How disruptive will robo advisory, algorithmic trading and machine

learning platforms really become?

Fintech Connect - December 2016

CHAPPUIS HALDER & Co.

Robo Advisors : Where do we stand today?

CHAPPUIS HALDER & Co. 2

 Executive Summary
Robo-advisors benefited from a
1 favourable environment to develop
their offers
The market is experiencing high
2 In France, the first players on the market have recently launched their offers (1st Advize in 2012; 2nd Fundshop in 2014) and
growth in America, however, the
These actors seem to bring real
added value to a new market, thanks
3 client on tactical allocations of its portfolio but above all manage / facilitate the customer relationship by (partly or fully)
in particular to a better and richer
user experience
More and more traditional players
4 are interested in the value
proposition of robo-advisors
Robo-advisors represent a real
5 opportunity for the asset
management market
*Assurance-vie = Life insurance with fiscal advantages
Robo-advisors have emerged in the US before reaching Europe and the rest of the world. They have benefited from a
favourable combination of regulatory changes, digital (r)evolution and need to address categories of retail investors
neglected or poorly served by the financial institutions or by the traditional financial advisers.
The robo-advisors provide a response to the retail investors who were expecting their personal plans to be taken into
account in their own savings. They offer wealth management services adapted to mass affluent or retail +
The robo-advisors market saw a rapid development in America. The three main pure-players have raised more $500m and
traditional players have already established partnerships or are beginning to launch their own offer.
do not have the capital (less than 5m per year in fundraising) allowing them a rapid development in an environment where
client acquisition is expensive.
Although nascent, the European robo-advisor market appears to have many arguments in favour of its development or
alternatively the development of its model within the traditional financial institutions. Indeed, a robo-advisor allows to
address 94% of the French population at a lower cost (thus 44% of the financial assets). A robo-advisor can not only assist the
digitizing it. Moreover, it goes further in the automation of the customer knowledge and on the following aspects: client
onboarding, customer profiling, advice delivery and assets monitoring
The movement largely started in the US and around the world with leading players who acquired start-ups, made
partnerships with these new actors or yet created their own platform (ex: BlackRock, UBS, vanguard, Charles Schwab, etc.)
In France, this movement is accelerating and players such as Crdit Mutuel Arka, Financire de lEchiquier or Amundi have
positioned themselves
Retail banks, private banks, IFAS, asset management companies, online brokers, all traditional financial institutions will be
impacted by the arrival of robo-advisors, but rather than seeing a threat, we prefer to see these new entrants as a real
opportunity for the former to rethink their customer relationship and thus acquire new customers or develop their
relationship with their existing customer base by increasing the added-value for their clients
CHAPPUIS HALDER & Co. 3
 Investors expect a real added value in terms of support for the management of their savings, with
tailor-made advice

The main incentives for customers changing financial adviser1 Clients expectations are increasingly demanding in terms of
investment management or advisory

Benefit from advisory or discretionary management

Find someone who demonstrated objectivity and
tailored to their situation
26%
neutrality
Constant demand of information
Seek a specialist, as opposed to more a general adviser (need of understanding / education)
16%
who can manage several areas
Incentives Desire independent advice and investment
A bad adviser's experience: advisory default, loss of related to diversification
12%
money, poor results &dviser
Need for communication, availability and
Trust my adviser 12% responsiveness from the Adviser

Willingness to consult online

Have a better qualified adviser than my current adviser 10%
(all investments and documents)

Have access to new, better or more adapted products 16% Need of a trustworthy relationship with their
financial adviser
Incentives
Have access to better information 15% related to Desire of full transparency on costs and gains
products
Have a different vision, a broader view of things 10% Request to be listened to and that its projects are
taken into account in the financial decisions

Investors are increasingly willing to take control of their savings

Investors are more demanding of their financial adviser. They wish projects, ensuring they are better listened to by their financial
to perceive a significant know-how from the latter and a genuine institutions and are acquiring a greater understanding of how their
added value of the service provided to them investments are managed. They expect a daily presence if
necessary

Source: 1UFF/IFOP, CNGCP, TNS SOFRES/ING direct, CH

research CHAPPUIS HALDER & Co. 4
 This new need for support from retail investors, associated with the digital evolution and recent
regulatory changes favoured the emergence of new practices

