Why have the intelligent robo-advisor products collectively delisted by banks become a "chicken rib"?

The domestic intelligent investment advisory industry boom since 2016 has reached a milestone.

Recently, many banks such as cm bank, industrial and commercial bank of china, china citic bank corporation and others have successively announced that they will stop their smart investment advisory related businesses by the end of this month or early next month. In contrast to the situation at the end of last year where banks no longer added smart investment advisory scale, many banks this time chose to convert existing smart investment advisory portfolios into single fund holdings.

The so-called intelligent investment advisory, referring to the official definition by the Financial Industry Regulatory Authority (FINRA) in the USA: Intelligent investment advisory utilizes big data analysis, algo financial models, and intelligent algorithms to provide automated asset allocation advice for users based on their risk tolerance levels, financial status, expected return goals, and investment style preferences, using a series of intelligent algorithms and theoretical models for portfolio optimization.

In short, using robots to manage your finances, conduct portfolio allocation and optimization.

In 2008, the first company focused on intelligent investment consulting, Betterment, appeared in the USA. In 2016, domestic venture companies, third-party wealth management platforms, and traditional financial institutions all began to launch related businesses, and intelligent investment consulting has become a new focus in fintech. Among them, CM Bank's 'Capricorn Smart Investment' was the first entrant in the banking industry, setting a benchmark in terms of institutional investment level and industry attention. Now, with the 'suspension of service' of 'Capricorn Smart Investment,' the once trend of intelligent investment consulting is worth a re-examination.

However, this may not necessarily mean the complete failure of bank-based intelligent investment consulting. Several industry insiders told Titanium Media APP, 'The intelligent investment consulting market has great potential, but there are also regulatory risks. Currently, it should be in a period of regulatory restructuring, and the possibility of a return after completion of rectification cannot be ruled out.'

So why did banks collectively remove intelligent investment consulting products at this time?

Observation 1: Regulations are still unclear.

In December of last year,CM BankIt was stated that the bank is currently undergoing standardized transformation of Capricorn Smart Investment, will suspend the purchase function, redemptions and rebalancing transactions for existing positions will not be affected, but there is a risk of not being able to continue providing services in the future.

At present, In order to comply with regulatory requirements, we will temporarily suspend the purchase function of Capricorn Smart Investment. If there are any changes to the follow-up services, we will inform you promptly so that you can make investment arrangements. We sincerely hope to continue providing you with fund portfolio service business in the future.

More than just.CM BankLast year at the same period, at least including China Citic Bank, Shanghai Pudong Development Bank, Guangfa Bank, Bank of Jiangsu and many other banks have temporarily suspended the purchase function of their robo-advisory services, existing customer services are not affected, and have mentioned several times "in order to comply with regulatory requirements".Industrial and Commercial Bank of China stated that the bank will conduct the adjustment of existing housing loan interest rates in accordance with market-oriented and legal principles, comply with laws and regulations, and intends to publish specific operational guidelines and related matters on October 12, 2024, through the official website, WeChat public account, branches, 95588, etc. They aim to complete the batch adjustment of existing housing loan interest rates before October 31, 2024.

The latest document on the regulation of robo-advisors came from the beginning of November last year, issued by regulatory departments in various regions titled 'Notice on Regulating Fund Investment Advice Activities'.

This 'Notice' clearly requires: firstly, the main body of business operations to be fund sales institutions; secondly, the target funds to be fund products sold by fund sales institutions on behalf of agents; thirdly, the service targets limited to clients of the institution's fund sales business; fourthly, not to sign separate contracts with customers for providing fund investment advice; fifthly, not to charge separate fees for providing fund investment advice services; sixthly, institutions without the qualifications for fund investment advisory business are not allowed to provide fund investment portfolio strategy advice, not allowed to provide specific fund composition ratio advice in the fund portfolio, not allowed to display the performance of the fund portfolio, and not allowed to provide repositioning advice.

At the same time, it also requires,Relevant rectifications are to be completed by June 30, 2022.

Industry insiders told Titanium Media App that the financial regulatory authorities recently conducted window guidance on some head offices of banks again, requiring the banks to further implement the 'Notice on Regulating Fund Investment Advice Activities' issued at the end of last year. Many banks choosing to suspend operations before June 30 are likely closely related to this notice.

However, it is worth noting that ICBC and CM Bank have both obtained qualifications for fund investment advisory business in the past.Industrial and Commercial Bank of China stated that the bank will conduct the adjustment of existing housing loan interest rates in accordance with market-oriented and legal principles, comply with laws and regulations, and intends to publish specific operational guidelines and related matters on October 12, 2024, through the official website, WeChat public account, branches, 95588, etc. They aim to complete the batch adjustment of existing housing loan interest rates before October 31, 2024.、CM Bank、Ping An BankAmong the 60 pilot institutions approved, they are only 3 banks.Why did they choose to shut down at this particular time, even though they had already received policy support?

Some practitioners told the Titanium Media APP that this is related to the unclear regulatory framework for robo-advisors, and how the China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission cooperate is a key issue.

"Bank-affiliated robo-advisors face dual supervision from the China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission. At the product level, bank-affiliated robo-advisors' portfolios include bank wealth management subsidiary products (regulated by the China Banking and Insurance Regulatory Commission) and various fund products (regulated by the China Securities Regulatory Commission), making the regulatory bodies extremely complex." This practitioner stated,The entire wealth management business in the future will require coordination between the China Securities Regulatory Commission and the China Banking and Insurance Regulatory Commission for supervision.。”

In the unclear regulatory environment, banks chose to temporarily suspend rather than rectify in a timely manner.

