END DESTINATION OF THE BOOM

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1 November 2016
Eiichiro Yanagawa
Robo-Advisor Services: The Road Ahead

The fundamental essence of financial system services will remain, but with innovation, the inconvenient and irrational elements of the industry will be eliminated, falling by the wayside. The first touchstone for this will likely be the battle among robo-advisor services. With Japan’s highly integrated industry, mutual funds have from the beginning grown in the context of a modular (or unbundled) business structure. In the future, the insurance industry is expected to experience a similar change. It is only natural that bancassurance accelerates such structural change.

On the demand side, robo-advisor offerings are expected to play a supporting role in particular with retail investor asset management in terms of the (PDCA) cycle (which in this context refers to setting fund management goals, selecting and purchasing products or services, post-purchase review “checks,” and ongoing action). On the supply side, expectations are high that robo-advisors will yield benefits in B2B via functions that enable support tools geared toward professionals in the asset management arena. Moreover, observers have even loftier expectations that robo-advisors can play a role in enabling the asset management market to evolve into a sounder and more cyclically sustainable market.

Celent expect that robo-advisors in Japan’s market will work to supplement investment literacy on the demand side, heighten accuracy and transparency related to information (including price, quality, and risk) about asset management products and services, and supply technology that will help to solve the incentive problems that interfere with efficient business transactions on the supply side (and the oligopoly of the value chain).

From a technical perspective, there are three important points that would make the robo-advisor initiatives become widely accepted and profitable:

  • Use of refined smartphones with easy operability and robust security, providing a high-quality user experience.
  • Ability to provide diversity of products and services, low-value and high-frequency trading support, and automation.
  • Ability to (conduct / carry out) traceability and rebalancing, where assets are vigilantly monitored, and plans can be reviewed and revised accordingly.

FIG 7: Expectations for Robo-Advisors

robo7

Shift to the Modular Structure

It is incumbent upon the financial industry as a whole to shift to a modular demand structure to meet new demand spawned by new digital technologies and new demand in the digital industry. Institutions should ease their dependence on vertically integrated, direct sales — that is to say, keiretsu sales channels — to establish more dynamic and open delivery models. The demands and challenges of omnichannel transcend choosing an open or closed channel; rather, these demands proffer an ideal opportunity for companies to review and reconsider the optimal delivery model for their needs. Moreover, this means that financial institutions can collaborate with a wide range of non-financial sector entities including startups to broaden access to and the scope of the market that they can potentially claim as their own.

Financial institutions should strive to become trailblazing purveyors of financial services that leverage digital technology. In the financial services value chain, areas coexist where firms can and should go it alone to generate their unique in-house high-value-added services and products as well as other areas where they stand to benefit by collaborating with other firms to thoroughly drive down costs. Also, if firms thoroughly consider economies of scale and economies of scope, they can possibly parlay their cost centers into new profit centers and play a role in the industry infrastructure by collaborating with other firms. In the actual operation, after deliberating and implementing such initiatives, big-data analytics and automation of all processes will prove key. Here as well, a shift to a modular supply structure will be required, and a critical factor in determining the success of financial institution management will be alliances — namely how adroitly they select and choose to partner with other entities.

Fintech is much more than the application of novel technology in the sphere of financial services. Rather, it portends nothing less than a wholesale structural overhaul of the financial services industry that is an opportunity to envisage anew and redefine the industry’s future. There can be no doubt that Fintech transcends the mere establishment of a digital channel. Instead, it will clearly affect products, services, IT units, and sourcing models and, in so doing, provide the financial service providers of the future a chance to seriously consider exactly what kind of companies they would like to be and the corporate cultures they would like to foster.

FIG 8: Key Transformative Points in the Financial Services Industry

robo8

Just published the new Celent reports:

Fintech and Robo Advisors: Booming in Japan


[1] For more detailed information, please see the Celent Asia Blog posts titled Decoupling of Product Creation from Sales: Modularization in the Financial Services Industry (December 26, 2014), Digital Technology Is Spurring Straight Through Processing (STP) in Financial Services Industry (January 26, 2015).

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Content Type
Blogs
Location
Asia-Pacific