www.pwc.com/it

Digital Wealth ManagementThe frontier to informed financial investments

in collaboration with

Index

Financial literacy in Italy 04

1.1 The Italian and Global context 051.2 ThebenefitsofanationalstrategyandtheItalianplan 061.3 Keyelementsforaneffectivenationalstrategy 08

The “Leonardo” project 10

2.1 Introduction 112.2 MainfindingsoftheSurvey 11

Italians’ investment persepectives 14

3.1 Italians’investmentschoices 153.2 Italians’wealthinarisk–returnperspective 18

The frontier of automated investment solutions 20

4.1 TheevolvingcustomerneedsintheWealthManagementindustry 214.2 FinTech&RoboAdvisory:ItalianandGlobalmarketoverview 224.3 Automatedinvestment:analysisofRoboAdvisorperformance 26

Bibliography 33

4

Financial literacyin Italy

5 Overthelastyears,financialliteracyhasbecomeakeytopicintheagendaofmanycountries.Therecentfinancialcrisishashighlightedthat,althoughpeoplehaveaccesstoanenormousamountofinformation,themajorityisunabletouseiteffectivelytosupportfinancialdecisions.Asaconsequence,peopleareinclinedtomanagetheirfinancesineffectively,withresultingsideeffectsonnationalwealth.

Financeisanintegralpartofeveryone’sdailylife:ensuringasufficientincomeafterretirement,planningpersonalorfamily’sfinancialneedsortaking-outamortgagetobuyahouseareonlysomeofthefinancialresponsibilitieseachcitizenhastoassume.Moreover,individualshavetoproperlyevaluaterisksandopportunitiesinordertomakeinformedfinancialdecisions.

Globally,oneoutofthreeadultsisnotabletoanswerquestionsthatrequirearelativelylowleveloffinancialknowledge1,thusstrugglingtomakecomplexfinancialdecisions.Furthermore,thespreadofmultichannelofferingstrategiesandtheconcretepossibilitytoacquirefinancialproductsthroughanydigitaldeviceareincreasingtherelevanceofalltopicsrelatedtofinancialliteracy.Multiplesurveyshavebeenconductedonalargepanelofcountriestoinvestigatetheleveloffinancialliteracyoftheircitizens.ResultshaveprovedtobedisappointinginmanycountriesincludingItaly,wherethefinancialliteracyscorerecordedhasbeenof37%2,significantlylowerthanwhatthemajorityoftheotheradvancedeconomieshaveachieved.Inthelastdecade,thesesomewhatdiscouragingresultshavepromptedmanycountries(e.g.CanadaandUnitedKingdom)toestablishinstitutionsandorganizationsaimedatdesigningandlaunchingnationalfinancialeducationstrategiestofinanciallyeducatead-hoctargetsofthepopulationandmonitortheresultstotacklepotentialimprovingareas.

Similarly,Italyhasrecentlylaunchedanationalstrategytopromotefinancialliteracy.Evenifitisprematuretoevaluatetheconcreteresultsofthedifferentnationalinitiatives,effectivenessmaybepartiallyassessedifcomparedtosimilaractionscarriedoutinthepastbycomparableGovernments.

Theincreasingurgencyofplanningpensionsproperly(giventheagingpopulation)andthe

1 Batsaikhan,Demertzis,Uuriintuya.2018.“FinancialliteracyandinclusivegrowthintheEuropeanUnion”.

2 FinancialLiteracyaroundtheWorld,2015.

widebreadthoffinancialinstruments’supplyareonlypartofthereasonsthatmakefinancialliteracykeyinanynationalagenda.Theultimateaimofanynationalstrategyistoprovidethepopulationwithallthenecessaryinstrumentstomanageitswealthinlinewithshortandmedium-longtermgoals.

1.1 The Italian and Global context

FinancialLiteracyisdefinedas“acombinationofawareness,knowledge,skills,attitudeandbehaviourneededtotaketherightfinancialdecisionsand,ultimately,achievepersonalfinancialwell-being”.(High level Principles on National Strategies for Financial Education, 2012).Thedegreeoffinancialeducationisgenerallymeasuredastheabilitytoanswercorrectlybasicfinancialquestions,usuallystructuredalongfourmaintopics:

1. Riskdiversification;2. Inflation;3. Interestscalculation;4. Interestscapitalisation.

TheItalianfinancialliteracylevel(37%),onlyhighertothePortugueseone(26%)withintheEurozone,isevenmoreconcerningwhencomparedtowhathasbeenrecordedinG20countries,suchasCanada(68%)orGermany(66%).ItalyanomalouslyrankssecondtolastalsoamongtheG20countries,presentingleveloffinancialeducationinlinewithdeveloping,ratherthandevelopedcountries.Theseresultsaremorerelevantgiventheprovencorrelationbetweenacountry’sfinancialliteracylevelanditseconomicdevelopment.

