ROBO ADVISORS

ENTER THE SCENE

FINANCIAL

MANAGEMENT
01

04

02

Startups to
conquer Wall
Street
INTERVIEW

Jos Diego Alarcn

(Serfiex)

FINTECH SERIE BY

05

Could we have
robots instead
financial advisor?
INF0GRAPHIC

How they work

robo-advisors?

innovation edge

03

How should you

manage your
fortune?

01

Startups
to conquer
Wall Street
A walkthrough of the fintech trends looking
to revolutionize financial advice (
).

SERIE FINTECH AUGUST 2015 www.centrodeinnovacionbbva.com/en

They are young and seek to

change the traditional model
of the financial world.
Storming Wall Street. A dozen
startups are looking to
compete with long-standing
companies or fill the void of
the traditional models. A
pioneer in the United States,
Wealthfront has moved more
than $2 billion in managed
assets in only three years, with
an average shareholding per
customer of about $115,000.
Its competitor, Betterment,
nears $1.5 billion in assets.
These figures are a far cry
from the large banks Bank of
America is close to $1 trillion
although they are attractive to
young people ( ). Dubbed
the "Henrys" (high earning, not
rich yet) by Goldman Sachs,

these customers do not plan to

go to a bank branch in their
lives and want to move their
money with just a click. The
study by Accenture and
Partnership Fund for New York
City highlights that investment
in Financial technology has
tripled from 2013 to 2014.

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Fintech companies are

characterized by removing or
replacing banks and financial
institutions as intermediaries,
promoting cooperation or
establishing new schemes for
more accessible commissions.

Fintech trends that entice

young customers

Digital Crowfunding:
Hybrid between Blockchain
technology database that
records transactions with
cryptocurrencies and, as the
BBVA Blockchain technology:
The ultimate Disruption in The
Financial System report
explains, it removes the need
for intermediaries and
significantly reduces costs for
banks, and crowdfunding.
Companies are making offers of
digital stocks. The US company
Ethereum stands out as it
allows developers to create
distributed applications, define
custom currencies, contracts
and even intelligent

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crowdfunding platforms
(collective microfinance). To be
able to run programs in the
network, you need to have a
certain amount of Ether, the
platform's "currency". Another
platform is the European
Crowdcube , which allows you
to create a "portfolio of startups"
with a minimum value of ten
euros, and then keep track of
what happens to each of them.
As explained on its website,
"many investors contribute
small or large amounts of
money to entrepreneurs and
businessmen to carry out their
project. In exchange, investors
receive shares in the company
and become its partners
accompanying the company in
its future growth".

Payment services with

low-cost investments
The star of services-based
investment is Robinhood, the
broker backed by Silicon Valley
investors, including Google.
The broker with no
commissions or spreads aims to
democratize trading. It is very
easy to use and you don't need
to have a minimum capital to
open an account. Instead of
charging fees, Robin Hood
charges interest on the use of
margins and charges for the
use of "leveraging" (increasing a
company's level of debt).
Robinhood allows developers to
create trading applications such
as graphics, signals or

fundamental analysis. Payment

products based on services to
attract the traders who are
most experienced with Robin
Hood.

Robo advisor (

As indicated above,
Wealthfront and Betterment
stand out in these types of
services that create automated
low-cost portfolios based on
our profile, by eliminating the
commissions of a managed
portfolio. A model that prevails
in North America and is
coming to Europe. In 2014,
about 73,000 customers
contracted such services in the
United States.

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Some trends that confirm that

the growth of startups
continues to increase: In 2014
the assets of startups
dedicated to consulting in the
US reached $5 billion. And
forecasts suggest that this
figure will have tripled to
exceed $15 billion by the end
of this year.

02
Could we have
robots instead of
financial advisors?
The rise of so-called robo-advisors is changing the
traditional financial management landscape in the US
and they are slowly being incorporated in Europe. ( )

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Could a robot manage my

money? Without a financial
advisor acting as an
intermediary? Little by little socalled robo-advisors are
changing the way money is
being moved in the US and
are beginning to reach
Europe. This model means
customers do not need
financial advisors. They just
have to turn on their
computer and fill out a
questionnaire. Customers
report their risk tolerance,
goals and investment and
their money is managed
automatically ( ).
A model that, according to the
consultant from GVC Gaesco
Albert Enguix, has
experienced "spectacular

growth of around 10 to 15%

increase each year in the US.
Around 73,000 customers
have contracted these services
with a volume of 14 billion
euros in assets under
management at the end of
2014. This figure is expected
to rise further." Enguix explains
that the model guarantees
"absolute return investments.
It sets controlling return and
risks as its goals". Through
robo-advisors investment
portfolios of customers who
move amounts of between
$50,000 to $100,000 can be
controlled." The money is
invested in EFTs (ExchangeTraded Funds) and volatility is
controlled; the goal is absolute
return. This is about making
portfolios under the famous

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VVMSQ - volatility-valuemomentum-size and quality of

the composition of the
holding", explains Enguix.

