Reference | FYI

ROBO-ADVISER

First-time investors urged to turn to inexpensive 'robo-advisers'

by Kazuaki Nagata

Staff Writer

It appears not many people are into investment in Japan.

As of last December, only about 16 percent of Japan’s ¥1.7 quadrillion in personal financial assets was held in stocks, investment trusts or bonds.

This is partly due to a general belief that investments are for the affluent or those with financial expertise. Others, meanwhile, just don’t want to take the risk.

But a new service known as robo-advisers might change this trend, allowing people to dive into investments more easily.

Piggybacking on the growing finance technology sector, companies are now offering the automated wealth management technology service that creates financial asset portfolios and manages investment for clients.

Following are some questions and answers about robo-adviser:

What do robo-advisers do?

Many robo-advisers invest in exchange-traded funds, or ETFs, which are securities that track indexes, such as the Nikkei 225 and NASDAQ 100.

To start a service, people fill in information about themselves, such as age, investment experience and willingness to take risks, on robo-adviser websites or apps.

Based on those answers, robo-advisers will create asset portfolios suited to the client’s profile.

Although it contains the word “robo,” it’s more like an online-based artificial intelligence.

But AI-based advisers are not suitable for investing in particular firms’ stocks in a high-risk, high-return approach known as active investing.

Such strategies need a more complex analysis on why a particular company is performing well or not.

“Robo advisers still cannot make such decisions,” said Toshio Taki, who heads a laboratory to research finance- and technology-related trends at Tokyo-based Money Forward Inc. “Even if they can, those systems are very costly.”

Which companies provide robo-adviser services in Japan?

While dozens of firms already provide robo-adviser services in the U.S., such firms are only emerging recently in Japan.

Money Design Co., a Tokyo-based startup, launched a robo-adviser service called THEO in February.

Based on user information, THEO offers a diversified portfolio consisting of 30 to 40 ETFs selected from about 6,000, including from overseas.

Nao Kitazawa, the company’s chief operating officer, said THEO took a passive investing style aimed at following long-term market averages.

Another firm, 8 Securities, has provided low-cost robo adviser service 8 Now! since last May, while Tokyo-based startup Wealth Navi kicked off its invitation-only service for users who registered their email address in January.

Internet giant Yahoo Japan is also reportedly looking into a similar move.

Also, Mizuho Bank has been running a Web service called Smart Folio, which provides asset portfolio optimization for users based on questions and answers. But Smart Folio does not actually manage the investment and only gives portfolio suggestions.

Why rely on AI instead of fund managers, who usually handle investments or suggest portfolios?

Investments have been somewhat exclusive to wealthy people and those who have expertise. But the AI-based service can lower the hurdle for beginner investors, experts and robo-adviser firms said.

“Simply put, it has to do with the cost,” said Taki of Money Forward.

While securities firms provide asset management services using wrap accounts, they usually require tens of millions of yen in startup capital.

This is because securities firms cannot earn enough commission from small-capital investments to cover the cost of human fund managers. But as robo-advisers are cheaper to run, the services are available for those who want to start investing with much smaller amounts of money.

“We have really focused on lowering (the) psychological, economic and physical hurdles for customers,” said Kitazawa of Money Design.

People can start investing with ¥100,000 through Money Design’s THEO, paying a 1 percent annual management fee. The user interface is easy to understand and people can start or quit anytime via their smartphones, Kitazawa said.

As a result, Money Design has attracted about 2,000 users since its launch. Of those, 41 percent have had little investment experience, while 54 percent have invested ¥200,000 or less. About half the users are aged 30 or under.

“By creating a product that lowers hurdles and firmly explains that they can start investing easily, it is possible to attract (people previously uninterested in investing),” said Kitazawa.

How reliable are robo-advisers?

Kitazawa said that the benefit of robo-advisers is to eliminate the subjective views of humans and thus human error.

“Our management style is (to let robo advisers) analyze all the data from the past and come up with the best options,” he said.

“There is no need to include estimates by humans on how stock prices or interest rates will change next week. It’s an advantage to secure objectivity.”

Taki also said that when it came to creating a passive investment portfolio, there was no big difference in whether human experts or robo-advisers recommended investment targets.

But robo-advisers still cannot take care of the detailed needs of customers, such as advising on taxes in relation to investments, he said.

Also, although more robo-advisers are expected to debut in Japan, Taki added that it will be hard for such firms to differentiate their AI products from rivals because they tend to be similar, as they use the same portfolio-optimization mode. The competition, therefore, is likely to focus on providing cheaper management fees.

In addition, attracting consumers who are indifferent to investment, to a service which is also new and unfamiliar to many, is something that robo-adviser firms will need to work on, said Taki.

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