But what about the most innovative applications of data? Consumer banks with mass-affluent investors are now mining user data to construct portfolios, to seek higher investment returns, to enhance product development, and to personalize offerings.
Private banks catering to ultra high-net-worth individuals and families are dipping a toe in these waters, but in different ways, and with caveats.
“A.I. and big data could be the differentiator in product innovation,” said Kam Shing Kwang, head of private banking in Asia at J.P. Morgan. Like many private banks, her firm has other divisions: investment banking, capital markets, asset management, prime brokerage. “We can leverage the data we already have,” she said.
Differences over data
This makes sense for banks serving tycoons at the helm of extensive businesses.
To a degree, such data aggregation can also play a role at monoline private banks such as Pictet Wealth Management, which is a pure-play asset manager for wealthy clients. “Of course we analyze how clients use our tools, so we can refine the information we send to them,” said Claude Haberer, CEO for Asia. “It’s important to fine-tune our offering.”
However, the diversity of data and what it can do means that banks are taking different approaches.
“We’re not likely to use A.I. for a robo advisor,” said the Asia CEO for ultra-HNW at a U.S. bank. “But using machine learning to understand trends in terms of what clients want, and to data mine for prospecting new clients? That’s at an early phase.”
Serving the client
To derive insights from client data first means a bank needs a killer app that clients like to use. This has to be more than just digitizing paper statements; it has to help clients make decisions. And then the bank has to find a way to plug this into its legacy I.T., so it can pull client data from various mainframes traditionally dedicated to product lines, not customer profiles.
One bank that has taken steps down this path is Credit Suisse, which has rolled out its “Digital Private Bank”. The firm’s head of private banking for Asia Pacific, Francois Monnet, says putting big-data analytics to work will require bigger changes in the bank’s operating model, however.
“We need to invest in context management,” he said, “and mining the user activity online.” For example, can banks provide their relationship managers with video and other storytelling tools, to make sense of the data? That’s where A.I. and client data comes in.
“The last mile of optimization is not a new tool, but a new way to service the client,” Monnet said.
One Hong Kong company providing A.I. tools to private banks is MioTech. Jason Tu, its co-founder and CEO, says banks are using data to provide RMs with better ways to work with clients – who themselves are better informed thanks to the internet.
“The clients know more than the R.M.s now,” Tu said. “It’s harder for RMs to make the case for a particular investment idea. So they need a data story and they need visualization tools.”
The clients know more than the R.M.s nowJason Tu, MioTech
Companies like MioTech crawl the web for data, including traditional financial feeds, plus trends in news and social media, and then other online sources and apps, which can get very specific. Then they map that to their proprietary “knowledge graphs” that connect events or topics with specific companies or people.
It’s the same work a human analyst would do, but instead of taking weeks to collate information, the A.I. can do it in less than an hour.
Enter the robo-advisor
Another area that is creeping into private banks is robo advice. Few banks are actually looking to apply this to their ultra HNW clients. But Goldman Sachs and J.P. Morgan are using robo in the U.S. for their lower-tier HNW clients, in the $2 million to $10 million range of assets.
In Asia, these firms are more focused on just the ultra client, usually $25 million up to billions of assets. Their trading desks are already using A.I., however, both for quant strategies and for other alpha-generating investment strategies. And private bankers in Asia are looking at robo, if not yet deploying it.
Robo’s role is less obvious, but it will play a partKam Shing Kwang, J.P. Morgan
Ricardo Wenzel, director at KPMG, a consultancy, says private banks are exploring robo-advisory portfolio management tools and digital channels.
“An important consideration here is client-management efficiencies, without compromising client experience,” he said. Lower-value clients require lower-touch servicing as investments are mostly around vanilla, listed products. This is easier to automate.
The value of robo for ultra-wealthy clients is more about allowing them to self-direct trades if they prefer to do so.
The future value of the R.M.
But robo will not replace R.M.s (although they are likely to resist it). There is no way a computer can structure a complex asset allocation, advise on restructuring a company, or set up a philanthropic foundation. The same probably goes for structured products and other complex products. And in times of financial crisis, rich people will probably demand human assurances.
And then there’s the biggest obstacle of all: how to integrate a robo-advisor into a bank’s legacy systems.
But for daily transactions and investment ideas? That’s already easy to automate.
“Robo’s role is less obvious for ultra high-net-worth clients,” said Kwang. “But it will play a part.”