The advisor stressed that the

process is very simple, "You
access the platform from your
computer in the same way as
if you wanted to make a
transfer. Analysts, statisticians
and economists have created
financial strategy models
beforehand using thousands of
pieces of data. Algorithms and
statistics to design programs
that manage your money."
What are the risks? "The same
as in the traditional market.

Machines cannot foresee a

financial crash. They cannot
guess the psychological
component that can change
the entire financial picture of a
market in minutes just as
advisors are unable to do so.
It's not an exact science,"
Enguix explained who added
that with this type of platform
companies "save costs by not
having to hire financial
advisors".

Customer profile (

The profile of customers who

opt for this technology to move
their money "is around 35 years
old and with a high purchasing
power," Enguix explained. The
millennial generation uses this
model the most. The end
result is similar to what a
traditional consultant would do
for them but at a lower cost.
The US consulting firm AT
Kearney said that "these
services will become a trend
over a period of three to five
years," according to this article
from Bloomberg. In 2020,
robo-advisors will control 5.6%
of investment assets in the US.
The figure is currently around
0.5%.

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According to Adam Nash,

CEO of Wealthfront, a firm
that manages more than
$2.4 billion in assets, "rather
than the investment world
being a sprint, it is like a
marathon and robots don't
need to sleep. They can
make their calculations and
movements while analyzing
all markets whatever the
time."

A new model that also

confronts "the collapse of
commission prices", which is
stressed from Wealthfront.
The firm is convinced that
future generations and
technology will revolutionize
the financial market: "The
preferences of younger
consumers have a huge
impact on financial services
and companies will have to

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respond quickly to new

trends.

Arrival in Europe
In Europe, this model is
being incorporated extremely
slowly. "We are lagging
behind the US, which is 10
years ahead on this type of
service," says Enguix. In
France, Germany and
Switzerland some companies
such as the German firm
Vaamo or the French firm
Advize have launched in this
market. "Although there is
still a long way to go to reach
customers en mass in Spain
and Europe. Many
professionals in the sector
have never even heard of
robo-advisors. There is a long
road ahead," says the
consultant from Gaesco.

03
How should you
manage your fortune?
Personalized advice is not going to disappear, but the
competition from new models is ambitious and greatly
reduces the prices (
).

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Two executives are having

lunch after a conference on
asset management. They are
arguing over the recent
emergence of small digital
capital management
companies that focus
primarily on retail investors in
the emerging "Business-toConsumer" (B2C) market,
which refers to the strategy
that commercial enterprises
are following to go directly to
the end customer or
consumer. One of the
executives is not worried

about these new businesses

at all and does not see them
as a threat; he argues that
investors always prefer direct
person-to-person relationships
with their financial advisors.
The second strongly
disagrees and notes that all
traditional companies must
understand why these new
companies are emerging,
what makes them attractive
to customers, and what
capabilities must be
developed in response to this
"threat". This hypothetical

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scenario relating the Deloitte

study 'Digital disruption
in Wealth Management'
illustrates the real debate
taking place in the wealth
management industry on the
relevance of these new digital
companies and their potential
to successfully break into the
market. Traditional
companies are trying to
decide whether it is worth
investing time, money
and effort to better
understand these emerging
businesses.

The story of the consultant is

fictional, but the discussion it
narrates is increasingly real. At
the recent Finance2.0
conference, which was held in
Zurich and brings together
technology companies
specialized in finance, it was
emphasized that automated
solutions are increasingly
attracting customers. In
Switzerland, a landmark for
traditional banking, a startup
such as True Wealth and the
website Investomach.ch are
committed to automating their
advisory models with roboadvisors. The question buzzing
round the conference in Zurich
was whether customers would
pay for advice, as if they use
automated methods, costs are
minimal in the case of robo-

advisors fees are between 30

and 70 bps (0.3% to 0.7%)
per year. Felix Niederer,
founder of True Wealth,
emphasized that the costs
could decrease even more.
And that it's moving toward a
model where fortune is
managed completely free,
although the most
sophisticated payment services
will remain.