InvestigatingthecausesofthepoorscoreofItaliansonfinancialmatters,itisinterestingtohighlighthowmostoftheso-calledmillennials3 donotknowtheconceptofinflationand,ifcomparedtopreviousgenerations,theygenerallyshowalowerleveloffinancialcompetences.Thisdivergencecouldbepartlyexplainedbythenaturaldistancefromrelevantfinancialchoices(e.g.housepurchases,retirementplanning,etc.)thatcharacterisemillennialsbut,atthesametime,themaincausemaybereferredtothelackofsupportfromtheeducationsystemasawhole.ThisgapisevenmoreevidentifweanalysethelowcorrelationbetweentheyoungItalians’educationlevelinmathematicsandreading

3 Peoplebornbetween1981and1999.

6 andtheirfinancialliteracy.Infact,asPISA2015resultsshow,only42%ofstudents4haveobtainedperformancesalignedwith,orsuperiorthan,whatwasexpectedbasedontheirmathematicalandreadingskills.

InItaly,“do it yourself”solutionsareoftenthepreferredoneswhenpersonalinvestingcomesintoplay.Thisattitudeistheresultofseveralfactors,includingageneralisedoverestimationoffinancialcapabilities(especiallyinmenandgraduatedpeople)andasharedmistrustoffinancialinstitutions,whichmakesItaliansreluctanttorelyonindustryexperts’advices(onlyaquarterofthepopulationwantstoinvestafterhavingreceivedaprofessionaladvice),preferringthosecomingfromfriendsandrelatives.

Thefollowingmessagesaretheclearsynthesisofthecombinationbetweenthelowfinancialeducationlevelsofthecountryandsomeofitsendogenousculturalfactors:

1. Italy needs a proper financial literacy strategy

Thecommonlackofbasicskillshinderspeopleinmakinginformedfinancialchoicesintheirdailylives,causingpotentialnegativeeffectsonhouseholdwealth;

2. Young people have access to all means, but need contents and an approach

An“early”educationcansignificantlyreducethegapbetweenyoungItaliansandtheirpeersinthemostfinanciallyeducatedcountries.However,youngpeoplemustbetargetedadequatelyconsideringtheirpreferencesandneeds(e.g.digitalcommunicationchannels,etc.);

3. Financial literacy is directly connected with the adoption of financial advisory services

Animprovementinthegeneralleveloffinancialeducationmighthavepositiveimpactsnotonlyonhouseholds’financesbutalsoontheAssetandWealthManagementindustry.

1.2 The benefits of a national strategy and the Italian planOverthepastdecade,bothatglobalandEuropeanlevel,severaleffortshavebeenmadetotransmittheneedofajointactionbetweennational

4 Referstoapanelof15yearsoldstudents.

institutionsandprivateorganisationsinordertoincreaseindividuals’financialliteracy.Thisneedforfinancialeducationisdrivenbysixmainareasofinterest5,someofwhicharecoveredindetailsinthefollowingchapters:

1. Greater likelihood to prepare for retirement and to do so with a greater accumulation

Withtheincreaseinlifeexpectancyandthedeclineinbirthrates,socialsecuritysystemsarestrugglingtosustaintheperformancelevelsguaranteedinthepast.Thus,pension-fundingresponsibilityisgenerallymovingfromGovernmentsandenterprisestowardsindividualworkers,whoareoftenmissingthenecessarytoolstomakeinformeddecisions.Ingeneral,moreadvancedfinancialskillsdetermineagreaterdiversificationoftheretirementportfolio,withhigherexpectedreturnsandlowercosts.

2. Diversification of the investment portfolio Itisimportantthatpersonalfinancial

portfoliosarealignedtotheindividual’speculiarlifecycleneeds,byconsideringvariousinvestmentoptions.Althoughthedecreasedincidenceofrealassets,theItalians’portfoliosstillhavealowlevelofdiversificationandarecharacterizedbylargequotasofcash.ThisportfoliocompositionispartiallyduetothegeneraliseddecreaseofItalianbond(Italiansfavoritefinancialassets)yieldandhasonlybeenpartiallycounterbalancedbyanincreaseinwealthallocatedtomanagedinvestments.Italianscontinuetokeepasmallamountoftheirwealthinvestedinfinancialassets,althoughithasbeenproventhatacompleteabsenceoffinancialinvestmentsresultsinapotentiallossofwelfare.

3. Higher awareness in loans request process Peoplewithlowlevelsoffinancialliteracy

tendtoaccepthighertransactioncosts,facing“out of business”feesandgenerallysubscribingtoloansathigherrates.ConsideringthatthehouseholddebtlevelinItalyisaround40%ofGDP,lowerthantheEuropeanaverage,aninformedevaluationoffinancingoptionsrepresentsasignificantlevertooptimiseresources.

5 FinancialliteracyandinclusivegrowthintheEuropeanUnion,2018.

7 4. Better resources allocation Short-termdecisionshaveimpactsonlong

termearningopportunities.Agoodfinancialliteracylevelcanhelppeopleinbetterunderstandingrisksandreturnsfordifferenttypesofinvestmentsand,therefore,allowsanefficientallocationofresourcesandensuresoptimisedfinancialsecuritylevelstoindividualsoverthecourseoftheirlives.