Private banks are not yet jumping into big-data analytics or robo. But the fact that they’re studying these things, and starting to talk about them, is already a change.
There will be limits to what a private bank can or should do with data. But how exceptional is the private-banking model? And does this mean they will remain aloof from the big-data and A.I. trends now engulfing other parts of financial services?
First, bankers say, they serve relatively few clients, and therefore have few data points they could use.
DigFin does not believe this will remain the case. The customers may be few, but they own or influence big companies, which have extensive financial activities. Big data will play a huge role across these touchpoints. And those private banks that are able to aggregate this will have an even bigger edge.
The second argument against big data is that the most important client information is private. It must be given in person, often for compliance reasons, and is therefore off the table. That may be true, but DigFin’s view is there are now so many new sources of data out there – on people, on companies, on things that impact their portfolios – that it is naïve to think that this won’t impact the ultra rich.
In fact, the opposite is more likely: the ultra rich have lots of assets in lots of places. The balance of data that can be found online will become far greater than information gaps due to family secrets or complexities of estates.
The third argument against rushing into A.I. is that private banks offer bespoke, sophisticated service, so there’s no need (or desire) to use tech to personalize offerings, as happens in the mass consumer space.
DigFin believes this is true, but also notes that the financial products and the investment ideas on offer are pretty commoditized, even for ultras.
What remains bespoke are things like estate and tax planning, generation management, legal advice, and softer things like building art collections or endowing a philanthropy. These are true differentiators. But investments? The only sustainable edge there is the delivery of content – the U.X., the data, the algos – not the content itself. (Sorry, active fund managers.)
The final hedge against private banks’ using A.I. and big data is trust. Private banking is above all a trust business. Technology is a tool that can deliver efficiencies, convenience and better service. How it gets deployed, especially with regard to treating customer data, will matter most of all.
Lu Global reverses the Lufax story
Lufax began as a P2P and became a wealth manager – in Singapore, it’s adding secondary trading.
Lu Global, a wealth-management fintech in Singapore, has just launched a marketplace to enable its customers to trade the same products they bought on the company’s website.
Kit Wong, CEO at Lu Global, says the company has developed its consumer-facing business and is now selling both funds and structured products.
But it believes some clients want to get out of these positions, particularly structured notes. Instead of having to hold them to maturity, they can now see if other users in the Lu system are willing to buy them (at a discount).
Wong says the firm, which has a capital markets services (CMS) license in Singapore, serves about 300,000 customers. Some are resident in Singapore (where the business can only market to accredited investors), others are from outside, who can be either professional investors or retail.
The biggest segment of investors are mainland Chinese, who already know the Lufax brand, but there are also a lot of Taiwanese and Hongkongers, and a growing number of Southeast Asian users, Wong says.
The electronic marketplace has just gone live, so it has no volumes to speak of. Lu Global does not take positions in this secondary trading environment – it merely matches its existing customer base in case users want to make trades among themselves.
Lu Global declined to state its assets under management. Wong says the largest number of products are mutual funds, issued by the likes of BlackRock and Pimco – but the biggest volumes are in structured products.
He believes this may have to do with economic and political uncertainty in the region, which is spurring demand for products with known outcomes and terms.
But such products only pay out upon maturity – and the same destabilizing factors may be leading more investors to want to cash out early, even if they do so at a loss. But providing a marketplace not only gives them access to liquidity (assuming there’s a buyer on the other side) but also lets them sell at a better rate.
The launch of this product is a strange parallel to parent Lufax’s journey. Shanghai-based Lufax began in 2011 as a peer-to-peer marketplace for transactions, financing, and investment management. It exited the transactions and financing aspects to focus just on wealth management.
Lu Global built itself first as a marketplace for wealth products – but now it’s expanding into secondary trading, creating a marketplace for customers to exchange financial products before they reach maturity among themselves – a different kind of P2P than lending, which mainland authorities are clamping down on.
Half of Invesco’s China sales now via digital
But as the PRC joint venture learns how to distribute digitally, Invesco remains unsure of robo’s role in Asia.
This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. See also strategies from AllianceBernstein and BEA Union Investments. Go here for more insights into digital asset and wealth management.
Invesco is using its joint venture in mainland China, Invesco Great Wall, to figure out digital distribution.
The business now manages about $50 billion of assets, of which about 80% is retail, making it the fourth-largest Sino-foreign fund house in China. Over the past two years, half of retail inflows have come from new digital channels, as opposed to the traditional reliance upon banks, says Andrew Lo, senior managing director and Asia-Pacific CEO of Invesco in Hong Kong.
