Since the digital revolution has already reached the lending business for private and commercial customers and fintech providers such as Finreach and Number 26 have also started to focus on current accounts, robo-advice appears to be the next revolution in investment advisory services. Simply put, robo-advice is an online portfolio management based on algorithms. Portfolios are usually mapped through ETFs.
According to the concept of robo-advisors, this procedure avoids human errors made by investment advisors and wrong incentives due to high broker’s commissions. So does robo-advice have what it takes to revolutionize the way we invest our money? In an interview with Erik Podzuweit, the CEO and founder of Scalable Capital, we will have a look at the opportunities offered by robo-advice.
Wolfgang Becher: Mr. Podzuweit, robo-advice—or in simple terms, online portfolio management based on algorithms—is currently being praised as the revolution of investments for private customers. What is Scalable Capital’s positioning in order to benefit from this trend?
Erik Podzuweit: We are a digital asset manager. We create and manage ETF portfolios for our customers and continuously monitor these portfolios using our risk management technology. Scalable Capital was founded a year ago and currently employs more than 33 people in our offices in Munich and London. Besides, a bank-independent robo-advisor with a BaFin licence is quite rare on the German market. Thus, as a regulated asset manager, we have the permission to fully manage our customers’ assets at our own discretion. This is what distinguishes us from “Sales 2.0” fintech companies that only act as a broker between investors and fund owners and pass on customer assets to these owners. Additionally, we use a proprietary risk management technology that has not been available to private investors so far.
Who is the typical Scalable Capital customer?
Our services are directed at well-qualified people who are looking for a cost-efficient and automated ETF portfolio for accumulating capital. Sales-oriented advisory services that are only provided during on-site meetings at branch offices and entail sales talks really distress these customers. And they want to evade the effort of making investments on their own, for example investing in favorable ETFs through online banks. This is where we come in: we offer professional asset management that consistently uses technology to disable all unnecessary cost drivers for successful investments.
Which criteria are used to allocate the investors’ money?
Our investment model is centered around the dynamic risk management procedure developed in cooperation with our co-founder professor Mittnik. This technology has only been available—if at all—to large institutional investors. A numerically quantified loss risk that corresponds to the individual risk appetite is allocated to each customer portfolio. If the loss risk is on the verge of being exceeded, the investment is automatically adjusted, e.g. through shifting from high-risk shares to lower-risk bonds. Consequently, investment risk is controlled dynamically and specifically for each investor and does not vary depending on the risks in the financial markets. Our technology is based on sound capital market research findings. We solely relied on ETFs for implementing our investment strategy, since there is no better and more cost-efficient way to build a highly diversified portfolio. All ETFs are selected solely and entirely by us.
The Germans are known for their conservative investment behavior, which in the current low interest rate phase is threatening private pension schemes of numerous households. How is robo-advice going to influence the Germans’ investment behavior?
We see huge opportunities for robo-advice to ease the investment crisis in Germany, since it offers these high-level asset management services—which have only been available to high-net-worth customers so far—to a wider audience. To build the necessary trust on such a broad scale, you need to take many small and large steps: the right investment model, a fair fee structure, full transparency, immediate availability, open communication and many more. In the financial industry, a lot of money is made through the dissymmetry of information distribution. In other words: It is very easy to earn some more money without the customer noticing it immediately. We are convinced that it is possible to set up a truly customer-centered financial institution if you decide to act in line with customer requirements in all of these situations. Intelligent customers will recognize and appreciate this. This is how you build a reliable brand and provide numerous customers with professional and favorable retirement provision.
Now to something different: Your company, being a newly founded fintech company, has chosen Munich as its office location. What makes Munich such an attractive location for start-ups?
Firstly, this is due to our team of founders: our co-founder Prof. Dr. Mittnik holds the Chair of Financial Econometrics here at the LMU Munich. And secondly, fintech companies benefit from favorable conditions here in Bavaria. Authorities, such as the Bavarian state bank, help very effectively and quickly, and Munich has more well-trained computer scientists than any other German city. And finally, Munich bears a lot of capital that wants to be better invested.
How would you assess the political framework for entrepreneurs/founders of fintech start-ups in Germany? Is there anything you would like to be improved?
Despite all rumors, the regulatory framework is quite okay. For our area of private investments, we see improvement potentials particularly with regard to tax incentives, which are too low in Germany. In countries such as the U.S., England and Australia, private provision on the capital market is promoted more strongly, which makes these markets more attractive for robo-advisors and other fintech solutions.
Back to Scalable Capital: What will your company and robo-advice look like in 2020?
In the next ten years, robo-advice will trigger more changes to the way money is invested than have been effected in the last 30 years. By using and accepting new technology, this way will become more favorable, more transparent and easily accessible. This change will significantly improve the financial situation of many private investors who at the moment are virtually excluded from fair investment possibilities. Therefore, our services will not remain niche products, but instead establish themselves as a true investment alternative, and physical financial advisors in banks will be at the receiving end. Our goal is to establish Scalable Capital as the key leader of this development in Europe.
Mr. Podzuweit, thank you very much for this interview.
Further information on Scalable Capital can be found on the Fintech Hub by zeb.