Financial Services digitize their offers to accompany savers beyond and financial institutions need to know their
traditional banks and branches clients better
Evolution of the monthly Consultation rate of the financial
attendance rate of bank branches1 institutions websites2
According to a study conducted by NICE Actimize, 61% of financial
61% institutions are affected by regulatory changes in customer knowledge
62% (KYC)
Of Internet users regularly
27% 70% visit the website of their bank
(2014)
Financial institutions must:
2008 2015
1 Have in-depth knowledge of their clients on 2 levels:
> Identity
Evolution of the number of bank Evolution of the number of > Financial behaviour
branches1 customers of online banks3,4
2
Establish procedures to identify fraud and attempted
Million
fraud
2.8
39,86 37,52 2.3
3 3 3
Inform customers of the regulatory approach in terms
of customer knowledge
2006 2014 2014 2015
Figures of the French market

Digitalization of financial services has truly begun. Branch attendance is These regulatory pre-requisites are both prescriptive, but also allow
decreasing dramatically, forcing banks to close them. Conversely, the the financial institutions to acquire a more accurate knowledge of the
regular consultation of the banks websites appears high (70%) and 100% expectations of their clients and thus improve their relationship with
online banks continue their rapid growth them

The massive adoption of digital by customers of financial institutions is a real opportunity for the latter, enabling them to support their clients at any time
beyond bank branch visits, to interact more frequently with their customers and, above all, to know them better. They are thus able not only to meet
regulatory requirements but also offer savings projects in connection with the expectations of their clients.
Source: analysis, CH, 1FBF 2BVA via FBF, 3Cbanque, 4 Online
Banks reports, NICE Actimize CHAPPUIS HALDER & Co. 5
 With digitization, new players have emerged: robo-advisors.
They offer services approaching those of a private bank or a specialist adviser to retail investors

Technological evolution has enabled the

automation of many processes favoring both
the speed of execution and the customers
feedback (improving knowledge of each
client).
3. Digitization of the The advisory automation saves precious time
customer for the adviser, enabling customization and
relationship and tailor made support for each customer,
automation of the whatever the portfolio size
advice

Through discretionary or advisory portforlio

management offers, robo-advisors are very R.A.
similar to services offered to wealthy clients
of private banks. The range of services By offering advisory or discretionary
delivered at lower cost can target a larger
1. Discretionary
2. Targets: retail portfolio management delivered at
clientele and make robo-advisors a serious or advisory
investors lower cost, the robo-advisors are able
option for households willing to have closer management
to attract a large part of the individual
monitoring and control-autonomy over their investors. These services have a real
savings project advantage, beyond the simple
traditional argument of a reduced cost:
they focus on transparency, constant
support and development of an
investment plan tailored to each profile

These internet players intend to compete with traditional wealth management institutions by offering a differentiating offer that is based on three pillars:
providing high-end services, a lively customer relations in near real time via technology interfaces and a wider target audience, thanks to reduced costs.

CHAPPUIS HALDER & Co. 6

Robo-advisors : key trends

CHAPPUIS HALDER & Co. 7

 European robo-advisors are mostly B2C and some B2B2C. They are quite different from the asset
management advisory platforms, purely B2B that are integrated into banking or management systems

1 Business to Consumer 2 Business to Business to Consumer 3 Business to Business

Just like the American pioneers, the first
French robo-advisors have positioned
their offer to serve end customers
directly, offering asset management
services to private clients, wealthy or not
Definition
Number
8 4
of robots
For the sake of development, some
robots positioned in the B2C segment,
offered their services in B2B2C. They thus
place themselves as partners for the
traditional wealth management advisors
or traditional networks of banks and
insurers that want to offer their
customers an enhanced digital
experience. In addition, these services
enable traditional players, segmentation
and a more efficient monitoring of their
customers
Robo-advisors who offer their services to
businesses only help the asset
management players, on their allocation
strategies and the monitoring of assets
under management. These tools also help
manage and track customer as well as
support managers in their decision
making process
5+

Robots

We observe today a pivot performed by robo-advisors positioned on the B2C segment. They Note: this study focuses primarily on B2C
are increasingly orienting their offer towards the B2B2C model to acquire and B2B2C players due to their major
volume and thus to accelerate their development impact on the relationship between
financial institutions and individual
Reminder: scope of the study investors