This is in keeping with a broader trend in the global mutual funds industry, which is shifting from one based on products to one focused more on investment solutions. “There’s an emphasis on designing outcomes for clients, such as through asset allocation or structuring,” to combine types of risk and asset classes.
That’s driven both by client demand as well as market volatility and challenges to active fund houses to deliver alpha (outperformance) on a net-free basis, compared to ultra-affordable passive investments tracking a benchmark.
That’s been an emerging story for the funds industry over the past decade. But on top of that is a new wrinkle: the ability to use technology to speed up operations and to reach more people.
“Technology is now changing the distribution landscape,” Lo said. “In China, it’s having quite an impact on reaching retail investors.”
For now this has been a story unique to mainland China, where existing bank channels (which dominate funds distribution in most Asian markets) are not well developed, and where regulation favors digital disrupters like Ant Financial.
The power of digital was evident in Ant’s success with money-market funds (under an affiliated fund house, Tianhong Asset Management), but it has now extended to equity and quant products onshore – products that Invesco’s J.V. now sells through fintech channels, including Ant, East Money Information, JD.com (Jingdong) and Snowball Finance (Xueqiu).
This has not been straightforward, however. Fund management companies are designed to cater to bank distributors, and are built on old-fashioned tech.
“We learned how to do digital marketing,” Lo said. “It’s very different to traditional distribution. It’s iterative, it changes fast, and you have to listen to customer feedback.” Partnering with digital channels has also required a different sense of product design, and to rebuild the company’s operational process to support round-the-clock digital sales and support.
Lo says the experience will be increasingly relevant as other markets digitalize, although they may need to be tweaked, depending on local regulation, client behavior and distributor demands. “Some things we can learn and apply elsewhere as the world goes digital,” Lo said.
The onshore funds market manages about Rmb14 trillion (almost $2 trillion) in total assets among 135 asset managers authorized to sell to retail clients, of which are 44 Sino-foreign JVs.
But most of these JVs are run by the local partner, with foreign shareholders having less influence. They are limited to stakes no greater than 49%, and local partners are often banks or other powerful institutions. One analyst told DigFin that local fund houses are not particularly bold when it comes to digital channels; and even if they are, the lessons don’t flow to the foreign partner.
But Invesco Great Wall’s case is different. Both Invesco and Great Wall Securities own 49%, with two other shareholders holding another 1% each. Given that Great Wall Securities has its own in-house funds business, it has been willing to let Invesco drive the business. (Beijing has recently permitted J.P. Morgan Asset Management to take a 51% stake in its funds J.V.) Invesco Great Wall is also among the oldest funds JVs in China. It is today led by Shenzhen-based CEO Ken Kang Le.
In China, Invesco is leading the way in digital opportunities. Elsewhere it seems to be running with the rest of the herd. In the U.S. and the U.K., it has made digital acquisitions: Jemstep, a B2B robo-advisor that services U.S. bank distributors, and Inteliflo, a British platform to support financial advisors.
“We haven’t found the right use case in Asia,” Lo said. Onboarding a digital B2B (of B2B2C) platform needs scale, but Asia is fragmented, with each market requiring its own business and compliance needs.
“Digital transformation is still evolving,” Lo said. “My guess is it can be like it is in China, where it’s a real thing that has become a major part of the industry.” But what that looks like elsewhere remains hard to know – or at least hard for justifying a business case.
New China distribution not just for money-market funds
Investors on digital platforms are beginning to look to other products, says BEA Union’s Rex Lo.
This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. We will also provide strategies from Invesco and AllianceBernstein. Go here for more insights into digital asset and wealth management.
Retail investors in China accessing funds via digital platforms are beginning to diversify away from money-market funds. That is creating opportunities to push ETFs and active funds, says Rex Lo, managing director for business development at BEA Union Investments.
China’s retail funds industry is mainly about money-market funds (MMFs). The total industry size is Rmb13.2 trillion, or $1.9 trillion, of which MMFs account for 57%, or Rmb7.7 trillion.
Among MMFs, by far the biggest player is Tianhong Asset Management, whose product, Alibaba’s Yuebao fund, is Rmb1.2 trillion in size, or $162 billion – the largest money-market fund in the world.