Returning to the Deloitte

study, startups are definitely a
clear indicator of what's to
come. The consultant
examined more than 50 new
digital wealth management
companies in the B2C market;
most were founded in the last
ten years. The study highlights
that these growth companies

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attract retail investors in three

ways: by helping them to
connect, advising on financial
matters; and helping them to
invest ( ).

The keys for the consultant

are ( ):

Connecting
Adding investor accounts:
Consumers increasingly have
the need to connect different
accounts often accounts
from multiple providers in
order to create a holistic
picture of their wealth and
more easily manage their
finances. In addition,
investors want to be
connected together to learn
from their peers, and to
connect with specialists and
advisors that meet their
needs. The new companies
are providing integration of
all these accounts, beyond
traditional boundaries.

Retail investors are

increasingly frustrated by
having to reconcile multiple
accounts through numerous
banks, placements or, for
example, retirement
accounts. They need to have
an accurate real-time view
and, if possible, an aggregate
of financial assets, liabilities
and net worth across multiple
accounts and suppliers.
One of the pioneers in this
market was Mint.com, a free
online personal financing
service that allows users to see
all their balances and
transactions in one place.
Launched in 2007, it currently
has over one million users.

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Social networks:
Since the financial crisis, retail
investors have become
increasingly skeptical about the
advice they receive, but have
also realized that they need
this advice more than ever.
Investors want to know what
their peers think and how they
invest, not only learn from
investment specialists. They
also value interactions with
their peers beyond just
meeting their immediate
investment needs. Forums
that began as chat groups and
online discussions have rapidly
evolved into fully-blown social
platforms that allow an open
exchange of ideas and the
ability to form groups.

People & Pick, founded by

Zacks Investment Research, is
an example of a company that
has created a social platform
and online community for
users to interact with each
other. The platform allows
users to evaluate any piece of
stock as a purchase/sale.
Users can share ideas with
other users, and track their
stocks.

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Advising:
Financial planning: New asset
management companies
have entered this market and
successfully attracted
financial planning customers
by creating digital showcases
that have a low learning
curve. These companies can
form a complete picture of a
customer's financial situation
by taking into account their
personal financial goals, risk
tolerance, diversification,
and/or trading strategies. An
example is Personal Capital,
offering a trading platform
with multiple choices, from
investment monitoring and

analysis to financial services

(for investors with more than
$100,000 in assets).
Accounts aggregation allows
users to control their finances
as part of a single integrated
control panel that shows the
asset allocation, the potential
risks of the holding, and how
various product commissions
could affect their goals.

Investing:
In the current environment of
low-yield investment,
investors are constantly
looking for better risk/return
opportunities. In response to
this new companies have

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emerged that provide

customers with access to
sophisticated trading
strategies by copying the
business strategies of
professional management
services (PMS) and thus
allowing these companies to
offer private investors
services to which historically
only certain institutions or
large investors had access.
An example of a startup that
offers non-traditional
placements is Covestor,
which allows its members to
access, view and study the
holdings of professional
management services.
Going back to Switzerland, a
survey by Axa IM notes that
90% of the Swiss still prefer
personal advice to move their
money. It seems that things
are starting to change in the
rest of the planet.

04/INTERVIEW
Robo-advisors
democratize financial
advice
Jos Diego Alarcn is a partner of the Spanish
SME Serfiex, which specializes in Financial Risk
Management software, consulting and solutions.
Along with a team of financial analysts,
econometricians and IT specialists it has
developed a robo advisor with which the
company aims to approach small investors (
).

SERIE FINTECH AUGUST 2015 www.centrodeinnovacionbbva.com/en

What is the difference between

a robo advisor and a financial
advisor?
One difference is that, thanks
to the Internet, a robo advisor
can advise many people while
an individual obviously does
not have the same capacity.
What does a robo-advisor
contribute? ( )
Our company has
fundamentally developed a
new approach to investing.
The robo advisor is the tool
that automates this
methodology. The important
thing is the methodology
behind the robo advisor. It
must be very detailed, very
objective, nothing is left to
intuition, it is a mathematical
procedure. Our robo-advisor is
characterized by both things.

On the one hand, it builds an

initial portfolio with potential
losses. The second feature,
which is the most important or
most innovative, is it
reconstructs the portfolio
periodically and in an
automated way, i.e. it
rebalances it. Each month it
compares the data, analyzes
the expected profitability of the
initial portfolio with the real
profitability of the portfolio itself
and based on that difference
and the passage of time it
recomposes and optimizes that
portfolio. Without asking the
customer for any new data.
Is it better or worse than an
advisor?
It's no better or worse.
Everything is simplified with
the robo-advisor but it is no

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better or worse. As it is on the

Internet, it can reach many
people and democratizes such
advisory services. It may be
cheaper but the important
thing is the methodology
behind it.
What logic have you followed?
The process that we have
followed after many years in
this field has been to
synthesize it as far as possible.
We seek to advise a person
with the smallest amount of
information possible. We
create a flow chart and define
it following a methodology.
Then the robo-advisor is the
tool that implements it in a
channel such as the Internet.