Source: Interviews, Players Website, CH & FI CHAPPUIS HALDER & Co. 8

analysis
 Behind the term of robo-advisors" different value propositions and business models are identified, with
offers ranging from discretionary portfolio management to wealth advisory coaching

Discretionary portfolio Investment delegation on an Financial investment Advisory (patrimonial

1 2 3 4
management assurance vie contract advisory approach)

Robo-advisors that offer
discretionary portfolio
management in France must
have the status of Socit de
Gestion (Asset managers or
Investment company). To date,
Definition only one company holds this
agreement. It is thus able to fully
manage its clients assets on
different investment contracts:
Assurance Vie, PEA, securities
account...
Some of the robo-advisors that
have the status CIF also have a
delegation from their insurer
partner, enabling them to offer
their customers management of
their assets, but only on an
Assurance Vie contracts.
However, they can not at this
stage manage assets of their
clients on other contracts (such
PEA Securities accounts, ...)
Robo-advisors as financial
investment advisors help clients
make sound decisions about
their investments. Some offer
advice on an existing Assurance
Vie, PEA or even securities
account. Others require that
they open a new portfolio from
one of their partners
To date, only one company
offers holistic advice on the total
wealth of its clients. This solution
takes the form of a complete
diagnosis of client assets. It then
delivers recommendations on
asset allocation, ways to reduce
taxation or the precautions that
clients must take for retirement

Robots

Note: not disclosed by WeSave, positioning estimated

Source: Interviews, Company Websites, CH CHAPPUIS HALDER & Co. 9

& FI analysis
 Robo-Advisors therefore differ on the services offered, advisory or discretionary and the allocation is
not always based on algorithms but sometimes made by a portfolio management team

1 Management Team vs. Algorithms

The degree of automation in the asset allocation

is one of the distinguishing criteria of French
Robo-Advisors. Indeed, platforms such as Marie
Discretionary Quantier or Fundshop are automating the
recommendation and asset allocation proposals,
while platforms like Advize or Yomoni use a
management team

Service
offered 2 Advisory vs. Discretionary

This criterion is the difference between the

issuing investment advisory and management for
third parties. Indeed, some start-ups offer
customers to monitor their financial portfolios
Advisory
and help them in their investments (Investissima
or Fundshop for example), others offer them to
completely manage their portfolio (Nalo, WeSave
...)

Note: Nevertheless, while offering a controlled

Portfolio Management Algorithms management to their clients, it is important to note that
Team Nalo (and potentially WeSave) does not (do not) have the
Socit de Gestion agreement but only a status CIF with
Degree of algorithms an investment delegation from its (their) insurer partner.
used for allocation

Source: interviews, CH & FI analysis CHAPPUIS HALDER & Co. 10

 The real change will ultimately not be on the allocation and pricing aspects:
the French robo-advisors are mostly disrupting the customer experience

Mainly web-based communication campaign

Communication to private investors (Retail)
Client on Ability to call the client service as a last resort
1 Mainly digital clients experience
boarding
Registration 100% online (dematerialized supporting documents)
Begins the customer journey by defining its savings plan

Determination of the investor profile carried out by an online form

Dynamic in time, can request at each clients login if its situation has
Customer
2 changed
profiling Potentially very sophisticated profiling and particularly suited to the
personal situation of the customer (data science) The strength of robo-advisors lies
in their ability to deliver an
Advice delivered via email, SMS or directly onto the personal space of enhanced user experience
the person
Issuance of
3 Automatic advisory (no action required)
the advisory Advice refined through the preferences criterion and the customer risk
profile

Daily monitoring
Availability 24/7 online
4 Monitoring Graphics easily understood by the users / clients
High transparency vis--vis the expenses and profits

One of the main objectives of the robo-advisors is to digitize customer relationship and thus to transform it drastically, bringing:
Improved interaction with customers (more regular interaction, updating most common customer information, etc ...)
A piece of advice always tailored to the customers profile
A consequent reduction in costs and time spent by advisers for delivering personalized advice to a larger population

CHAPPUIS HALDER & Co. 11

Machine Learning and Artificial Intelligence

CHAPPUIS HALDER & Co. 12

 Executive summary
The Machine Learning, Artificial Intelligence context for the Asset Management and Capital Markets industries

The potential of Machine Learning and Artificial Intelligence has caused technology and analytics to develop rapidly and
today we see the impact these applications have on organisations across industries. The financial institutions are not left
unaffected, they are now racing to deploy Big Data solutions and, in their search, they are taking a keen interest in new
FinTech ventures.

