This week, we held an exclusive interview with Zheng Yudong, CEO of the wealth management division at Pintec (NASDAQ: PT), a 3-year old fintech startup, and spoke about Pintec' s value proposition and the long-term potential of robo-advisory in China.
Robo-advisory, which manages investment portfolios and offers low-cost investment advice based on artificial intelligence, is at a nascent stage in China. We believe the market is likely to gain traction in the long-term, driven by the imbalance between demand and supply - In 2018, there were over 100,000 retail investors in China while only 40,000 professional financial advisors were available. Machines have the potential to fill in the gap, as it would take considerable time to train a large number of human wealth advisors.
Pioneers in this new sector include tech giants, traditional financial institutions and fintech startups. This week, we held an exclusive interview with Zheng Yudong, CEO of the wealth management division at Pintec (NASDAQ: PT), a 3-year old fintech startup, and spoke about Pintec' s value proposition and the long-term potential of robo-advisory in China.
Q: AI can surely add value to the high-frequency trading deployed at hedge funds, but how can it be applied to wealth management which adopts passive investment?
A: Yes we have witnessed AI achieve alpha for hedge funds; in addition to that, AI also assists asset managers like us to pursue smart beta. There are two main aspects that AI could address to optimize the process:
- The technology helps us automatically analyze clients' risk/return profiles and select suitable investment products for them. This is different from the hedge fund industry, since portfolio managers at hedge funds are expecting to achieve outsized returns for high-net-worth clients with similar risk appetite and target rates of return, and when they adjust the fund positions, it leads to the same results for all LPs. However, the wealth management business serves a larger group of retail investors with different abilities and willingness to take risks. When we provide personalized services to different individuals, we need an automated process.
- After the initial client assessment, AI helps us automatically capture trading signals and adjust clients' positions accordingly. Our system tracks over 1,000 factors such as value, momentum, macroeconomic indicators and technical signals like moving average. Effective indicators change over time. For example, sometimes the market is value-oriented while at other times investors may favor growth. AI calculates correlation constantly to determine efficient indicators.
In short, due to diverse people dimension and market dimension, our system needs to deploy some levels of AI. There are many so-called robo-advisory firms; one way to distinguish between robo-advisory and fake AI is to figure out whether the portfolio reallocation happens during the same day for different clients. When that happens, there may be human traders delivering it manually.
Q: What is the value addition of B2B wealth management enablement platforms like Pintec?
A: Wealth management enablement platforms bridge the technological gap for traditional financial institutions. Most city- and county- level commercial banks lack the expertise to develop intelligent wealth management platforms, which results in their falling behind the tech giants BAT (Baidu, Alibaba and Tencent) in releasing convenient online solutions. This creates an industry for the B2B wealth management enablement platforms, in which players like Ping An One Connect, Yingmi and us can provide such technologies to financial firms. This in turn will enable them to fulfill the wealth management needs of their own customers.
Q: The robo-advisory market in the US is relatively mature with iconic platforms like Betterment and Wealthfront. However, there are few established players and no proven business model yet in the Chinese robo-advisory sector. Why is that?
A: That China lags behind the West in robo-advisory adoption is due to the fact that our country's wealth management is immature.
In the US, around 70% of private wealth is managed by independent wealth advisors (also known as Registered Investment Advisor, RIA). The RIA industry is made up of small businesses and serves non-high-net-worth individuals. This creates a natural opportunity for fintech firms to help them build technology-driven wealth management platforms. By contrast, personal assets in China have been largely managed by traditional financial institutions, due to people's low trust in lesser-known platforms. Our core customers are medium and small investment managers who lack the resources to build technology-driven platforms to satisfy complicated client needs, so problems like these can be a challenge for us.
Second, in the US, individuals usually pay 1% of asset under management fees to traditional wealth managers and 0.25%-0.5% to robo-advisory, but most wealth management services are free in China. At this point, many Chinese families and individuals believe that investment is about doubling or tripling the principals and they are less willing to pay for services which promise safer but less hefty returns. But in reality, the paid wealth management services make more sense, since free wealth management leads to higher incentives for platforms to adjust clients' positions to earn commissions, while paid services allow them to lower their transaction fees and potentially achieve higher returns for clients.
Q: Why do you use real-time market analytics as the intelligent wealth management platform is designed to adjust positions only on a monthly basis?
A: In theory, the systems we design are able to change position weights every day, but this is expensive to clients. Nevertheless, we still need to closely monitor markets every day and analyze on a daily basis, and when we see the benefits outweigh costs, we trade for them.
Q: Why did Pintec choose the 2B path instead of 2C?
A: Right now, our clients which are scalable banks and asset managers are offering intelligent wealth management platforms to end-users for nothing as the market is in its infancy. Even though it is a loss-making business for them, they have to involve such segment, or risk losing their existing customers to BAT. Since we are a startup company, we have limited tolerance of losses, so we chose the 2B path as it can be quickly monetized at this point.
Q: Can you comment on the project lengths and pricing models?
A: We charge installment fees, maintenance fees and revenue-sharing fees. Right now the highest portion of revenue comes from installment, but we expect this to trend lower as the robo-advisory market becomes more penetrated in China, and then revenue-sharing can dominate.
The project lengths vary. If clients need little customization and are open to using our own trading system, the deal can be closed in three to four weeks. Otherwise, it may range between a month and three months.
Another thing worth mentioning is that essentially we need the in-house confidential data provided by our clients to build the wealth management platforms. In this case, our clients have data security concerns for sure, but our nature as a pure 2B service provider relieves some of their concerns, when they are choosing between us or 2B providers which conduct 2C businesses as well. We also use desensitized data to protect data security.
Q: What about penetration?
A: We rank top in terms of market penetration, serving around half of the clients who have built intelligent wealth management platforms. There are thousands more of potential clients seeking to find the right service provider to help them establish such platforms, so we believe there is plenty of room for us to grow.