Robo advice is all the rage in wealth management, particularly in developed markets such as the United States. What is the potential for robo advice in Japan and the rest of Asia? Will robo-advisers replace all human advisers, or will they peacefully coexist? And how do such megabanks as Mizuho balance their traditional channels with the robo advice channel? Keisuke Ito, CFA, head of investment technology at Mizuho–DL Financial Technology, shares his perspectives.
The Take 15 Series is a series of short interviews with leading practitioners on timely topics focused on the investment profession.
[MUSIC PLAYING] Hello, welcome to another episode of CFA Institute, Take 15 series. My name is Larry Cao. I am a content director in CFA Institute Asia-Pacific office. Here with me today is [INAUDIBLE]. He is the chief financial adviser of Mizuho-DL Financial Technology. He's also a former president of CFA Society Japan. Welcome.
SPEAKER 1: you for having me. My pleasure.
LARRY CAO: So today, we're going to discuss fin tech. I think you have a very interesting position. So you actually run the robo advisor operation within a traditional financial institution.
SPEAKER 1: Yes, well, it's not just fin tech. We are doing asset-management related strategy development. And fin tech, like robo advisor, is one of those things.
LARRY CAO: Fascinating. So I guess maybe we start with a very broad question. You know, what do you think is the future of financial advisory? Do you think this will be dominated by robo advisors? Was this continue to be-- you know, will clients continue to prefer human interaction?
SPEAKER 1: I think it would be a mix. Well, the advantage of robo advisors would be, they are cost efficient. They're consistent. So some of the investors that want to do everything themselves, but they need some advice, they don't want to interact with people. Those people with cost-efficient mind might prefer a robot advisory.
On the other hand, there are many people that have more complex needs. And for those kind of deep needs, or for people that need human connection, a robot advisor might not be good enough. So I think, depending on people's preference, both would have demand for them.
LARRY CAO: Right. So you mentioned complexity as a driver for differentiation between a robot advisor and human interaction, or the traditional financial advisor channels. What are some of the other factors? Where do robot advisor really shine? You know, where do you think people would still want to go with the human, sort of the traditional financial advisory channels?
SPEAKER 1: I think there are several. One is, of course, cost efficiency. But another thing would be transparency. Most of the robot advisors disclose what they're doing. So, and there is no intended bias. So some people might feel more comfortable to pursue those ways.
LARRY CAO: Will these be high-- well, the high-net worth individuals? Or will these be really, sort of the mass affluent? What type of segment, or segmentation in this business?
SPEAKER 1: It could be both. But maybe more so for the math affluent. Because the financial service advisors, the human advisors, might not be able to spend too much time for the people that have less amount invested.
LARRY CAO: Right. For a financial institution like Mizuho, with a traditional financial advisory channel, and now adding this robo channel, are there channel conflicts? How does Mizuho balance these two channels?
SPEAKER 1: We are still trying to figure out. But one way to think about it is to follow the customers' needs. Some clients just like cost efficiency, do-it-yourself type of clients, might prefer robo advisors. So our robo advisor platform is more intended for an Internet user, rather than a--
But we can also use that for in our retail branches, to assist the salesperson. But it's more about automation, transparency. On the other hand, those people that need attachment with people, we would be doing that in the traditional way.
LARRY CAO: Right, I see. So it's more of a client's needs? So robo advisors, is that mostly serving, like you said, sort of Internet-savvy clients? So these are individual clients, maybe younger clients?
SPEAKER 1: Younger client have less hesitation to use robo advisor services. But where the money is is in the elder people pool. So we have to address that part of the segment too. So we are trying to make the robo advisory platform as easy to use as possible, so that different kind of people would feel comfortable to use it.
SPEAKER 1: So it's Internet-savvy. Doesn't matter how old you are. It's more people who are active on the Internet. So that's more of the differentiation. Very interesting. So I guess the-- how do you see the development across different geographies? Robo advisor as a phenomenon seems to have had more success in North America and in Europe. I think in Asia it's been-- seems like growth has been a little slower. What do you think have been the driving factors behind that?
SPEAKER 1: There could be several factors. If you look at Asia, maybe Japan and China, or other parts of the Asia, might have a different background. In Japan, the interest rate has been near zero for the last decade, or even more longer. and--
LARRY CAO: Becoming more of a global phenomenon, unfortunately.
SPEAKER 1: Yes, exactly. And also if you look at the stock market, it peaked in the late '80s, and then it kept falling down. So right now, there are about $17 trillion US of individual household wealth. And about 52% of that, in Japan, is invested in bank savings. And that percentage of bank savings way higher than--
LARRY CAO: North America or Europe, right?
SPEAKER 1: And they were correct putting their money in bank savings during that the last two decades where the stock market kept falling. So maybe one reason in Japan was the preference towards banks saving. But that is going to change. It's just a matter of time. Because there's no way that interest rates can stay this low forever.
Another reason for other part of Asia might be the growth of the economy. So in many parts of the Asia, contrary to Japan, the stock market has been doing very well. So people just enjoy investing in stock market, or bond market themselves. So maybe they didn't have that much motivation to have a more consistent way.
But that will also be changing. If you look at the Asian economy for the last couple of years, it's quickly changing. So I think maybe the economic environment and market environment might have influenced the speed of adoption of those fin tech technologies in Japan, in Asia. But it's just a matter of time that it would follow US or Europe.