5. Increased planning and savings for social groups at greater risk

Itispossibletoimplementlow-costfinancialeducationprogramsaddressedtohigh-risksocialcategories(e.g.low-incomeindividuals,etc.)overashortperiodoftime,producingalmostimmediatefinancialbenefits(e.g.higherresourcesinvestedinadditionalsavingsaccounts,etc.).

6. Greater savings and behaviors planning for children and young adults

Structuringadequateeducationalprogramsforyoungpeopleisfundamentaltofosteraninformedfuturegeneration,abletohandletheuncertaintyoftheinvestmentandretirementlandscape.

InlinewiththeOECDandEuropeanUniondirectivesaimingatimprovingtheleveloffinancialeducation,theItalianGovernmenthaslaunchedanationalstrategywithathree-yearplantoreach“acountryinwhichfinancialknowledgeandexpertiseareavailabletoeveryone,whereeveryonemaybuildasafeandpeacefulfuture”(Quello che conta,2017).Themaintargetsofthenationalstrategyare:

1. The whole population Ithasbeenlaunchedanad-hoconlineportal,

named“Quello che conta”,whichcoversthemaintopicsaboutfinance,insuranceandpensionschemes.Thewebsiteoffersadviceusingunderstoodlanguagetoprovidesupportforeverydayfinancialdecisions.Inthefuture,specificlearningtools(e.g.videotutorials,etc.)andpracticaltoolswillbeuploadedon“Quello che conta”.Furthermore,followingthestepsofwhathasbeendoneinothercountries(e.g.Canada,etc.),afinancialliteracymonthwillbeestablished.

2. Young adults Therearealreadymanyongoingand

plannedactivitiesaimedatoptimisingthefinancialexpertiseamongyoungadults.MostinitiativesdirectlyinvolvetheMinistryofEducationandwillthenbeconveyedviaad-hocschoolcurricula,withtheobjectiveofstimulatingstudentsbutalsoraisingawarenessamongteachers.

3. Adults Thestrategyclearlysetsoutseveralinitiatives

tobecarriedoutdirectlyatworkplaces,aimedatsupportingworkersinmanagingtheirresourcesintheshortandmedium-longtermfinancialplanning.Bothteachingandpracticaltools(e.g.games,simulations,etc.)willbeprovidedwithinworkplaces.

4. More vulnerable groups (e.g. older people, migrants, etc.)

Forthemostvulnerablecategories,messagesandad-hocinformationwillbeconveyedthroughexistingcommunicationchannels,givingthemtheneededtoolstomakemoreinformeddecisions.

5. Small entrepreneurs Thestrategyincludesadirectcooperation

withindustryassociations(e.g.Unioncamere,etc.)aimingatincreasingfinancialliteracyamongbothItalianentrepreneursandthosegroupsofpeoplewhicharemoreexposedtofinancialrisksandemploymentresponsibilities.

Tosummarise,theaimofthenationalstrategyistoprovideaservicetobothpeopleandthewholeCountry,thusstartingavirtuouscirclebetweeninstitutionsandindividuals.Thechallengeisundoubtedlyambitious,buthasbeensupportedbyauthoritiesandmayleverageanenvironment,alreadyweanedfromexistinginitiatives.

Withinthecomplexlandscapeofexistingandpotentialinitiatives,oneshouldnotunderestimatetheimportantrolerepresentedbythenewdigitalcommunicationchannels.Thesetechnologiesneedtobecarefullyconsideredasakeyinstrumentoffinancialinclusion,ratherthanamerewaytoimplementamultichannelstrategytospreadandimprovefinancialliteracy.Infact,thesemeansrepresentapowerfulwaytotargetthewidestpossibleandyoungestaudienceaccesstoavarietyoffinancialproductsandservices,rangingfromstandardbankingproductstospecialisedconsultancyonfinancialinvestments.

8 1.3 Key elements for an effective national strategy

Withanationalstrategystillintheearlystage,itisdifficulttoevaluatetheeffectsoftheactivitieslaunchedsofar.However,Italylagsbehindothercountriesintermsofstrategyadoptionandcantakeadvantageoftheresultsobtainedbyothercountrieswiththeirpastinitiatives.Thenationalgoalshouldbetoproposeaprogramabletoimproveindividuals’awarenessonfinancialissuesbyleveragingoninitiativesthathavehistoricallyprovedtobethemosteffectiveinthosecountrieswithabaselinecomparabletotheItaliancase.Recentstudiesshowhowtechniquescombiningbehavioraland/orpsychologicalelements,deliveredwithinadefinedtimeframe,representthemosteffectiveapproachtodelivercontinuingeffectsontheindividuals’financialbehaviors.

Overthelastyears,countriessuchastheUnitedKingdomhaveadoptedjustintimeeducationalinitiatives-coursesdesignedtoprovidefinancialtheoryelementsjustpriorthansinglechoicesand/oractionstobetakenbyindividuals.