In order to unlock the true potential in Big Data, organisations need both to leverage the latest technology and the rapidly
evolving, powerful analytics. Todays market offers a rich mix of FinTech startups and software tools which are built around
machine learning and artificial intelligence algorithms. The applications are plenty and can for example enable firms to do
predictive analysis that feeds trading, strategic business decisions, operative effectiveness and other forward looking
models.

In this context, this presentation will look closer at some of the recent developments within capital markets that CH&Co
considers the most interesting. The application of these tools and techniques will be explored through different use cases,
which demonstrate how advanced analytics could create new opportunities to:

improve client driven or risk driven revenues

better understand customer behavioural patterns
drive risk taking positions
enhance the performance of decision making, or
improve quantitative-investment strategies

CHAPPUIS HALDER & Co. 13

 Overview of the use cases : . Investment Strategies

Bridgewater Associates, Renaissance Technologies

and Two Sigma Investments are well known Hedge A Generating higher alpha
Funds with $150bn, $65bn and $32bn of AuM
respectively. These three funds are examples of a
handful of firms that have been using Artificial
Intelligence (AI) and Machine Learning (ML) for their
Investment Strategies. Today they are no longer
alone there are new players causing disruptions in
the market. Investors such as Binatix, Aidyia and
Sentient, as well as Fintechs, are adapting and B Predictive analytics and smart alert solutions
leveraging these very techniques.

AI and ML can now process unstructured natural

language data in the form of news articles, company
reports and social media posts. This enables investors
to gather insights about the future performance of CH&Co use case #1
companies, currencies, commodities, or financial
instruments. At unprecedented speed.
C Behavioural profiling
These techniques are especially adopted to serve the
following main business use cases:
A. generating higher alpha
B. establishing accurate predictive analytics and
smart alert solutions
C. providing behavioural profiling
CHAPPUIS HALDER & Co. 14
 Investment Strategies use cases
A - Generating higher alpha

By predicting price movements, spotting patterns and solving complex problems, machine learning
algorithms can compliment traditional investment strategies to deliver higher alpha

Name Country Launch Date Description

Walnut Algorithms is a systematic investment manager focused on applying the
latest advances in data science and machine learning research to the financial
2015 markets. They are developing algorithms to drive the technological disruption
brought by combining advanced machine learning techniques with financial
expertise to generate medium frequency pure alpha strategies

Numerai is a platform for artificial intelligence to access capital markets. Numerai

2015 lets users build models on homomorphically encrypted data and connect their
artificial intelligence back to the API which commands the capital in the hedge
fund. Numerai Fund 1 LP began trading in November 2015

2007 Binatix is a deep learning trading firm, possibly the first to use the state-of-the-art
machine learning algorithms to spot patterns that offer an edge in investing

Aidyia is acting as an asset manager with a long short equity fund. Their cutting
edge artificial general intelligence (AGI) technology is able to identify patterns and
predict price movements in global financial markets.
2011
By learning how to mimick the human brains breadth, depth and generality of
understanding and applying to financial markets, AGI can provide financial
prediction and trading systems

Using advanced Artificial Intelligence technology, massively distributed computing,

2007 and a scientific approach to the verification of newly discovered strategies,
Sentient Technologies delivers novel solutions to complex problems in a wide
variety of fields

CHAPPUIS HALDER & Co. 15

 Investment Strategies use cases
B - Accurate predictive analytics and smart alert solutions

In order to increase their profitability and to focus on their customer centric approach, the UK's high-street
banks have been very active in adopting predictive analytics and smart alert solutions