It’s no surprise then that digital distribution platforms in China mainly cater to MMFs. Lo says until recently, MMFs accounted for about 80% of all funds sold on digital platforms. This is propelled businesses such as Tianhong (which of course is sold via Ant Financial) and a few bank-affiliated fund houses with big MMF products, such as CCB Principal and ICBC Credit Suisse.
But it has made digital distribution of limited interest for fund houses looking to sell equity funds or other actively managed products; for them, traditional distribution via banks has remained the only viable channel.
MMFs: less big
Lo thinks this is changing, however.
The popularity of MMFs lies mainly in the fact that they offered high returns combined with guarantees, real or assumed by investors – assumptions the government has been reluctant to upset.
Yuebao and other MMFs usually invest in non-standardized wealth-management products (themselves supposedly “guaranteed”, with investors assuming a government backstop), that returned 5% to 8% to those managers. They in turn offered investors 5%, an equity-like return on what’s meant to be an ultra-safe and liquid asset class.
Over the past few years, however, Chinese banking and securities regulators have been trying to shift the funds industry onto a footing that respects risk and return, and clamping down on the supply of shadow-banking instruments available to portfolio managers.
“Today MMFs return only a little over 2%, while A shares are doing well,” Lo said. “As demand for money market funds declines, turnover has fallen, so these distributors are now promoting index or active funds.”
In recent months, Lo says, MMFs account for only 70% of sales on digital channels, with ETFs now gaining ground.
Accessing the mainland market
BEA Union is able to sell its Hong Kong-domiciled Asia fixed-income fund to Chinese retail investors through a scheme called MRF, Mutual Recognition of Funds.
This program, which began in 2015, allows fund managers on either side of the border to sell eligible products through a master-agent arrangement. Regulators in mainland China have been slow to approve such funds, however, and there are only seven Hong Kong products available via MRF, including BEA Union’s (and 48 mainland funds available for sale in Hong Kong).
Lo is hoping to take advantage of the shifting fortunes among asset classes to use digital channels to push BEA Union’s bond fund.
Platforms such as Ant Financial are requesting the fund house for more material around equities and active funds management. It’s a big, long-term commitment to investor education – especially for foreign fund managers whose ranking is low on Ant Financial and other digital platforms.
“Domestic investors want familiarity,” Lo acknowledged. “But we continue marketing because we want to be on the platform. Today it’s more for exposure than real [inflows], and ticket sizes are as small as Rmb100 ($14). But if you have 100,000 investors, that becomes a lot of money.”
The intention of this ongoing marketing is to become sufficiently well known among Ant’s users to take advantage when retail investors want to invest overseas.
New ways of doing business
Adding platforms such as Ant to traditional distribution methods has been an eye-opener, Lo says. “They don’t think like a traditional finance company. They’re a fintech, so they’re very responsive and open to new ideas. And they’re independent – they’re not a bank with its own funds J.V. – so there aren’t conflicts of interest.”
Marketing was not the only part of business that had to adjust.
“I was amazed when we began to work with these firms,” Lo said. “Enhancements that would take months to get done in Hong Kong take them a few days. We can learn a lot from working with fintechs.” It’s knowledge that will come in handy as more banks in Hong Kong and Asia add mutual funds to their mobile trading apps, as Standard Chartered did earlier this year.
There are limits, however, to how far a fund house can go selling products on mainland China’s digital platforms.
Those channels are limited to funds from either local licensed retail-facing houses, or offshore products eligible via MRF. The retail funds market in China, at $1.9 trillion, is only a fraction of the total investments industry, which is about $9.7 trillion – but that includes separate licensed businesses for asset managers linked to insurance companies, or to trusts, or to banks. Those businesses for now can’t market to retail or use sell via e-commerce players.
BEA Union is a joint venture formed in 2007 between Bank of East Asia and Germany’s Union Investments. Its initial business model was to service local pension and insurance customers, so its investment expertise has been mainly in Asian fixed income. It has since developed funds in Hong Kong and Asia equities, and its total AUM is now $11.2 billion.
It is the only foreign fund house to establish a wholly owned foreign enterprise (Woofie) in Qianhai (part of Shenzhen), as opposed to Shanghai. This was partly because the authorities in Qianhai were very welcoming, and because Bank of East Asia has a presence in southern China, and the fund house hopes to take advantage of this should cross-border opportunities emerge (under the concept of a “Greater Bay Area”).
This medium-term ambition is another driver of BEA Union’s strategy to build an online brand on Ant Financial and other digital platforms.