Justintimeinitiativeshaveproventobeeffectiveininfluencingfinancialbehaviorsofinvolvedindividuals.Moreover,thisapproachhasrevealedhowpracticalskills,ifnotappliedpromptly,tendtoinfluencebehaviorswithaninverserelationtotheapplicationtiming.Inaddition,ithasbeenprovedthatthelengthofeachsingleinitiativehasadirectimpactonitseffectiveness:longerprogramshavegreaterimpactonparticipantsthaninitiativeswithaloweroverallduration.Ajustintimelearningsystemdoesnotconflictwiththeadoptionofinitiativesduringschool.Onthecontrary,astructurededucationalpathwiththecombinationoffinancialtrainingsessionsduringschoolyearsandinitiativesthroughoutadulthood,allowstostrengthenthebasicskillswhileprovidingconcreteandspecificfinancialcompetences.Furthermore,thevoluntaryorcompulsorynatureoffinancialeducationinitiativesdoesnothaveadirectinfluenceontheparticipantsabilitytolearn.ThisevidenceprovidesadditionalsupportinfavoroftheintroductionoffinanceasasubjectintheItaliannationaleducationsystem.

Thecombinedapproachshouldbecoupledwithtechniquesaimingatpositivelyinfluencingconsumers’behaviors.Forexample,introducingpsychologicalandsociologicaltools,aswellaselementsderivedfrombehavioraleconomyandfinance,caneasetheimplementationofthewidearrayoftheoreticalconcepts.Theultimateaimshouldbetosettheconditionsaccordingtowhichconceptsarenotonlylearnedbutalsoapplied,inlinewiththeneedsand,atthesametime,thebestlearningapproachesforthedifferenttargetofthepopulation.

Withthisinmind,thefirststepshouldbetoconsider,asareferencepoint,thosecountrieswhichhavereachedhigherleveloffinancialeducationand,atthesametime,havelaunchedlong-standingnationalstrategies.Inthisrespect,oneofthemostvirtuouscountrieshasbeentheUK,whose5-yearprogram(2006-2011)hasmultiplesimilaritieswiththe3-yearinitiativelaunchedinItaly6.

ThefirstBritishnationalstrategyhadtodealwiththesideeffectsoftherecentfinancialcrisisandtheconsequentreorganisationofthepublicentitiesunderwhichthestrategywasinitiallylaunched,makingithardtocomparethedifferentinitiativesandresults.However,theeffectsontheBritishpopulationhavebeensignificant,demonstratinghowproperlyadministeredinitiativesareabletoinfluencecitizens’dailyfinancialchoices(e.g.statisticalimprovementofpeoplesavings).

Inconclusion,awell-definedandimplementednationalstrategyisundoubtedlyakeystepandhasgoodprospectsintermsofeffectivenesswhenevermostoftheresourcesaredestinedtoinitiativestailoredtospecifictargetsofthepopulation.Furthermore,aproperstrategyshouldbeengineeredwithinitiativescharacterizedbyadequatelengthandtiming,designedwithinteractivedynamicsand/ortoolstopracticallyapplylearnedconcepts,fulfillingpeopleneedsthroughouttheirlifecycle.

6 TheUKnationalstrategyincludedsevenpillars:(1)interventioninschools,(2)programsforyoungadults,(3)onthejobseminars,(4)communicationandconsumerprotectionenhancementprograms,(5)onlinetoolsdevelopment,(6)informationprogramforneo-pa-rents,(7)developmentofanimpartialsystemtosupportindividualsinretirementandinvestmentdecisions.

9 Figure 1

Main institutional initiatives

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

LaunchoftheNational Strategy for Financial Capability

Financial Capability in the UK Delivering ChangeSevenpillarsprogramme1. Interventioninschools2. Programsforyoungadults3. Onthejobseminars4. Communicationand

customerprotectionenhancementprograms

5. Onlinetoolsdevelopment6. Informationprogramsfor

neo-parents7. Developmentofanimpartial

systemtosupportindividualsinretirementandinvestmentdecisions

NA

tion

al S

trat

egy

Tow

ards

a N

atio

nal

Stra

tegy Money Advice Service

Independentinstitutionofferingonlineandtelephonicadvicestosupportindividualsinfinancialdecisions

“Financial Capability Strategy for the UK”

InstitutionoftheFinancial Education Committee

Go liveofQuello che conta

NAtional Strategy3-years program with initiatives aimed to target1. Young adults2. Adults3. More vulnerable

individuals4. Small entrepreneurs

Italy

UK

Source:OECD,Quello che conta,MoneyAdviceService

10

The “Leonardo” project

11 2.1 Introduction

Inthefirsthalfof2018,PwClaunchedthe“Leonardo”projectincollaborationwithaninstitutional(ASSOSIM)andanindustrial(DeusTechnology)partnerinordertopursuethreemainobjectives:• analysingthedynamicslinkedtoItalians’

investmentchoices;• providingeasyandimmediateguidelines

tohighlightthebenefitsofDigitalWealthManagementsolutions;

• investigatingItalians’leveloffinancialeducationandattitudetowardsinnovativeinvestmentsolutions.

