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The wealth management market in the Middle East is undergoing a dramatic shift as the region’s regulators embrace digital financial advisories, also called robo-advisors.
The Central Bank of Bahrain has issued a set of directives regulating the position of these new fully automated algorithm based investment platforms, which are fast gaining popularity among digitally native millennials eager for customised, responsive solutions that are available on demand and at a minimal cost.
Bahrain has successfully positioned itself as a leading digital financial hub and authorities are keen to maintain this edge in line with broader policies that foster financial inclusion. The new directives help the Kingdom strengthen that advantage.
Robo-advisors are so far active in just a handful of markets, most notably the US, the UK, India and China, although Singapore, Malaysia, Australia, Canada and the UAE are also regulating digital wealth managers.
For this emerging class of wealth tech firms, the opportunity lies with an emerging class of younger and ‘mass affluent’ investors with investable income that doesn’t qualify for traditional asset management services from banks.
Boston Consulting Group estimates that the region’s HNWI/UHNWI population will grow at 14.1 per cent through to 2022, double the global rate of 7.4 per cent. By then, the Middle East’s wealth per capita is expected to increase to $25,000, from $18,000 in 2017, with total personal wealth forecast to grow eight to 10 per cent annually from $3.8 trillion in 2017.
With a regional median age below 30 years, and internet penetration rates of 65 per cent, the investor profile will skew towards a much younger demographic comfortable living their lives online, and who consider instant access to information and innovative smartphone tools to be everyday standards.
Robo-advisors are a natural fit for this population, with their potential to promote sophisticated investment practises to investors with limited access to financial advisors in a fragmented banking market.
The world’s first robo-advisor to interface with customers launched in 2008, but AI-powered solutions have only recently begun competing with human asset management consultants—a welcome development for regional investors inundated by cold-calling wealth managers.
As the industry has expanded, robo-advisors are now more sophisticated, with a wide range of capabilities. From app interfaces to hybrid models, today’s advisories cater to specific investor niches, including women, Islamic finance, emerging markets, and sustainable and socially responsible financing, besides encompassing a variety of asset types.
Once an investor’s investment profile and risk tolerance are ascertained, they are assigned a personalised portfolio of exchange-traded funds at management fees of between 0.2 and 0.5 per cent, a quarter of the traditional two per cent charge.
Worldwide, Deloitte estimates that the robo-advisory market is expected to reach between $2.2 trillion to $3.7 trillion in assets under management by next year and $16 trillion by 2025. Separately, EY estimates that digital approaches to wealth management, a sector it calls holistic management, will comprise 30 per cent of all worldwide assets under management.
Bahrain is well placed to leverage that opportunity. As of 2016, the Kingdom Bahrain had $18 billion in assets under management (AUM), a figure expected to increase to $22 billion by 2020. In comparison, Saudi Arabia had $22 billion AUM, and the UAE $1.6 billion, according to data from the Dubai International Financial Centre.
The Central Bank of Bahrain’s (CBB) new regulations will benefit businesses and consumers alike. Bahrain is already the most cost-efficient place in the region for fintech industries, with setup costs for financial services 35 per cent cheaper than in other jurisdictions, KPMG shows.
A host of recent new regulations such as those supporting open banking and crypto-asset trade regulation have supported Bahrain’s ecosystem for financial growth and innovation. Encouraged by these developments, 36 new financial services companies from 15 different countries have launched operations at the Bahrain Fintech Bay, a support hub for new businesses.
The new directives for robo-advisories could bring new companies to the region. Khalid Hamad, Executive Director of Banking Supervision, said the rules would enable specialised fintech firms planning to offer digital financial advice obtain a licence to offer such services to investors. In addition, banks and investment firms will now be able to introduce similar services with approvals from the CBB, offering new services to existing customers in other sectors.
The Kingdom’s robo-advisory directives will also reinforce Bahrain’s appeal for investors. Although the final directives have yet to be published, a consultative draft focused on providing safeguards and controls governing the use of algorithms, in addition to regular independent testing by an external consultant, while educating and informing clients as to the suitability of their products.
As forward-thinking regulators such as the CBB take the lead in innovating, the industry must respond with new products and solutions for this fast-expanding business sector—or risk losing out to agile new players.