Name Country Launch Date Description

Accern provides social analytics solutions to the financial service industry to
support trading, investment and research.
It uses a combination of proprietary and 3rd party natural language processing and
2013 machine learning algorithms to derive feature-rich analytics in real-time. They
provide both an API and SaaS web platform solution for institutional investors
and researchers of all kind
InfoTrie is a Consulting and Financial Engineering company headquartered in
Singapore, with a pool of expertise in Information Systems, Artificial Intelligence,
Financial Engineering & Quantitative Modelling.
One of their solution is FinSentS, a news analytic and Sentiment Analysis engine.
2012 It scans in real time the web (news, blogs, social media) and proprietary sources
for thousands of stocks, FX, commodities or any financial topic... Sentiment
scores are correlated to asset prices to ensure consistency. They can be used a
technical indicator or as a quantitative real-time feed (market data) for the
customers algorithms or systems (risk, compliance, ).
Dataminr is a real-time information discovery company who could transform
real-time data from Twitter and other public sources into actionable signals,
identifying the most relevant information in real time for clients in the financial
2009 sector. It trawls social media and other information sources using complex
machine learning algorithms to identify significant or newsworthy posts and then
flags them for its clients in real time
Dataminr has a partnership with Twitter for real-time access to all public tweets
Dataminr scores every tweet using about 30 indicators of significance

CHAPPUIS HALDER & Co. 16

 Investment Strategies use cases
B - Accurate predictive analytics and alert solutions

Summary CH&Co use case #1: Marketing intelligence

Exploitation of customers databases in order to refine
Objectives the insurance offer of products and complementary Context
options according to clients profiles Massive clients databases are not fully exploited
The use of a machine learning model enables to offer additional options and
Insurance policies proposals products depending on the clients characteristics
Scope Fraud detection A good modelling of the customers specification allows an efficient
targeting of the offer and a high probability of complementary options
Credit risk
underwriting
Logistic regression
Techniques Neural network Approach
Segmentation of the data base in 2 subbases: one for the learning and the
Random forest
second one to test the model
Initialisation of coefficients and calibration of parameters through a
Illustration machine learning model in the learning base to optimise the predictive
P1 85%
power on the test base
X1
Extension of the model on the entire base
Exploitation of the data with different machine learning models
P2 72% Selection of the best model through cross-validation
Focus on the three products or additional options the most likely to be
X2
underwritten
Machine learning
P3 68%
model
X3 Outcomes
P4 5%
Revenue generation Time optimisation
X4

P5 92% Risk optimisation Quality optimisation

Operating cost optimisation

Client profile Underwriting probability for each
products/additional options
CHAPPUIS HALDER & Co. 17
 Investment Strategies use cases
C - Behavioural profiling

This technical analysis involves the utilisation of basic indicators and behavioural psychology to determine
trends or reversal patterns in asset prices, as such it can adapt investment strategies

Name Country Launch Date Description

Sybenetix is the leading Enterprise Behavioural Analytics company working with

hedge funds, banks and asset managers to systematically improve investment
performance and conduct management at the individual, team and company-
wide level. Two solutions are offered:
Edge, which provides investment teams with the automatic behavioural profiling and
2011 real-time decision support tools needed to measure and manage decision-making
skill, counter behavioural biases and build a model for excellence in investment
performance
Compass, which delivers compliance teams with the behavioural profiling algorithms
and real-time decision support tools needed to automatically analyse market activity
and unusual trading behaviour. A single System enables suspicious activities to be
flagged more accurately and investigated immediately, transforming conduct
management

AlgoDynamix can warn clients before the market undergoes a nasty selloff. It uses
real-time data from exchanges, looks for patterns and searches for clusters of
traders who are bailing out of an investment.
AlgoDynamix provides clear and visual signals when sellers are gaining strength
before a broad slide kicks in.
2013 Their software is continuously monitoring and analysing data flows on the worlds
major financial exchanges.
Algorithms analyse the dynamic behaviour of market participants i.e. buyers and
sellers and cluster them based on common feature sets.
Noise classification, cluster identification and behavioural finance theory are part of
their core capabilities

CHAPPUIS HALDER & Co. 18

Inspiring use cases
Main covered topics

Uses cases will be presented according to the following four main topics

CH&Co use case #1

Data
Visualisation -
Investment
enhancing
Strategies
value chain in
research

Reading
capabilities Operational
Efficiency
CH&Co use case #2
CH&Co use case #3

CHAPPUIS HALDER & Co. 19