Withintheproject,PwChaslaunchedaninteractiveonlineportaltofulfilthethreestatedgoals.ThekeyscopeoftheportalistoactivateafinancialeducationalpaththatcouldbeaccessibleandunderstandabletoallpotentialinvestorsoftheItalianmarket.

Indeed,onceaccessedtheonlineportal,usersarefirstguidedintheselectionoftheirinvestmentprofilebyidentifyingboththeirobjectivesandrisk/returnpreferences.Uponcompletionoftheinvestmentprofile,theplatformsimulatestheperformanceofaportfoliomodelthatmatchestheselectedprofileonafiveyears’timehorizon,comparingthedifferentperformancesthatthesameportfolioallocationwouldhaveifmanagedwithorwithoutanautomatedinvestmentsolution.Returnsaresimulatedbasedonrealhistoricaldatathat,oncealignedtotheriskprofileselected,areprojectedthroughouta5-yearinvestmenthorizon,givingaconcreteandeffectivepictureofthepossibilitiesgivenbythemoderntechnologicalsolutions.Theresultclearlyemergingisapotentialadvantageofthemostadvancedtechnologicalsolutionsintermsoftotalreturn,efficiency,riskandmaximumperspectiveloss.

Furthermore,theportalhasaneducationalsectionentirelydedicatedtohighlighttheconceptsleveragedtoassessthequalityofinvestmenttargetsbygivingusersthechancetolearncriticalfinancialtopicslikeportfolioriskand/orperformanceindicators.

Finally,theusers’interactivepaththroughtheportalendswithasurvey,aimedatunderstandingtheleveloffinancialawarenessandthepersonalattitudetowardsinnovativefinancialsolutions,withparticularreferencetoDigitalWealthManagementsolutions.

2.2 MainfindingsoftheSurvey

Thankstoaneffectiveadvertisingofthe“Leonardo” projectthroughavarietyofcommunicationchannels(includingcorporatewebsites,socialnetworks,industryforums,e-newspapers,etc.),over1.000surveyswerecompletedinonlytwomonths.Moreover,thepanelwascharacterizedbyanevendistributionacrossdifferentgenerations(fromunder18toover65)andeducationallevels(formprimaryschooltoPhD).

Theanswerscollectedwerethenanalysedbymappingthedifferentinputsreceivedtofourmaindimensions:financialliteracy,levelofdigitalisation,attitudetochangeandpropensitytosubscribetoautomatedinvestmentsolutions,suchasRoboAdvisory.

Financial literacy

Theleveloffinancialeducationwasmeasuredthroughaqualitativeself-evaluationofrespondents,whowereaskedtoranktheirfinancialknowledgeintofourcategories(i.e.basic,low,medium,andhigh).Theresultshighlighthowonlyonepersonoutoffiveclaimedtohaveahighknowledge,whereasoneoutofthreeclaimedtohaveabasicorlowknowledge.Moreover,thedataobtainedassumesadifferentperspectiveifevaluatedacrossthedifferentagegroupsofthepanel.Indeed,whilejustover30%ofrespondentsbetween46and55declaredtobefinanciallyeducated,thispercentagefallsbelowthe20%iftheagegroupsattheoppositeendsofthesampleareconsidered,withrespectively19%(forunder26)and16%(forover65).Iftheresultshighlightedfortheolderrangeofthesamplemaybeexplainedbyageneralisedlowerlevelofeducation,thedataismorealarmingfortheyoungergenerations.Focusingonrespondentsunder26,thoughtheireducationisfarhigherthantheoneof

12 theotherdemographicgroups,thisconditionisnotdirectlyassociatedwithahigherleveloffinancialliteracy.Theseresultsmaybeinterpretedinlightofacombinationofmultiplefactors:theabsenceofanadequatefinancialeducationprogramintheItalianeducationsystem(seeChapter1)andthetimingdistancefortheyoungergenerationsbetweenfinanciallearningprocessandapplication(i.e..financialportfoliomanagement,choiceofthepensionscheme,signingamortgagetobuyahouse,etc.).

Inclination for digitalisation

Overthelastfewdecades,thewebhasbecomethemaininstrumentofcommunicationandinformationforcitizensofthemajorityofdevelopedcountries.ThesurveyclearlyshowedhowthenetworkrepresentstodayanirreplaceablesourceofinformationforItalianswithreferencetoinvestment-relateddecisions.Indeed,ingeneral,oneoutoffourItaliansreliesonthewebasthemainsourceofinformationforinvestmentdecisions.

