Nomura Asset Management’s strategic tie-up with 8 Securities is the most important deal for robo-advisory in Asia Pacific.
As announced on March 30, NAM will invest $25 million into 8’s two business entities, with a majority stake in Japan-based 8 Securities and a minority position in Hong Kong-based 8 Limited.
Here’s why this is a landmark transaction, and some new questions it raises.
A direct-to-consumer robo business can be viable.
No B2C in Asia has amassed anything like the assets under management or customer size of Betterment ($13 billion, 444,000 accounts) or Wealthfront ($10 billion, 244,000 accounts), the two American startups (from 2008) that inspired the likes of 8 Securities.
Mikaal Abdulla, CEO at 8 Limited, declined to state the business’s customer numbers or AUM. According to Statistica, Japan’s industry robo-advisory AUM reached $3.3 billion as of December, and 2016 statistics from the Japan Investment Advisors Association shows local competitors Money Design and WealthNavi boasting the largest robo businesses.
Beyond Japan, the B2C scene is modest: Singapore has several players, such as AutoWealth, Smartly and StashAway, as well as wealth manager Crossbridge’s Connect robo. But Singapore’s total robo AUM is $1.7 billion, Statistica reports.
Many robo players in Asia, such as Bambu and Quantifeed, are in the B2B world of providing digital services to banks or other financial institutions.
But 8 Securities, armed with Nomura cash, is going to be in a position to invest in its direct-to-consumer businesses in Japan and Hong Kong. Abdulla tells DigFin the top spending priority from the proceeds will be marketing, and his company now has a budget that no robo in Asia has yet enjoyed. NAM wouldn’t be doing this if it didn’t see the viability of B2C.
B2C can’t be viable if you’re independent.
Just because the NAM/8 deal validates direct-to-consumer doesn’t mean anyone can succeed. In fact, it probably means B2Cs will never scale if they remain independent.
“We took for granted how hard it was to be a startup,” Abdulla told DigFin. Part of the appeal of integrating into NAM was the ability to use the Nomura brand name, particularly in Japan.
Instead, look for traditional asset managers from the West to gradually introduce their robo affiliates to the region: Aberdeen, BlackRock, Invesco and Vanguard are among those that have acquired robo startups, while Hong Kong financial planner Convoy Global Holdings has a stake in U.K. robo Nutmeg.
In Japan, NAM will integrate 8 Securities into its retail operations, which has the potential to give 8 Securities scale. NAM claims a 45% market share of locally listed ETFs and index funds, a roughly $200 billion industry. Its product set will now be open to 8 Securities in Japan, letting it offer a diverse set of products.
8 Securities will also focus on growing the B2C business in Hong Kong (8 Securities also runs a trading app in Hong Kong called TradeFlix, but that appears to be outside the scope of product sharing). This market is tougher going because there’s no competition, Abdulla says.
“There’s not much going on,” he said. “We need banks to enter and educate the market.”
Can traditional asset managers go direct in Asia?
NAM intends to use its stake in 8 Limited, the Hong Kong entity, to develop a retail business in Asian markets beyond Japan, Abdulla says. NAM has offices across the region, but for institutional and wholesale channels.
It wants to use 8 for tapping millennials, both abroad and in Japan, where NAM’s average customer is 60 to 80 years old. The average age of an investor in 8 Securities is 32 years, says Abdulla.
In Japan, the robo advisory market is vibrant, but until now, no traditional asset managers were involved. There are a number of independent robo players (with their own partnerships, including WealthNavi’s tie-up with online broker SBI Securities) as well as banks proffering a robo element. NAM is the first asset manager to join the fray.
Do B2B robos need to care?
Yes, because several robo advisors straddle both the B2C and the B2B worlds, including 8 Limited. Abdulla says another priorty for the NAM capital injection is to double 8’s webdev team on its nascent B2B side.
Whereas in Japan and Hong Kong, 8 Securities will remain focused on B2C, it intends to roll out front-end services to third parties in the rest of the region.
Should competitors in other Asia markets be worried? After all, 8 Limited will be a newcomer to dealing with banks and other clients. However, it will have something that pure-play B2Bs: real-life experience of onboarding consumers, designing products for them, and handling their problems.
Abdulla says 8 Securities is already working with banks, providing UX and integration services to let them sell their existing set of investment products. He expects revenues to be balanced between consumer and B2B by spring 2019.
How will governance work between a startup and a giant, traditional firm?
NAM is investing $15 million of its $25 million in the Japan business, where it will take majority control (at an undisclosed valuation). There will be a five-person board at 8 Securities. Two seats are reserved for Abdulla and Nobufumi Iimori, the company’s Japan president, and three for NAM executives, including Kenji Kitagawa, executive vice president. 8 Securities does not have representation on NAM or Nomura Securities’ board.
The first internal project will be to develop a new back-office system, to be provided by a domestic vendor. App updates and product releases will still be developed by the 8 Securities team in Hong Kong, but will have to plug into the Nomura-led back office, Iimori says.
Iimori will continue to serve as president, but Nomura will control the Japanese business, so it will be up to them to ensure they don’t stifle the company’s innovation or nimbleness. But NAM has only a minority stake in 8 Limited, the headquarters in Hong Kong, which continues to oversee product development.
Will 8 Securities get access to Line?
Two days before NAM announced its deal with 8 Securities, it unveiled an agreement with Line Corporation to explore a business alliance, with the aim of providing securities services. A joint venture, with Nomura owning 49% and Line 51%, to be set up in May. The business would enable Line’s 73 million active users in Japan to access financial services over its messaging app.
Line also has a substantial presence in some Southeast Asian markets, notably Thailand, although the announcement didn’t mention this.
For now, NAM’s 8 Securities deal appears to have been done in isolation. Executives say there is no role for 8 Securities in the proposed Line Securities J.V.; its job is to focus on developing investment products.
But that might change, given 8 Securities is a wholly mobile-app business: its focus would seem to fit. This opens the prospect of the first robo startup getting access to a huge mobile ecosystem. China’s internet giants have already plowed this path, but from within, such as how Tianhong Asset Management distributed its Yuebao money-market fund across Alibaba’s ecommerce network.
“We’re not involved in that,” Abdulla said, “but naturally we’d like to be.”