LARRY CAO: So robo advisor, in terms of assets under management, is probably very small compared to traditional channels at this point. But where do you think you may get to in markets like Japan, the more sophisticated market in Asia, say in five or 10 years? What percentage of the market do you think will be served by robo advisors versus the human, you know, more traditional financial advisor channels?
SPEAKER 1: That is a very good question. It might depend on how much-- especially in Japan-- it might depend on how much people would be willing to shift their money from bank saving to investment trust or to the financial market vehicles. And so we have to see.
LARRY CAO: But of the money that's already managed by a financial adviser, say, you know, this is the overall market, 100 percent, is between robo advisors and traditional financial advisor channels, that split. You know, right now it's probably less than 1%, I would guess. In five or 10 years, you know, how much more do you think robo advisor will be able to capture?
SPEAKER 1: Well, right now, there are $17 trillion of household wealth. Among them, about $1 trillion is invested in mutual funds. And some more in direct stock market. It is, I think it is possible, that in maybe 10 years, in Japan, another $1 trillion US would be invested in low-cost--
LARRY CAO: Robo advisor channels?
SPEAKER 1: Yes.
LARRY CAO: That quite exciting. I think that's actually quite a bright future, if it does come through to that. I guess the natural question now is, what are some of the obstacles that's holding fin tech startups, or holding the robo advisors up at this point, for realizing that potential.
SPEAKER 1: Well, there could be many obstacles. Like the hesitation-- maybe some of the traditional financial institution have interest in protecting their legacy business. But I would say, I would say, there might be three things. One would be the regulation.
Well, financial institution are by nature regulated, so depending on the willingness of the regulating body to backup these new technologies. It could have a big impact on the speed of fin tech adoption. So regulation might be one thing.
The second thing might be brand awareness, especially for the startups. Well, the startups might have a very interesting technology, but what they don't have is the brand name, and especially for asset management, there's always risk. You cannot guarantee your performance.
And where there is risk, well, you want to rely on brand names.
LARRY CAO: More familiar names.
SPEAKER 1: Yes, familiar names, exactly. So maybe the corroboration between the startups and the large, established financial institution might be a key to go through those obstacles.
The third thing, especially for robo advisors, might be, what is the true value added of that service?
LARRY CAO: That's a very good point.
SPEAKER 1: Yes. Well, there are many technologies. For example, people are doing account aggregation, aggregating balance information from different account. There are questionnaire that would judge your risk tolerance.
Those kind of things people are not willing to pay money. And there are many services that offer those service for free. So, I guess that is not good enough value added to make people pay money. So what is the true value added?
Well, sometimes trading algorithms like tax loss harvesting or automated rebalancing or some other automated transaction might be worthwhile for the customer to pay money for that. So I think we have to really think hard. What are the true value added for the clients that makes them be willing to pay money to use that service?
LARRY CAO: That is a really important point. I think many financial institutions are offering those services already though, within their package. So that kind of is from a competitive standpoint of view, it's actually not easy for robo advisors to demonstrate their competitive edge. You know, what are the things they offer where the financial institutions cannot compete?
But maybe look at some other areas of fin tech. Do you think in other areas where maybe some of the fin tech startups may have an edge compared to financial institutions?
SPEAKER 1: Yes, well, obviously, block chain would be taking off. I don't know whether that would be profitable. But I think it's just a matter of time that different financial institution would be adopting those kind of technologies.
If you look at payments, well, in Japan-- Recently Apple Pay is becoming a hot issue. But in Japan we have been using our-- what do you say? Train station pass, to pay at convenience store to buy groceries things for more than a decade.
LARRY CAO: The same in Hong Kong actually.
SPEAKER 1: So those kind of payment, cashless payment using technology, have been there for awhile. And so, in terms of cash settlement payment, those have relatively low uncertainty. It's just mechanical. So for those area, I think technology would be quickly adapted.
And there are also appear to be lending. Those have a little bit more uncertainty. So it is growing, but some service providers are facing challenges. And so I think it would grow, but it's not easy to replace the whole financial industry. It might have some-- it would have some market needs. But it would depend on people's preference.
LARRY CAO: Wonderful. I think we started from the question that, between financial institutions and fin tech startups, who will win the robo advisor or the financial advisory war. Maybe we close on the more general topic of, between financial institutions and fin tech startups, who do you think will win the general war of competing for customers, for business, in the next few years? How do you see this evolution take place?
SPEAKER 1: Well, I think the ultimate winner should be the client. And I don't know whether it would be startup or the established financial institution. I think it could be a collaboration between those two parties. But it's not about how much you can profit from that. It's more about what are the true client's needs. So it should be the client that would be the winner.
LARRY CAO: I think the tone of the discussion in general has moved from this competitive mode, we're trying to disrupt your new business, and more into this collaboration mode as you describe. I think fin tech startups and financial institutions are seeing more and more the value of collaboration. So that is probably a trend that we'll see more of as we are seeing in your organization that Mizuho actually actively starting a robo advisor operation as well. So these are all trends to watch, I guess. So thank you very much for sharing your insights with us today.
SPEAKER 1: Thank you very much.
LARRY CAO: And thank you all for watching.
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