Oftherespondents,18%getsinformedbyusingspecialisednewspapersandonly4%sawfinancialadvisorsastheprimarysourceofinformationforinvestments.Thelatterdataisevenmoresignificantifconsideredbasedonagegroups:ontheonehandofthesample,morethan30%oftheover65gathersinformationfortheirinvestmentsbytalkingtoafinancialoperator,ontheotherhandthispercentagefallsto3%ifconsideringpeopleunder45yearsofage.Thisresultclearlydemonstrateshowthereareheterogeneouspreferencesand,duetotheevolutionofmarketdynamics,financialoperatorsmustmoveforwardtodevelopboththebusinessmodelandtheofferingtakingintoaccountthechangingpreferencesofcurrentandpotentialcustomers.Toconclude,itisimportanttounderlinehowthesecondsourceofinformationisrepresentedby“acquaintancesmoreexpertonthesubject”,toevidencehow,inlinewithwhatreportedinChapter1,Italiansseemtofavoradvicecomingfromrelativesand/orclosepeopleratherthanfromindustryprofessionals.

Willingness to change

Although,asexplainedintheformerparagraph,thereisnoevidenceofalinearcorrelationbetweenthelevelofeducationandtheoneoffinancialliteracy,thefirstseemstohaveamajorimpactonthepropensityofindividualstoadoptinnovativeandtechnologicallyadvancedinvestmentsolutions.TwooutofthreerespondentswithauniversitydegreeoraPhDarefavorabletosubscribetoDigitalWealthManagementservices,whileabout30%ofpeoplewithelementaryorsecondarydegreeansweredthesame.Overall,theresultsofthesurveyareencouragingforindustryoperatorsinclinedtodevelopinnovativefinancialsolutions:slightlylessthan50%ofthesamplewouldindeedsubscribetotheseserviceswhileonlyoneinfivepeoplewouldbecertainnottoadoptanyofthem.

Therefore,playersshouldconcentrateonthe35%ofthesample,withparticularfocusonthelesseducatedclusters,whoconsiderthemselvesnotabletoassessthepossibilitytoadopttheseservices.Leveragingonthediscussionofthepreviouschapter,anationalstrategyabletoeffectivelyfosterfinancialliteracymightresultinaconsiderableriseinthedemandofDigitalWealthManagementservicesfromtheleasteducatedclusters,benefitingthetoplineoffarsightedindustryoperators.

Propensity to Robo Advisory solutions

Thelastdimensionanalysedaimstomeasuretherespondents’attitudetowardstheadoptionofaparticularDigitalWealthManagementsolution—RoboAdvisory,withoutdistinctionbetweendirectB2CsolutionsandB2Bservicesthatsupportprofessionaloperators.Consideringalltherespondents,abouthalfofthemturnouttobeattractedbytheseinnovativeinvestmentsolutionsandconsideredthemselvesreadytotesttheminrealinvestmentsituations,givenaserviceofferedbytheirbankorfinancialoperator.

13 Filteringrespondentsalongtheinitialinvestmentprofiledeclared,aclearcorrelationemergesbetweenthewillingnesstoadoptRoboAdvisorysolutionsandtheriskand/orperformanceprofile.Indeed,twothirdsofrespondentswhoarelookingtoconstantlybeatthebenchmarkintheirinvestments(aggressiveprofile),demonstratedapositiveattitudetowardsRoboAdvisorysolutionsifcomparedtothe24%ofrespondentswithaconservativeormoderateprofile.

TheseresultsseemtoindicatethatinvestorsgenerallyconsiderRobosolutionsasriskierthantraditionalinvestmentopportunities,despitetheirdifferentiatedofferingforeachinvestmentprofile.Thisperceptionmaybecounterintuitive,inlightofwhatpresentedinChapter4,inwhichsimulatedRoboperformanceinUSrevealthecompetitivenatureofthesesolutionsifcomparedtotraditionallymanagedportfolios.

14

Italians’ investment perspectives

15 3.1 Italians’ investment choices

AsdiscussedinChapter1,theleveloffinancialliteracyinItalyisbelowtheG20countriesaverage.FocusingonasubsetofG20benchmarkcountries,shortlistedbecauseoftheirhighleveloffinancialeducation(farsuperiorthantheG20averageof>57%),cleardifferencesemergeintermsofgrosshousehold’swealth7distribution

Figure 2

BylookingatFigure2,itisclearhowtheItalianhouseholds’environmentpresentsastrongimbalanceofgrosswealthdistributiontowardsnon-financialactivities,whicharemainlycomposedbyrural(35%)andreal(25%)assets.AlthoughSpain,FranceandGermanyalsoshowapreferenceforrealassets,therestofthepanelpresentsaclearpreferencetowardsfinancialassets,withUShouseholdsleadingthegrouphavingashareof69%investedinfinancialassets.

7 Grosshouseholdwealthincludesfinancialandnon-financialwealthofhouseholds,familymanagedmicro-enterprisesandnot-for-profitorganizationssupportinghouseholds.

