Robo-Advisors in Luxembourg (part I)
by Arnd Heßeler, Maria Katharina Heiden, Joël Theisen, and Sylvia Drewling, zeb consulting*
Robo-advisors aim for a digital revolution in the asset management industry. Known at the beginning from the startup scene, many of the established providers are now setting up their own Robo-advisor. But how is the concept taking off in Luxembourg’s finance industry? We took a closer look at the market.
The term “robo-advisor” has come to be defined as a “digital and fully automated asset manager” over the past few years. This description, however, goes rather too far, as a robo-advisor in itself is simply a web- and/or app-based customer interface for determining the appropriate risk profile for an investor. It merely digitalizes the MiFID II client classification as well the suitability and appropriateness assessment carried out by the client advisor in a traditional advisory meeting. A differentiation between robo-advisors only takes place in the subsequent process of actual asset management where the risk profile is translated into a strategic asset allocation and implemented by selecting specific investment products.
Internationally, robo-advisors manage approximately EUR 480 bn in assets under management (AuM), which corresponds to about half of the German market for mutual funds. With about EUR 110 bn, Vanguard Personal Advisor Services is the largest provider worldwide and has a global market share of around 20%. The top 5 global robo-advisors manage about EUR 170 bn, which corresponds to a market share of roughly 40%. According to various sources the sector is estimated to grow to more than EUR 2,300 bn in AuM over the next five years.
With a volume of about EUR 14 bn in AuM, the European market is relatively small and roughly equals the size of Betterment, the third-largest robo-advisor in the world. In Europe, the United Kingdom is the largest market with AuM of EUR 5.5 bn followed by Germany with AuM of about EUR 3.9 bn. In terms of population size, the Luxembourg market corresponds to less than one hundredth of the German investment market and is thus a niche market for robo-advisory as a private client product.
Four Robo-Advisors in the Luxembourgish market
Currently, the four robo-advisors KeyPrivate, Birdee, SpeedInvest and Investify operate in the Luxembourgish market.
In 2016, Keytrade Bank launched the first B2C robo-advisor KeyPrivate to supplement its online brokerage platform. Keytrade Bank is part of the French Crédit Mutuel Arkéa group and a subsidiary of Arkéa Direct Bank. To carry out its portfolio management following robo-advice, it uses the Birdee middleware supplied by the Belgian FinTech company Gambit Financial Solutions, founded in 2007.
In 2017, Gambit Financial Solutions entered the Luxembourg B2C market with its proprietary robo-advice offering called Birdee. Gambit Financial Solutions is now part of the French BNP Paribas Asset Management.
Also in 2017, Banque et Caisse d’Epargne de l’Etat (BCEE) was the first Luxembourgish retail bank to launch a robo-advisor, called SpeedInvest.
Since 2018, Investify has also been present in the market. This robo-advisor has already been operating in Germany since 2015 and is a subsidiary of the German FinTech company Axigo, which—similar to Gambit Financial Solutions—also positions its software modules in the B2B business.
Investment strategies and rebalancing
Taking a look at the four robo-advisors’ investment approaches reveals a classic concept of simple strategies, usually carried out using ETFs (i.e. Exchange-Traded Funds). The asset management offerings differ regarding their strategic allocations in the number of risk profiles (three to ten), the number of ETFs and investment funds used as well as customizability on the part of the client. All providers classify their strategic asset allocation as active with up to daily rebalancing.
SpeedInvest, the Luxembourg savings bank’s robo-advisor, positions itself as a basic provider with only three strategies (cautious, balanced and dynamic). Depending on their investment horizon, financial strength and risk appetite, investors are offered a strategic allocation of 80% shares and 20% bonds in the “dynamic” strategy, 50% shares and 50% bonds in the “balanced” strategy or 20% shares and 80% bonds in the “cautious” strategy. The selected asset allocation is put into place using ETFs within a two SICAV funds which are posted to the client’s securities account.
Birdee offers its clients five strategic allocations (defensive, stable, moderate, protector, dynamic) with a similar structure of bond and equity ETFs and additionally allocates real estate funds in the more risky strategies. On top of that, these five strategies can be differentiated by through five special themes (Small Caps and SMEs, Biotechnology, Real Estate as well as two for Responsible Investing). In contrast to SpeedInvest, the selected strategy is not carried out by investing into a SICAV fund wrapper, but—as with all other providers—the ETFs and funds are traded directly on the client account.
With KeyPrivate, the investor is allocated to one of ten risk profiles which differ in their weightings of shares, bonds, commodities and cash. For investments into shares, five ETFs (Eurozone shares, US shares, Japanese shares, emerging market shares and APAC shares (excl. Japan)) are used. For investments into bonds, there are also five ETFs (inflation-linked, emerging market bonds, high-yield bonds, corporate bonds and Eurozone sovereign bonds). For investing into commodities, ETCs referencing gold and precious metals are available. KeyPrivate uses the Birdee technology, which means that both providers are based on Markowitz’s Modern Portfolio Theory, supplemented by the respective opinion of their investment experts, for determining the strategic asset allocation.
At Investify, clients are allocated to seven risk classes based on a proprietary scoring. The ETFs and theme funds are also allocated to seven risk classes, depending on their historic volatility. Investments are allocated to clients based on a linear risk allocation in which the individual risk score is represented by capital-weighted investments in different, individual ways. A client portfolio consists of the basic investment and if chosen theme investment options selected by the client, so that on average about 21 products are allocated to a client account. Investify thus positions itself as a robo-advisor with maximum customizability and therefore tends to address more experienced investors who wish get personally involved.
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