Robo-advisors Trust in the Machines

Fintechs have raced ahead of traditional banks when it comes to automated online investment advice. But now the big boys are fighting back with their own robo-advisors, often developed by fintechs.
Robo-advisors offer automated investment advice.

Deutsche Bank's "Investment Finder" concept seemed promising at first.

The digital tipster, also known as a robo-advisor, was designed to prepare individual portfolios for investors. The bank advertised the service heavily in 2015, but now the investment finder is about to fold. One year after the service was launched, the number of customers is only in the low hundreds.

From the standpoint of users, the investment finder offers too little help, and yet BaFin, the German Federal Financial Supervisory Authority, thinks even that is too much. It views the service as investment advice, a service for which banks and customers would normally be required to exchange a lot more information – and formalize it with signatures.

Apparently the bank has been given a grace period to sort this out, but the investment finder's days are numbered. Even today, it's already difficult to find it on the website of Maxblue, Deutsche Bank's online investment platform.

But a successor is already waiting in the wings. Deutsche Bank's new robo-advisor will offer "digital asset management" and is expected to go live in the summer. "It will enable customers to fully delegate their investment management," Markus Pertlwieser, digital head of Deutsche Bank's retail, asset and commercial business, told Handelsblatt.

Few of the robo-advisor companies will survive in the long run. There is customer interest, but whether they really invest is a question of trust. Martin Faust, Professor of banking, Frankfurt School of Finance and Management

The robo-advisor assembles a portfolio, monitors it and regularly adapts it to changes in the risk situation in the market.

The investment finder, on the other hand, was an attempt to digitalize the classic securities business of individual investment advice. "This path was not productive, given the current regulatory requirements," Mr. Pertlwieser conceded.

The bank has learned from its mistakes, and it is apparently cooperating closely with BaFin in developing its digital asset management service.

The case of the investment finder highlights the problems that can arise in the digitalization of banks. For young financial startups, known as fintechs, this principle of trial and error is usually a given. But established lenders have struggled with it. For them, developing a product and then dumping it again is a nightmare, especially given the fear of damage to their reputation. This is especially true when fintechs already offer services and banks are lagging behind.

Robo advice is a case in point. Michael Mellinghoff of Techfluence, a fintech consulting firm, counts 23 robo-advisors in Germany and 64 in the European Union. Very few came from banks.

"Banks need to take robo advice seriously and do something about it," said Martin Faust, a professor of banking at the Frankfurt School of Finance and Management. "When the first direct banks began offering their services, it took the established banks too long to react," he said.

Only a few years ago, many traditional German lenders couldn’t even imagine banking via the Internet and without branches. Nowadays, retail banking is unimaginable without companies like the web-based ING-Diba and Consorsbank.

Established banks were also long skeptical of digital asset management. But a survey by the Accenture consulting firm, which Handelsblatt has obtained, shows that customers are surprisingly open to computer-guided investment advice, with 61 percent of the Germans polled saying that they would use a robo-advisor when investing their assets.

According to Betina Wunderlich, who runs the sales and marketing for the banks division at Accenture, providing such services is now obligatory. "Banks often claim that customers aren't ready yet," she said. "That excuse no longer flies today."

Many banks do not offer a digital investment tool yet, and some only a rudimentary version. Others use technology provided by fintechs. ING-Diba, for example, cooperates with Easyfolio. And 1822direkt, a subsidiary of Frankfurter Sparkasse, as well as smartphone bank N26, have chosen Vaamo.

Vaamo, which specializes in developing apps for other finance firms, also has a partnership with Santander Bank, in which it operates the technical platform while Santander provides the investment strategy. Quirin Bank, Consorsbank, Targobank and Comdirect have their own products.

Several other lenders about to launch services are monitoring the market or looking into joint ventures. Mr. Faust advises them to develop their own know-how. "For banks, it is not a solution in the long term to cooperate with existing robo-advice firms," he said.

Fintechs are not unconditionally in favor of this model, either. "For start-ups, it is important that they concentrate on their core mission and not lose sight of it," said Lars Reiner, founder of robo-advisor Ginmon, which cooperates with Fidor Bank, a German online provider.

The young companies' customer numbers are still modest, and their managed assets are small. Scalable Capital, an online investment manager, recently reported that it had surpassed €120 million ($129 million) in managed assets within about a year. Ginmon has also stated that it is on the verge of €100 million.

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However, the fintechs can quickly pick up speed through advertising offensives and established partners. Scalable Capital has just entered into a partnership with Siemens. The electronics giant plans to recommend the fintech's services to its own employees through its subsidiary, Siemens Private Finance. When former employees and family members are included, that amounts to 250,000 potential customers in Germany. "I advise banks to hurry up," said Ms. Wunderlich.

But a quick solution is unlikely because of the high standards of both financial regulators and customers, as Deutsche Bank has learned. With its investment finder service, customers have to do a lot of things themselves, but with the new asset management service, they relinquish responsibility. To do so, they must provide extensive information about their financial circumstances, their experience with financial products and their risk preferences when registering for the product.

At Deutsche Bank's robo-advisor, the accounts are made up of passive funds (exchange–traded funds, or ETFs), as with most competitors. Value at risk (VaR), which is used as a measure of the risk of the investment, indicates the loss threshold that will not be exceeded to a specific degree of probability and within a certain time period. Scalable Capital uses a similar approach.

Mr. Pertlwieser stresses the differences between Deutsche Bank's service and the competition. "In our algorithms, customers receive all the knowledge from managing risk in classic asset management," he said. And asset allocation is supported by the bank's global capital market expertise and its chief investment strategist, Ulrich Stephan. He manages Deutsche Bank's Best Allocation fund, with a volume of more than €3 billion.

But it and other funds are not expected to be among the investment tools of the robo-advisor. The business units will remain separate. Nevertheless, digital asset management is expected to be able to incorporate securities accounts at a later point.

The finished robo-advisor will initially be placed in Maxblue, a site many experienced investors use. In the second step, the service will be advertised more widely to acquire new customers. The minimum investment will be no higher than €10,000, and the fee will be based on the volume of managed assets.

Many of the digital services tend to appeal to customers with investment experience and significant assets. But that could change. Because of new E.U. rules established in the MiFID-2 directive, it will become increasingly expensive for banks to provide customers with personal consultation.

"Only with very large investment sums will personal consultation be possible while covering costs," said Ms. Wunderlich. However, automated consultation could be offered to investors with small balances. "The banks should not overlook this target group," she added.

Mr. Mellinghoff of Techfluence expects rapid growth in the industry. "I wouldn't be surprised if there were 500 robo-advisors in Europe in five to 10 years," he said.

Mr. Faust warns against too much optimism, however. "Few of the robo-advisor companies will survive in the long run," he said. "There is customer interest, but whether they really invest is a question of trust."


Elisabeth Atzler is the banking correspondent of Handelsblatt since 2012. Katharina Schneider is an editor in the finance section. To contact the authors: [email protected], [email protected]