Source:OECD.Stats,BCE,BancodeEspaña

Households’ wealth composition (2016)

Italy SwedenUKGermany USAFranceSpain

79%

21%

59%

41%

59%

41%

55%

45%

46%

54%

35%

65%

31%

69%

FinancialAssets

16 Figure 3

Thegrosswealthdistributionimbalancetowardsrealassetsisastructuralfeatureofourcountry,asdemonstratedbythehistoricalevolutionofdata(Figure3).Infact,inthesixteen-yearperiodfrom2001to2016,theoverallgrosswealthhasunevenlygrownby56%,withnon-financialwealthincreasedby67%,incontrastwitha22%increaseinfinancialassets.ThemaindriveroffinancialwealthgrowthhasbeentheincreasedvalueofAssetsunderManagement,asshowninFigure4.Consideringthehistorical(2011-2017)andprojected(2017-2021)

riseofAuMintheItalianmarket,managedwealthisexpectedtogrowby24%duringtheperiod2017-2021,withastakeheldinmutualandhedgefundsdestinedtoreach45%oftotalAuM,againstthe35%registeredin2011.TheseprojectionswitnessagrowingattitudetowardsmanagedassetsbyItalianhouseholdsand,combinedwithanincreaseintotalfinancialassetsfarsuperiorthantheoverallgrosswealth,revealarenewedconfidenceofinvestorstowardscapitalmarkets.

Source:Bancad’ItaliaAnnualreport

Italian households’ wealth growth (€ bn)

6.424

9.722 9.733 9.785 9.828

CAGR+ 7,1%

2001 2007...... 2008 2009 2010

2.982

3.442

3.994

5.729

3.792

5.941

3.734

6.051

3.676

6.153

9.835 9.809 9.725 9.769

2011 2012 2013 2014

3.586

6.249

3.763

6.045

3.876

5.849

3.991

5.779

10.002

2015

4.223

5.779

10.047

2016

4.268

5.779

FinancialAssets

CAGR+ 0,4%

17 Figure 4

Asset under Management evolution in Italy (€ bn)

However,thegrowingquotaofAssetunderManagementhasnotunderminedhouseholdsgrosswealthinvestedinnon-financialassets.Infact,themarkedpreferencetowardsnon-financialactivitiesistheresultofacomplexcombinationofelements,includingthegeneralisedlowlevelsoffinancialeducationofItalianfamilies.

DespiteItaliansgiveprioritytorealestateand/orruralinvestments,theexpectedgrowthforItalianmanagedwealth(Figure4),coupledwiththepotentialresultsofthenationalstrategysupportingfinancialeducation,(seeChapter1)couldbekeydriversfortheriseofthedemandinthemanagementservicesinthenearfuture.However,WealthManagementoperatorsneedtohavethenecessaryinstrumentstodealwiththeperspectiveriseindemand,leveragingarenewedserviceoffer(seeChapter4)ideallyconveyedthroughamulti-channelstrategydesignedtosatisfythedifferenttargetedcustomers.

Source:Assogestioni,MEFOP

1.2961.370

1.516 1.777

2.042

2011 20132012 2014 2015 2016

454

419

2017 2018E 2019E 2020E 2021E

Mutual Funds

Alternative Funds

38

216

10070

466

481

40

228

9362

466

556

45

247

9871

591

683

46

267

114

78

640

849

49

289

128

87

2.164

685

849

54

300

129

95

2.319

717

1.016

57

317

135

78

2.507

773

1.092

62

345

149

86

2.735

833

67

375

165

95

2.936

898

183

106

3.154

959

1.341

203

117

409445

80

1.198

73

1.265

CAGR+10,2%

CAGR +8,0%

PensionsSchemes

Retail Mandates

InstitutionalMandates

InsurancePolicies

18 3.2 Italians’ wealth in a risk - return perspective

InordertoproperlyassessItalianhouseholdwealthinarisk/returnperspective,analyzingthedistributionbetweenfinancialandnon-financialassetsisnotenough.Indeed,asimplebreakdownoftheallocationcanindicateapreferencetowardsspecificcategoriesofassetsbutdoesnotprovideanadequaterepresentationoftheperformanceacrossagiveninvestmenthorizon.Inordertoevaluatehouseholds’returnperformance,itisfirstnecessarytomapthewealth’scomponentstothestandardisedgroupsidentifiedbytheOECD.

Thereafter,itisessentialtodefineabenchmarkindexrepresentingaproxyofthereturn8foreachidentifiedwealthcomponent.Onceallbenchmarkindexesareselected,followingaportfolioinvestmentapproach,itispossibletocomputetheweighted9averageofreturnscombiningeachwealthcomponentovertheselectedinvestmenthorizon.Thefollowingpicture(Figure5)representstherealisedreturnofa100,000euroinvestmentthatreflectsthecountry’shouseholdwealthallocationstartingfromJanuary1,2012andannuallyrebalanceduntilDecember31,2017.

Figure 5

8 Aggregatewealth(benchmark):liquidityanddeposits(inflation);bonds(futureson10-yeargovernmentbond);sharesandequity(equitymarkets);mutualfunds,lifeinsuranceandannuities,pensionfunds(investmentfundproxybuiltforeachcountry);houses(HousePriceIndex);land(Eurostat,LandPriceSummary).

