Case 5: A Chairman's Decision: Launching A Robo-Advisor in CCB Principal Asset Management Company

Case 5:
A Chairman’s Decision: Launching A Robo-Advisor in

CCB Principal Asset Management Company
Sarbani Mishra PGP/24/111

1. What are robo-advisors? How are they different from traditional financial advisors?
What is your view in the debate about whether robo-advisors can replace human
financial advisors and whether robo-advisory services can upset the asset
management industry?
Sol. Robo-advisors have combined the theory of asset allocation and portfolio
optimisation with new technologies such as big data and cloud computing to produce
digital financial solutions based on algorithms. Basically, Robo-advisor provide financial
and investment advice online with little human intervention using AI.
The process of allocating assets for robo-advisers was fully automated, and the portfolios
were managed by algorithms as opposed to how traditionally financial advisors analysed
and provided their services. There was barely any need for human interaction. The
management fees for robo-advisors were considerably less than the traditional financial
advisors. Only wealthy people had access to financial advisors traditionally, but robo-
advisers could serve a larger audience. Robo-advisors software was quite rigid and
rational, and thus exercised strict discipline in following a long-term plan while humans
have the tendency to make decisions based on emotions and gut feelings.
Robo-advisers can significantly reduce the effort and load of traditional managers at
much cheaper rates. It is however not possible to complete replace traditional managers.
This is because of the following reasons:
a. Robo-advisors were not able to spot or contest bad decisions or uncertainty from the
clients, nor sway clients’ decisions.
b. Complex financial planning that involved estate planning, tax planning, retirement
planning, insurance needs etc needed Traditional Financial advisors as robo-advisors
were often lacking in understanding the interplay. Without an actual human
interaction who understood the complexity of financial planning and could correctly
input the data entry, it was not possible for computers to calculate accurately, give tax
or legal advice, do retirement or estate planning and provided other more complicated
advices.
c. Human intervention is highly required in the event of an unexpected market event,
robo-advisors might be unable to respond in time and operate accordingly.
2. What is the financial model underpinning robo-advisors? Do you think it is a good

long- term investment strategy?
Modern Portfolio Theory (MPT) also called as mean-variance analysis was the financial
model underpinning. It provided the methodology for assembling a portfolio of assets
such that the expected return of the portfolio was maximised at a predetermined risk
level. It was a framework for asset allocation such that the expected return of a portfolio
of assets was maximised at a given risk level or the portfolio risk was minimised for a
given level of the portfolio’s expected return.
Robo-advisors applied the MPT model based on software, found the efficient frontier and
capital allocation line (CAL) for the given asset pool, and constructed portfolio around
the CAL at a given level of risk according to clients’ needs. Robo-advisers first needed to
identify and construct their asset pool for investment. After the asset pool was built, robo-
advisers took online surveys and questionnaires from the investors to clarify their
investment goals, risk tolerance and other preferences. Based on investment goals, time
period and risk tolerance, robo-advisors selected mutual funds or ETF from different asset
classes and used the optimisation algorithms based on MPT to find the optimal portfolio
automatically using Artificial Intelligence.
3. Are robo-advisors suitable for China? If yes, how can you resolve the bottlenecks for
the further development of robo-advisors in China and what could be a good
business model? If no, what are the reasons?
Robo-advisors are suitable for China as it is a growing market where retail investors in
great numbers are interested in automated devices and platforms. These platforms provide
affordable access, advices, improved returns at low interest rates, limited domestic equity
markets and stress on real estate prices.
China’s growth is supported by a shift out of deposits and larger uptake of investment
products by the small/big business and retail investors. As retail investors are now
becoming more experienced and advanced with their investments and portfolios, there is
potential for the robo-advisor space to grow in China. To evolve while maintaining
control, companies can think of building a hybrid model can be a good business model
which involves both the intervention of humans and robo-advisors. Robo-advising can
further give better, more efficient communication methods, resulting in better customer
service, primarily in advisory services.
4. What are the advantages and challenges for CCB Principal in launching a robo-
advisory service?
CCB principal Asset Management Co. Ltd. is a banking fund management company in
China which has different products to satisfy the needs of various investors. The major
products are funds of stocks, bonds, indexes, money market instruments, and FOFs
investing in Chinese securities.
Advantages:
a. Starting the robo-advisory services will add to CCB’s product portfolio with which it
can add to its user base and generate more income
b. With the new robo-advisory services which are relatively cheaper, CCB can also
cater to middle-class clientele.
c. All age groups who are interested in portfolio management and seeking advices, can
choose this service because of the convenience the technology it brings to the table.
Challenges:
a. More work is needed on its R&D so that it can seamlessly extend its product line
and provide robo-services without any glitches.
b. CCB has to go for some partnerships and acquisitions to allow for the Robo-
Advisors to find funding and an easy to target customer base while for the Asset
Manager/Bank obtaining a assuring product and avoid it shifting to a rival firm.
c. There can be a risk of conflict of interest because the Robo-Advisor only completes
orders in the way it was programmed. Consequently, if there is a clear bias in the
investment rules to focus on internal products then it can create some lack of trust
from its clients.
5. If CCB Principal launches a robo-advisory service, what are the potential impacts
on the existing products of the company? Is there possible product cannibalization
with its newly introduced products of fund of funds (FOF)? How could the company
respond to the impacts?
Fund of funds (FOF) was an investment strategy in which a fund invested in other types
of funds instead of investing directly in securities. For FOF, exposures to different asset
classes and various fund categories were wrapped into one fund. Through FOF strategies,
investors achieved broader diversification, thus less risk compared with investing in the
underlying assets directly. Investors typically had to pay twice the expense as multiple
funds and mangers were involved in the process. Hence, it would be safe to assume that
elite customers with high net worth and who preferred human face to face interaction
were the primary targets for this product.
Whereas robo-advisors on the other hand were primarily adopted to target middle class,
millennials, and retail investors based on client inputs such as investment level, risk
tolerance level etc. They had lesser minimum thresholds, lesser operating fee and required
zero to minimal human intervention.
Since both were essentially targeting different customer segments, it would be safe to
assume that robo-advisors would not be cannibalizing the FOF product category.
However, robo advisors could be used to help increase the effectiveness of the human
financial advisors in the FOF category.
6. What is the outlook for robo-advisors globally?

Robo-advisors when they were initially launched gained massive popularity as they were
easy to access, cost-effective and transparent. They provided investors a way to manage
their passive, buy-and-hold investments through a simple online platform. Many
companies followed suit and launched their own robo-advisors or by mergers and
acquisitions.
On a whole robo-advisors have gained much interest in many countries allowing a far
more number of people to access financial services and benefits than it was in the time
when only traditional managers ruled the landscape. There was however a divide when it
came to the utilisation between man and machine in the financial and investment sector.
While many middle class investors followed the trends and used robo-advisors, the
wealthier investors preferred more to have face-to-face meetings with human financial
advisors.
The onset of robo-advisors has increased the volume of people accessing financial
instruments, allowing people to have a source of investment and capital gains. However,
decisions on finer aspects such as estate planning, tax planning, retirement planning,
insurance needs, budget planning and saving needs were still could not be well addressed.
Owing to these issue there is a mix response about robo-advisors in the financial field
with the majority support being on the side of them as compared to the traditional system.

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Case 5:

A Chairman’s Decision: Launching A Robo-Advisor in

Sarbani Mishra PGP/24/111

2. What is the financial model underpinning robo-advisors? Do you think it is a good

6. What is the outlook for robo-advisors globally?

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