, robo-advisors will control 5.6% of investment assets in the US. The figure is currently around 0.5%.

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According to Adam Nash, CEO of Wealthfront, a firm that manages more than $2.4 billion in assets, "rather than the investment world being a sprint, it is like a marathon and robots don't need to sleep. They can make their calculations and movements while analyzing all markets whatever the time."

A new model that also confronts "the collapse of commission prices", which is stressed from Wealthfront.

The firm is convinced that future generations and technology will revolutionize the financial market: "The preferences of younger consumers have a huge impact on financial services and companies will have to

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respond quickly to new trends.�

Arrival in Europe In Europe, this model is being incorporated extremely slowly. "We are lagging behind the US, which is 10 years ahead on this type of service," says Enguix. In France, Germany and Switzerland some companies such as the German firm Vaamo or the French firm Advize have launched in this market. "Although there is still a long way to go to reach customers en mass in Spain and Europe. Many professionals in the sector have never even heard of robo-advisors. There is a long road ahead," says the consultant from Gaesco.

03 How should you manage your fortune?

Personalized advice is not going to disappear, but the competition from new models is ambitious and greatly reduces the prices ( ).

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Two executives are having lunch after a conference on asset management. They are arguing over the recent emergence of small digital capital management companies that focus primarily on retail investors in the emerging "Business-toConsumer" (B2C) market, which refers to the strategy that commercial enterprises are following to go directly to the end customer or consumer. One of the executives is not worried

about these new businesses at all and does not see them as a threat; he argues that investors always prefer direct person-to-person relationships with their financial advisors.

The second strongly disagrees and notes that all traditional companies must understand why these new companies are emerging, what makes them attractive to customers, and what capabilities must be developed in response to this "threat". This hypothetical

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scenario relating the Deloitte study 'Digital disruption in Wealth Management' illustrates the real debate taking place in the wealth management industry on the relevance of these new digital companies and their potential to successfully break into the market. Traditional companies are trying to decide whether it is worth investing time, money and effort to better understand these emerging businesses.

The story of the consultant is fictional, but the discussion it narrates is increasingly real. At the recent Finance2.0 conference, which was held in Zurich and brings together technology companies specialized in finance, it was emphasized that automated solutions are increasingly attracting customers. In Switzerland, a landmark for traditional banking, a startup such as True Wealth and the website Investomach.ch are committed to automating their advisory models with roboadvisors. The question buzzing round the conference in Zurich was whether customers would pay for advice, as if they use automated methods, costs are minimal – in the case of robo-

advisors fees are between 30 and 70 bps (0.3% to 0.7%) per year–. Felix Niederer, founder of True Wealth, emphasized that the costs could decrease even more.

And that it's moving toward a model where fortune is managed completely free, although the most sophisticated payment services will remain.

Returning to the Deloitte study, startups are definitely a clear indicator of what's to come. The consultant examined more than 50 new digital wealth management companies in the B2C market; most were founded in the last ten years. The study highlights that these growth companies

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attract retail investors in three ways: by helping them to connect, advising on financial matters; and helping them to invest ( ).

The keys for the consultant are ( ):

Connecting Adding investor accounts: Consumers increasingly have the need to connect different accounts – often accounts from multiple providers – in order to create a holistic picture of their wealth and more easily manage their finances. In addition, investors want to be connected together to learn from their peers, and to connect with specialists and advisors that meet their needs. The new companies are providing integration of all these accounts, beyond traditional boundaries.

Retail investors are increasingly frustrated by having to reconcile multiple accounts through numerous banks, placements or, for example, retirement accounts. They need to have an accurate real-time view and, if possible, an aggregate of financial assets, liabilities and net worth across multiple accounts and suppliers.

One of the pioneers in this market was Mint.com, a free online personal financing service that allows users to see all their balances and transactions in one place.

Launched in 2007, it currently has over one million users.

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Social networks: Since the financial crisis, retail investors have become increasingly skeptical about the advice they receive, but have also realized that they need this advice more than ever.

Investors want to know what their peers think and how they invest, not only learn from investment specialists. They also value interactions with their peers beyond just meeting their immediate investment needs. Forums that began as chat groups and online discussions have rapidly evolved into fully-blown social platforms that allow an open exchange of ideas and the ability to form groups.

People & Pick, founded by Zacks Investment Research, is an example of a company that has created a social platform and online community for users to interact with each other. The platform allows users to evaluate any piece of stock as a purchase/sale.

Users can share ideas with other users, and track their stocks.

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Advising: Financial planning: New asset management companies have entered this market and successfully attracted financial planning customers by creating digital showcases that have a low learning curve. These companies can form a complete picture of a customer's financial situation by taking into account their personal financial goals, risk tolerance, diversification, and/or trading strategies. An example is Personal Capital, offering a trading platform with multiple choices, from investment monitoring and

analysis to financial services (for investors with more than $100,000 in assets).

Accounts aggregation allows users to control their finances as part of a single integrated control panel that shows the asset allocation, the potential risks of the holding, and how various product commissions could affect their goals.

Investing: In the current environment of low-yield investment, investors are constantly looking for better risk/return opportunities. In response to this new companies have

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emerged that provide customers with access to sophisticated trading strategies by copying the business strategies of professional management services (PMS) and thus allowing these companies to offer private investors services to which historically only certain institutions or large investors had access.

An example of a startup that offers non-traditional placements is Covestor, which allows its members to access, view and study the holdings of professional management services.

Going back to Switzerland, a survey by Axa IM notes that 90% of the Swiss still prefer personal advice to move their money. It seems that things are starting to change in the rest of the planet.

