Technology and New Business Frontiers
Megabanks, startups, and dedicated online brokers are all jockeying to leverage their strengths in a way that accords them the most advantageous position possible. The latest iteration in the ongoing battle to be first, to move early, and to outdo the competition is unfolding around robo-advisor services and technology with a key point being which customer categories to target.
Historically, the asset management business in Japan has revolved around the relatively lower-hanging fruit: customers that have both assets and financial literacy. Moving forward, that will change. It will be important for players to expand the market’s reach to include customer segments in the stage of asset creation, namely younger generations in the midst of becoming financially literate and the senior demographic of customers with little experience with technology. Early robo-advisor movers pushing the boundaries of the market and acquiring new customers will be crucial if robo-advisory services are to gain traction and not become a fleeting phenomenon. Many progressive global examples of companies and markets are responding to diverse investment and technology needs and, in doing so, helping to boost financial literacy across the market.
The robo-advisor initiatives that have hit the market in Japan so far largely appear tailored to support the sales of mutual funds. As easy-to-use, non-face-to-face channels, they are garnering interest from investors with a level of comfort with IT and a degree of financial literacy. Moving forward, further advancements that draw on both the asset management facet and technology are expected in the following areas.
- Diversity of products: Expanding offerings from general, publicly offered mutual funds to multi-asset classes.
- Diversity of services: Online onboarding, portfolio management, reports, and alerts. Operation support that is a hybrid approach harnessing both existing contact centers and face-to-face channels.
- Automation: Automated reinvestment and rebalancing. Supporting small-value and high-frequency trading.
- Accommodating B2B: Pro-level sales support tools developed to offer the advanced features professionals want. Vendor-supplied cloud services and financial institution-supplied white-label service offerings for other financial institutions.
Sell Side Business Model
Overcoming the first obstacle presupposes a shift in the competition among firms marketing mutual funds. This would entail a move from the conventional model, under which they vie for short-term sales commissions, to a longer-term model in which revenue is generated from discretionary investment fees. Already, the number of wrap accounts is growing quickly as major players migrate rapidly to a wrap-account approach premised not on sales commissions but on discretionary investment fees (for investment services offered on a contractual discretionary basis that include investment choices, actual purchase or sale, and regular reports).
FIG 4: Surge in Wrap Accounts
This surge in wrap accounts has spurred debate. Observers point to issues in products, service content, and management performance; in concrete terms, this means the fee structure (major firms say that they typically charge a total of around 3% for mutual fund advisory fees, transaction and management fees, and fees related to mutual funds), minimum contract amounts (major players accept contracts from 3 million yen in increments of 10,000 yen), and investment types (wrap account-dedicated mutual funds, programs combining actively managed funds, programs combining index-managed funds, etc.). Celent would like to believe that the proliferation of robo-advisors will enhance product offerings and advice across the investment cycle overall. The advent of mutual fund sales professionals (major banks and securities brokers) adopting robo-advisory technology can be expected to be the dawn of a new technological era not solely for wrap accounts, but also more broadly for the mutual fund business and the asset management business.
Celent believes that Japan’s asset management business sector currently faces two challenges that must be addressed particularly on the sell side.
- Information imbalance: This refers to an imbalance or asymmetry in the quantity, quality, or use of information related to investment products or services. The market is flooded with investment information. However, there is a shortage of information and advice to cut through the noise to aid in reaching investment goals and to help prospective investors select products that match their risk appetites among the vast array of investment choices.
- Know-how imbalance: This refers to an imbalance in recommending appropriate investment products and services as well as know-how related to investor management and development. The market is awash in investment know-how. Nevertheless, there is a shortfall of accurate understanding of investor orientation and experience. This is coupled with a lack of help for investors to optimize their portfolio holdings, subsequent follow-up, and advice to achieve investment objectives.
Just published the new Celent reports:
Fintech and Robo Advisors: Booming in Japan