Fintech: Combining quant and tech to deliver solutions

September 27, 2017
Fintech: Combining quant and tech to deliver solutions
  • By The Edge, 27/9/2017

Five years ago, Alex Ypsilanti wanted to take on a new set of challenges in his career, so he set his sights on starting a robo-advisory firm.

At the time, he was managing director and head of quantitative and derivative strategies at Morgan Stanley in Hong Kong. He was responsible for Asian quantitative and equity derivative research products and developed bespoke solutions and applications for institutional and retail investors.

“I was fascinated by the impact technology had on the different aspects of our lives. This includes wealth management, which was something I knew well from my investment banking days. So, I wanted to leverage technology and my own expertise to build a digital wealth management platform,” Ypsilanti recalls.

He then met Ross Milward, who was then managing director at Bank of America Merrill Lynch, and the two discussed the possibilities of what they could bring to the table. “Ross and I were impressed by the development of robo-advisory services in the US. We recognised that there was a huge opportunity in Asia as the region’s mass affluent segment was huge and growing at a phenomenal pace,” says Ypsilanti.

Most importantly, financial institutions in Asia, which had huge client bases, were extremely well placed to offer robo-advisory services. However, Ypsilanti and Milward also realised that the institutions were struggling to develop such solutions quickly and economically on their own.

“Ross was experienced in trading and risk management technology while I brought quantitative and portfolio construction strategies. With our skillsets, we felt strongly that we could help financial institutions meet the growing demand for digital wealth management in Asia. So, we started from there,” says Ypsilanti.

The duo quit their secure, high-paying jobs and co-founded Quantifeed, a robo-advisory platform based out of Hong Kong. Ypsilanti explains that the name comes from an amalgamation of the words “quantify” and “feed”.

“The name of the company is a play on the word quantified. We have a strong culture of quantitative finance and rely heavily on data and analytics to power or feed the wealth management engines that we build for our clients,” he says.

Ypsilanti points out that Quantifeed’s unique value proposition is its combination of strong financial knowledge and software engineering — the quantitative aspect and tech rolled into a fully integrated and seamless wealth management experience. The company is Asian-focused and has nine institutional clients from Hong Kong, Australia, Taiwan and Singapore.

Quantifeed will be setting up an office in Singapore to drive its business in Southeast Asia. The team is currently in talks to partner financial institutions in Malaysia by the end of the year.

Focusing solely on a business-to-business (B2B) model, Quantifeed offers platforms-as-a-service robo-adviser to institutions such as online brokers, consumer banks, wealth advisers, private banks and insurance firms. That is because their top management recognises that this model has a number of benefits, says Ypsilanti.

“We work with financial institutions that have a large client base. We have always felt that working with established businesses — rather than against them — is a more sensible proposition for everyone,” he adds.

“We believe that financial organisations with strong distribution capabilities are best placed to succeed in the new era of tech-enabled wealth management — provided that they have the right investment and technology solution. We are more about empowering existing distributors, not replacing them.”

Unlike some robo-advisers that choose to adopt both B2B and business-to-consumer (B2C) models, the company does not think it can do both successfully, says Ypsilanti. “As a robo-adviser, I think players should either focus on customer acquisition, which is B2C, or work with financial institutions, which is the B2B route.

“Although there have been some success stories of players doing both, I think it is a very challenging task. There is a potential conflict of interest — you may end up competing with your own clients in trying to get new customers on board.”

Five years on, there is an increasing number of new robo-advisory players emerging in the region looking to take market share. As one of the pioneers in this area, Quantifeed offers strong customisation features to the end customer through financial institutions, says Ypsilanti.

“We are not offering off-the-shelf solutions to our clients. We work very closely with them over a period of weeks to understand their needs and figure out what kind of customer experience and investment journey is best for their target customers. The final set of features and functionality is based on the sophistication of their end customers as well as the go-to-market strategy of the financial organisation,” he notes.

Ypsilanti says the company takes a rules-based approach to investing and the portfolios are constructed based on transparent rules and industry best practices. Quantifeed offers its institutional clients goal-based, risk-based and theme-based investing.

“Goal-based investing enables customers to create an investment plan to meet a particular life goal such as retirement, a child’s education or home purchase. A customer can specify a target amount and time for his goal and the platform will personalise a portfolio of funds that is suitable to his risk profile and optimised to meet his goal,” he explains.

“Risk-based investing matches customers with a diversified portfolio of asset classes, including equities, fixed income, commodities and real estate, based on their risk appetite. The portfolio can be rebalanced on a regular basis so that it is in line with market conditions.”

Theme-based investing offers a more sophisticated way of picking off-the-shelf pre-constructed portfolios. Ypsilanti says there are dozens of portfolios based on a variety of interests, such as social media, cloud computing and Belt and Road initiative, offered on the platform.

Quantifeed clients can customise their own platform according to their needs. For example, end customers who choose theme-based investing can dictate the names of their thematic baskets and adjust the weighting of each stock within certain risk management parameters.

“If our client chooses strong customisation feature and allow their customers to customise their baskets, this would allow the end customers to make changes to the baskets. They can drop the stocks that they don’t like or gear more towards certain names that they like,” says Ypsilanti.

In terms of asset classes, the company started with exchange-traded funds and stocks before adding mutual funds, bonds and structured products as a response to its clients’ needs. Given the co-founders’ backgrounds, the platform also offers more sophisticated products such as contracts for differences — a leverage product that is similar to futures contracts. Quantifeed is currently the only robo-adviser to offer such a product to investors.

While the company was born out of fascination for advancements in technology, Ypsilanti believes that tech-enabled platforms such as robo-advisers are about empowering humans rather than replacing them. With the help of these platforms, financial institutions can understand customers better and adapt their advice accordingly.

“Quantifeed constructs investment portfolios that maximise returns for a given level of risk using Nobel-prize-winning methodologies. Our portfolio management engine can tweak a portfolio to the precise needs of each investor, allowing financial institutions to offer mass personalisation,” he says.

“We think artificial intelligence will have a huge impact on wealth management. We are looking to use this technology to improve our understanding of customers and how we engage with them. AI can be a powerful tool in helping empower human financial advisers.”

Golden rules

As a seasoned investment banker turned robo-advisory firm founder, Alex Ypsilanti has three golden rules when it comes to personal investments. These rules have guided him, a risk-averse investor, on his journey.

1. Don’t invest in things you don’t understand

“Warren Buffett says, ‘Never invest in a business you cannot understand’. If you are enthusiastic about an investment opportunity and have the resources to understand it, then that can make for a great trade. Otherwise, it is safer to stay put. Robo-advisory platforms can offer transparency and product solutions that are aligned with a customer’s understanding and interests.”

2. Know when to get out

“People tend to focus too much on when to invest and not enough on when to sell. I think it is as important to know when to sell a stock, for example, as it is to know when to buy it. Investors should have a target for their investment — whether this is in terms of time, price or an event. This is where digital wealth management solutions can be extremely helpful, in terms of educating investors and encouraging them to consider, set and execute on those targets.”

3. Always stay on top

“Many of us do not look at our investments often enough, particularly when they are doing poorly. Staying informed about the market, our portfolios and, most importantly, our options at any given time is the surest way of making the most out of a particular situation or event. Robo-advisers can be really useful in providing suitable micro-engagements or nudges that help us stay tuned with our investment lives — very much like a human adviser.”

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