04/INTERVIEW “Robo-advisors democratize financial advice” José Diego Alarcón is a partner of the Spanish SME Serfiex, which specializes in Financial Risk Management software, consulting and solutions.

Along with a team of financial analysts, econometricians and IT specialists it has developed a robo advisor with which the company aims to approach small investors ( ).

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What is the difference between a robo advisor and a financial advisor?

One difference is that, thanks to the Internet, a robo advisor can advise many people while an individual obviously does not have the same capacity.

What does a robo-advisor contribute? ( ) Our company has fundamentally developed a new approach to investing.

The robo advisor is the tool that automates this methodology. The important thing is the methodology behind the robo advisor. It must be very detailed, very objective, nothing is left to intuition, it is a mathematical procedure. Our robo-advisor is characterized by both things.

On the one hand, it builds an initial portfolio with potential losses. The second feature, which is the most important or most innovative, is it reconstructs the portfolio periodically and in an automated way, i.e. it rebalances it. Each month it compares the data, analyzes the expected profitability of the initial portfolio with the real profitability of the portfolio itself and based on that difference and the passage of time it recomposes and optimizes that portfolio. Without asking the customer for any new data.

Is it better or worse than an advisor?

It's no better or worse.

Everything is simplified with the robo-advisor but it is no

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better or worse. As it is on the Internet, it can reach many people and democratizes such advisory services. It may be cheaper but the important thing is the methodology behind it.

What logic have you followed?

The process that we have followed after many years in this field has been to synthesize it as far as possible.

We seek to advise a person with the smallest amount of information possible. We create a flow chart and define it following a methodology.

Then the robo-advisor is the tool that implements it in a channel such as the Internet.

What minimum information do you ask the customer?

The customer is only asked to define his/her risk profile. There are two ways to do so. One, which is longer, is done with a questionnaire where the customer has to avoid getting into a loop as many times he/she thinks one thing, writes another and then his/her portfolio is not what he/she wants, has or can be. Another way, which is what we use, is more direct: we ask what potential losses the customer is uncomfortable with using a certain probability. The customer has his/her risk profile, they say for example they are uncomfortable with a 3% loss per year and we build a portfolio from that information.

What customers are you looking for? ( ) We currently have large customers, pension plans, SICAVs, etc. The robo-advisor aims to attract customers with lower equity and who come through the Internet.

Is there interest in this service?

In Spain a bank has been interested in our software development, specifically the calculation engine part. Large Spanish investors have also approached us to ask about the methodology and we are going to present it in Mexico shortly. It's what we're seeing right now.

Do you have small customers?

No, currently only large customers.

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What do you expect in the future?

In a few years I think all the major banks will have a roboadvisor for their young customers, who are accustomed to the Internet and want to make up their portfolio.

People with low net worth that makes no sense for them to go to private banks. I trust that these large banks will contract the software, the calculation engine and provide a service to customers with low net worth, as is already happening in the United States.

happening in the United States for example is that the children of those millionaires are approaching robo-advisors and obtaining higher returns. That's causing their parents to become interested in the people who have designed this robo-advisor; they want to know the methodology.

Are wealthy customers not interested in that model?

Usually these people are older and they do not trust a roboadvisor. It's an automatic process and they prefer to speak with people. What's

Are there any disadvantages? A major danger is that it's not the same choosing between two people than between two roboadvisors. You can talk to people, ask them questions, you may have friends who

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have already placed their trust in those advisors or you follow your intuition; whereas if you go directly to a robo-advisor and you're not an expert in finance, you don't know the difference between a good and a bad one. You have no judgment and you have to wait quite a while to see the results and find out whether you were wrong or not. You may find that the algorithms are good but the products they are selling are very bad. You can have a good cook but if the raw material is bad, the result will be terrible.

05/INFOGRAPHIC How they work Robo advisors?

These are the automatic machines that offer financial advice and portfolio management.

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How they work?

Assess a person's income and find out: how much they can afford, how much they need to save, study the best tax structure and decide what investments should be made to realize those objectives. Intelligent algorithms can now do that.

Investment?

Risk?

Goal?

The answers are analyzed and the algorithms are processed, thus designing a tailored investment plan.

Users can adjust their goal and risk tolerance as they prefer.

Thanks to automation, an automated robot can charge lower fees.

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Time?

How things will change Less volatile markets Robots make investment decisions based on algorithms and not on their emotions, so it is more likely that they will buy stocks that will last.

More rigorous markets Robots process a large amount of information, design a preset rule and start doing the numbers non-stop until they find the right candidates for a portfolio.

Fewer transactions Programmed to accumulate wealth over a decade or two, they simply buy a set amount of stocks a year and ignore short-term fluctuations.

More global markets Robots manage portfolios and don't care whether a company is European, American or Asian, they just look for returns.

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The future in figures Active advisor robots in the United States (in trillions of dollars) 2020

-1.1

2019

2017 2016

0.7

0.8

2018

0.4

0.5 0.4

0.1

-1.1

(1) Uninvested assets include liquid funds (cash and cash-equivalent deposits).

-2.2

1.5

0.9

(2) Invested funds include credit market instruments, corporate stocks and mutual funds.

+68%

0.5

(0.2/0.0) 0.3

Switch from uninvested assets (1)

Switch from invested assets (2)

Key factors for choosing an advisor robot Price (low cost and transparency) is the crucial element of the advisor robot's offer: Early adopters

36

25

Second adoptersr

35

24

24

15

Price

Investment

Simplicity

Servicios

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23

16

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