American Robo-advisors vs. Chinese Super-platforms

The contrast between Paytm and its rivals is, in many ways, a proxy for the contrast between China and the US. In an increasingly bipolar internet world, the two superpowers have each evolved in distinct ways. And that distinction is sharpest in the online wealth management space.

But are the American and Chinese models suited to India? Which one will succeed? Or will India see the emergence of a hybrid?

Explaining the emergence

“I understand that from a technology point of view, it would be a superior UI/UX, easier on-boarding, etc, but getting people to invest needs much more than just technology. It requires a very innate understanding of the customer. The starting point of any financial intermediation is trust and it takes several years to build,” says Dhirendra Kumar, Founder of Value research Online, a mutual fund research website based out of Delhi.

The US has the largest mutual fund industry in the world, with net assets exceeding $18.7 trillion at the end of 2017. A large chunk of this goes to Robo-advisors—$200 billion worth. These are automated investment platforms that recommend products based on an algorithm.

Objective and low-cost, Robo-advisors increase the overall value for retail investors. The investors share details on their resources, goals, risk tolerance and retirement. These details are fed into an engine that juxtaposes them with market performance, fund performance, etc. Based on that, the algorithm determines an optimal portfolio for the investor.

Charles Schwab, one of the biggest investment companies in the US, manages $23 billion under Robo-advisory followed by the two leading Robo-advisory startups, Betterment and Wealthfront, who, together manage approximately $15.9 billion of assets for over 495,000 client accounts. Some US websites forecast that by 2025, just the top three Robo-advisors will collectively have more than $250 billion in AUM (assets under management).

Robo-advisors came up as a result of inaccessible and pricey investment management services that were available only for the rich. Financial advisors often charged annual management fees in excess of 1% and required account minimums of $1 million. In contrast Betterment and Wealthfront charge low fees and low account minimums.

Much of the funds invested by these Robo advisors are in exchange-traded funds (ETFs). ETFs, too, are low-cost as they track an index and don’t actively manage funds. Besides, they’re accessible. So much so that one could even benefit from the growth in emerging markets because there are indices that track emerging markets.

Where does China stand?

Then there’s China.

India’s neighbor swears by integrated platforms such as internet conglomerate Tencent-led all-purpose app WeChat and e-commerce leader Alibaba. WeChat is used to hail cabs, order food, payments, and through its sister concern, WeBank, for mutual fund investments. The user never leaves its ecosystem.

China also has Alibaba-funded Yue Bao, the largest money market fund in the world. Yue Bao, meaning ‘leftover treasure’, was started as a repository for cash left over after online spending. Beyond offering higher interest rates than banks, the fund has a swipe in-swipe out facility which allows users to withdraw whenever they want. As of 31 March 2018, the fund had $266 billion in AUM.

That’s right. $266 BILLION.

Putting up the earnings

Yue Bao benefits from the Alibaba association. Online sellers (mostly on Alibaba) have put their earnings in Yue Bao fund which was offering an annualized return of over 6% when it was started, as opposed to the <0.5% interest of domestic savings accounts. The arrangement was simple. A click on Alibaba-owned e-commerce site Taobao and one could withdraw from the fund penalty-free.

But financial literacy in China isn’t the same as in the US. Only 9% of Chinese household assets are inequities. That’s what worked in Yue Bao’s favor, making debt as the major asset class in China. Its success encouraged multinationals Tencent and Baidu to launch their own money market funds, expecting their existing customers to drive growth.

So, which of these models looks good in India? And will India ever see a Wealthfront or a Betterment; or would it be an Alipay or a WeBank?