Robo-advisers democratise investing and promote financial inclusion, experts say

Demand for low-fee, transparent digital investment platforms is growing in the Mena region

Robo-advisers are digital investment platforms that use automated algorithms to assign investors a tailored portfolio of exchange-traded funds or index funds. Getty

The advent of robo-advisers in the Middle East and North Africa region has encouraged savings, improved investor decisions, democratised investing and promoted financial inclusion, according to experts speaking at a personal finance webinar on Wednesday.

“Ten years from now, people will spend less time with human financial advisers,” Michele Ferrario, co-founder and chief executive of digital wealth manager StashAway, told the Robo Advisers and Mass Affluent Savings in Mena webinar, which was organised by Bahrain-based FinTech Robos.

“Robo-advisory tools enable people with less financial literacy to get access to professionally managed investment platforms.”

Robo-advisers are digital investment platforms that calculate an investor’s risk tolerance based on a series of questions. Using automated algorithms, they then assign investors a tailored investment portfolio of exchange-traded funds or index funds. Typically, they charge lower fees compared with traditional financial advisers and wealth managers.

While the US is the leading market for robo-advisers, they are growing in popularity around the world, the World Bank said in a 2019 report.

“Emerging economies have also witnessed the emergence of their own robo-advisers. For example, the number of robo-advisers is growing fast in Asia, driven by an emerging middle class and high technological connectivity,” the Washington-based lender said in the report.

In the US alone, the World Bank projects the robo-advisory sector to grow at an average annual rate of 31 per cent to reach about $1.5 trillion by 2023 from more than $400 billion in 2018.

There are three advantages to using a robo-advisory service: accessibility, customisation of an individual investor's needs and transparency on fees, according to Marie Briere, head of the investor research centre at Europe’s biggest asset manager Amundi.

“Individuals are not well-equipped to take complex financial decisions because of many biases, under-diversified holdings and limited time and attention to dedicate to their portfolio,” Ms Briere said. “People with low financial literacy are more subject to biases.”

However, robo-advisers cannot entirely replace human financial advisers, said Saad bin Atyan, founder of Saudi Arabia-based FinTech start-up Madhkol.

“There needs to be a human element in investment since people have a high emotional reaction when it comes to managing their finances,” he added.

Robo-advisers have also gained acceptance among the wealthy, with StashAway noticing that 20 per cent of its assets in the region derive from high-net-worth people, Mr Ferrario told the webinar.

“We initially thought we would target mass-affluent individuals,” he added.

“However, people who can afford financial advice have found out that banks charge high fees and have their own interests at heart, rather than the client’s. A lot of wealthy people, especially the younger ones, also prefer to manage finances on their phone rather than meet an adviser.”

Meanwhile, retail investors have little to no access to costly human financial advice and women and young people are often treated with bias by the advisers, Amundi’s Ms Briere said.

Robo-advisory tools democratise financial advise and reduce costs and biases, she added.

Investors have also had difficulty accessing Islamic investment funds, said Omar Shaikh, founder and chief executive of Cocoa Invest, a Bahrain-based Sharia-compliant investment solutions provider.

“We had a huge uptake from first-time investors who were below 35 years and have a digital-first mindset,” Mr Shaikh said. “We have a lot of opportunity since the region has a high proportion of unbanked and those below 35 years in the population. Robo-advisers can help to cater to their financial needs.”

The future of asset management has to be integrated with automation, where humans will provide strategic advice and machines will offer tactical suggestions, according to Mehdi Fichtali, founder and chief executive of digital wealth manager FinaMaze, which is licensed by the Abu Dhabi Global Market.

However, the robo-advisory industry needs to build trust and awareness for better acceptance, the experts said.

“There is nothing more sensitive than managing people’s hard-earned money,” Mr Shaikh said. “FinTechs need to earn that trust. Correct regulation and transparency of information can help build trust.”

Aligning incentives between the client and the robo-advisory company is also core to building trust, said StashAway’s Mr Ferrario.

The only fee robo-advisers earn is the one clients pay them, unlike human financial advisers who also charge high commissions, he added.

Meanwhile, “entrepreneurs are running faster than regulators” and this needs to change, Mr bin Atyan said. “The ecosystem needs to evolve from a regulatory and product perspective.”

Rather than viewing FinTechs as a threat, smart banks will choose to work with them to complement their human advisers, according to Mr Shaikh.

“Banking networks crucially need digital tools for their human advisers. Both models can coexist,” Ms Briere said.