Observation two: Becoming a redundant business, banks find it difficult to invest long-term.

Another major reason for the shutdown is that banks have not truly expanded and strengthened the asia vets advisory business.

"For banks today, asia vets advisory is a redundant business."A industry insider told the titanium media app.

Taking the first china bank asia vets advisory system "Capricorn Smart Investment" as an example, by the end of 2016, "Capricorn Smart Investment" was launched, and in the following October, csi all share investment banking & announced that the scale of "Capricorn Smart Investment" exceeded 8 billion yuan. However, this development trend did not continue, and its last report card is - by the end of October 2021, Capricorn Smart Investment has served over 0.2 million customers, with a cumulative sales scale exceeding 14 billion yuan.

In terms of the bank's business volume, this scale is very small, and the revenue ratio can be negligible.

A asia vets practitioner expressed to the Titanium Media App, "On the surface, the background for banks temporarily suspending the asia vets business is regulatory contradictions. At a deeper level, the issue is that fund advisory services require high input and long-term commitment, which banks often lack the patience and willingness to sustain for an extended period of time.。”

In his view, for most banks, a business that requires long-term investment with insufficient returns will inevitably compete with other departments for resources, making it difficult to sustain in the long run. On the other hand, fund operations are already a primary part of a bank's personal banking business, but to truly establish the asia vets business, it must generate revenue through providing advisory services rather than earning from trading commissions.""Banks venturing into asia vets need to undergo a self-revolution."

Observation Three: Banks owned by financial institutions are losing their advantage.

In the early stages of the development of asia vets in China, I once compared the differences between asia vets in China and the USA.

For example, there are no specific regulations governing asia vets operations in China, while the USA has relatively comprehensive regulations. China has fewer ETF funds, resulting in limited risk diversification, whereas in the USA, most asia vets are ETF-based, allowing investors to hedge risks through diversified investments. The percentage of individual investors in the Chinese market is higher compared to the USA, with a preference for short-term trading or principal-protected products. In the USA, the financial market is predominantly driven by institutional investors and so on.

After several years of exploration, the market environment of China's robo-advisors has been somewhat improved. For example, investors' passive investment concepts and acceptance have been significantly strengthened, and the financial sector's digital transformation has received top-level policy support.

Most importantly,The fund advisory market, which has intricate connections with robo-advisors, has entered a phase of rapid expansion.(The main difference between the two lies in the fact that the target of fund advisory services can only be funds, while the former can include other assets).

In October 2019, the pilot program for fund investment advisory services officially launched, heralding the transformation from seller-side advisory to buyer-side advisory. In the past two years, fund advisory services have entered a fast lane of development, with the China Securities Regulatory Commission announcing during a press conference in July last year that the total serviced assets of fund advisory services had exceeded 50 billion yuan.

In terms of user expansion achievements, the influence of fund advisory services should not be underestimated. By the end of 2021, Alipay's "Help you Invest" has served over 3 million users, and the number of signed customers using Yingmi's fund advisory services has exceeded 0.23 million, while the participation of customers in Htsc's "Worry-Free Investment" has surpassed 0.7 million, and so on.

However, the fund advisory industry still faces some core issues. The "2022 China Fund Advisory Blue Book" released by KPMG China pointed out that the current Chinese fund advisory market is facing five major pain points:

Heavy emphasis on buying over selling, lack of long-term investment behavior with hefty accounts leads to users not profiting from "spread"; the shift from seller-side advisory to buyer-side advisory is underway, but the buyer-side advisory model has yet to be widely adopted; the lack of long-term wealth planning services based on "full customer life cycle life goals"; insufficient passive underlying assets; the common phenomenon of emphasizing investment over advisory, with room for improvement in the space where robo-advisors operate.

The fundamental issue, such as the difficult transformation from "seller advisor" to "buyer advisor," is considered to be a fundamental problem that requires the industry to undergo a "self-revolution."From the perspective of banks, intelligent financial advisors (fund advisors) have already lost the initiative.

Since October 2019, there have already been 60 domestic institutions that have obtained the qualification for fund advisory services, including 25 fund companies, 29 brokerage firms, as well as 3 third-party fund sales companies and only 3 banks.Industrial and Commercial Bank of China stated that the bank will conduct the adjustment of existing housing loan interest rates in accordance with market-oriented and legal principles, comply with laws and regulations, and intends to publish specific operational guidelines and related matters on October 12, 2024, through the official website, WeChat public account, branches, 95588, etc. They aim to complete the batch adjustment of existing housing loan interest rates before October 31, 2024.、CM Bank、Ping An BankAs one of the first institutions to obtain pilot qualifications in February 2020, however, Currently, only the 3 approved banks have suspended the expansion of related businesses.

Compared to their competitors, banks and third-party fund sales companies have customer base and traffic advantages respectively, but they have obvious shortcomings in research teams and experience. The advantages of fund companies lie in their research teams and mature experience in FOF, but their disadvantage lies in distribution channels; brokerages are considered to benefit more significantly by many institutions as they provide convenient "service" and "investment" separately through their business departments and research institutes.

Tianfeng Securities previously analyzed that wealth management is currently undergoing a "quantitative" change from "selling products" to "selling portfolios", with fund investment advisory becoming the most important licensing basis. Currently, brokerages have taken the lead advantage, and may further compress the market share of bank sales distribution in the future.

(This article was first published on the Titanium Media APP, Author: Cai Pengcheng, Editor: Tian Peng)

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