What minimum information do

you ask the customer?
The customer is only asked to
define his/her risk profile. There
are two ways to do so. One,
which is longer, is done with a
questionnaire where the
customer has to avoid getting
into a loop as many times
he/she thinks one thing, writes
another and then his/her
portfolio is not what he/she
wants, has or can be. Another
way, which is what we use, is
more direct: we ask what
potential losses the customer
is uncomfortable with using a
certain probability. The
customer has his/her risk
profile, they say for example
they are uncomfortable with a
3% loss per year and we build
a portfolio from that
information.

What customers are you

looking for? (
)
We currently have large
customers, pension plans,
SICAVs, etc. The robo-advisor
aims to attract customers with
lower equity and who come
through the Internet.
Is there interest in this service?
In Spain a bank has been
interested in our software
development, specifically the
calculation engine part. Large
Spanish investors have also
approached us to ask about the
methodology and we are going
to present it in Mexico shortly. It's
what we're seeing right now.
Do you have small customers?
No, currently only large
customers.

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What do you expect in the

future?
In a few years I think all the
major banks will have a roboadvisor for their young
customers, who are
accustomed to the Internet and
want to make up their portfolio.
People with low net worth that
makes no sense for them to go
to private banks. I trust that
these large banks will contract
the software, the calculation
engine and provide a service to
customers with low net worth,
as is already happening in the
United States.

happening in the United States

for example is that the children
of those millionaires are
approaching robo-advisors and
obtaining higher returns. That's
causing their parents to
become interested in the
people who have designed this
robo-advisor; they want to
know the methodology.

Are wealthy customers not

interested in that model?
Usually these people are older
and they do not trust a roboadvisor. It's an automatic
process and they prefer to
speak with people. What's

Are there any disadvantages? A

major danger is that it's not the
same choosing between two
people than between two roboadvisors. You can talk to
people, ask them questions,
you may have friends who

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have already placed their trust

in those advisors or you follow
your intuition; whereas if you
go directly to a robo-advisor
and you're not an expert in
finance, you don't know the
difference between a good and
a bad one. You have no
judgment and you have to wait
quite a while to see the results
and find out whether you were
wrong or not. You may find
that the algorithms are good
but the products they are
selling are very bad. You can
have a good cook but if the raw
material is bad, the result will
be terrible.

05/INFOGRAPHIC
How they work
Robo advisors?
These are the automatic machines that
offer financial advice and portfolio
management.
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How they work?

Assess a person's income and find out: how much they can afford,
how much they need to save, study the best tax structure and
decide what investments should be made to realize those
objectives. Intelligent algorithms can now do that.
Investment?

Risk?

Goal?

The answers are analyzed and the

algorithms are processed, thus
designing a tailored investment plan.
Users can adjust their goal and risk
tolerance as they prefer.
Thanks to automation, an automated
robot can charge lower fees.

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Time?

How things will change

Less volatile markets
Robots make investment
decisions based on
algorithms and not on their
emotions, so it is more likely
that they will buy stocks that
will last.

More rigorous markets

Robots process a large
amount of information, design
a preset rule and start doing
the numbers non-stop until
they find the right
candidates for a portfolio.

Fewer transactions
Programmed to accumulate
wealth over a decade or two,
they simply buy a set amount
of stocks a year and ignore
short-term fluctuations.

More global markets

Robots manage portfolios
and don't care whether a
company is European,
American or Asian, they just
look for returns.

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The future in figures

Active advisor robots in the United States (in trillions of dollars)
2020

-1.1

2019

2017
2016

0.7

0.8

2018

0.4

0.5
0.4

0.1

-1.1

(1) Uninvested assets

include liquid funds (cash
and cash-equivalent
deposits).

-2.2

1.5

0.9

(2) Invested funds include

credit market
instruments, corporate
stocks and mutual funds.

+68%

0.5

(0.2/0.0) 0.3

Switch from uninvested assets (1)

Switch from invested assets (2)

Key factors for choosing an advisor robot

Price (low cost and transparency) is the crucial element of the advisor robot's offer:
Early adopters

36

25

Second adoptersr

35

24

24

15

Price

Investment

Simplicity

Servicios

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23

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