9 Weightsforthereturnscalculationwereobtainedbyconsideringthesharesofeachinvestmentclassontotalassets.

Households’ historical returns estimate

Source:Investing.com,Statista

95

100

105

110

115

120

125

130

135

2012 2013 2014 2015 2016 2017

Italy Germany UK USA Sweden

19 ThissimulationshowshowtheabsolutewealthofItalianhouseholdshasregisteredtheworstperformanceamongthepanelofanalysedcountries,presentinganalmostnullreturnalongtheselectedinvestmenthorizon.Onthecontrary,AmericanandSwedishfamilieshaveregisteredthehighestreturnswith30%and29.7%respectively.Resultsobtainedbythelattercountrieshaveresultedfromanunbalanceddistributionofwealthinfavoroffinancialassets,ifcomparedtotheItaliancase.However,thisover-performanceshouldnoterroneouslyleadtotheconclusionthatfinancialassetsarebydefinitiontheoptimalchoicetoobtainhigheryields.InGermany,forexample,eventhoughthewealthdistributionwassimilartotheItalianone,withnon-financialassetsrepresentingthemainportionofhouseholds’wealth(Figure2),familieshaveregisteredanextra20%returnoverthereferenceperiod.Thereasonofsuchgapliesinthedifferentreturnsoflandanddwellingsbetweenthetwocountries:inItaly,theseinvestmentshaveproducedalossgreaterthan10%,whileinGermanytheyhavegeneratedareturnhigherthan20%.Thiscasedemonstrateshowthemere

prevalenceoffinancialassetsinhouseholds’portfoliosdoesnotensurehigherreturns.TheInvestmentstrategyshouldbedefinedaccordingtothecountry-specificmarketconditions.Thus,theperformanceisadirectresultofhouseholds’capabilitytotakeinformedinvestmentdecisionsthatarereasonablyinfluencedbythedegreeoffinancialeducation.Toprovideadditionalsupportingelementstothisassumption,Italianhouseholds’yieldwassimulatedbyusingadifferentassetallocation.Inparticular,giventheconsistencybetweenUSandItalianindividualwealthcomponents,theanalysisshowshowItalianhouseholdscouldhavebenefitedofatotalreturnofmorethan15%withastrategicassetallocation,alignedwithAmericanhouseholds(Americanallocation)comparedwiththeeffectivereturnobtainedofalmost2%(Italianallocation)(Figure6).Dataseemtosupportthehypothesisthatthereisacorrelationbetweentheleveloffinancialliteracyandhouseholds’return.Inparticular,thesimulationshowshowagreaterfinancialeducationgenerallyimpliesmoreinformedinvestmentdecisionsand,asaresult,superiorperformancesoftheinvestmentportfolio.

Figure 6

Italian households’ historical returns estimate

Source:Investing.com,Statista

95

100

105

110

115

120

125

130

2012 2013 2014 2015 2016 2017

Portfoliovalue(Italianallocation) Portfoliovalue(Americanallocation)

+ 1,72%

20

The frontier of automated investment

solutions

21 4.1 The evolving customer needs

in the Wealth Management industry

TheWealthManagementmarketisgoingthroughaprofoundevolutionprocess,drivenbyatwofolddemandchangeintermsofnewcustomerrequirementsandapotentialrenewaloftheservicesofferedbytheindustryoperators,aimingtotargetaffluent10andmassaffluents11clientneeds.

Operatorsneedtoredesigntheirbusinessmodels,exploitingnewdistributionchannelsandDigitalWealthManagement-basedsolutions,inordertokeepanoffertailoredtomarketpreferences.Indeed,theadventofDigitalWealthManagementsolutionshasprofoundlychangedthetraditionalvaluechainbasedonacustomer-managerrelationshipandfosteredaprogressivedisintermediationprocess,similartowhathappenedinthebankingindustry.

Thisnewmarketset-uphasopeneduptonewpotentialoperatorsabletoenterthemarketdynamicallyandefficientlybuildingtheirbusinessmodelsontechnologicallyadvancedservicesandincreasingthecompetitionandthepressureonprofitmarginsoftraditionaloperators.However,incumbents12continuetohavetheopportunitytodeveloparangeofsolutionstargetingnewcustomersegments,thuspotentiallybroadeningtheirbusinesshorizons.

TherecentfinancialcrisishasplayedakeyroleinredefiningtheWealthManagementmarket,withaninitialreductionbothinthenumberofmandatesandinthevolumeofAuM(respectivelyby28%and21%from2007to2008),whichreturnedtopre-crisislevelsonlyin2013.Therefore,thesystemicimpactofthecrisishasinducedmarketoperatorstorestoretrustamongclientsthat,contemporarily,havebecomeincreasinglyindependent,demandingandinterestedinmoredirectandtransparentmanagementservices.

Thus,inthisnewscenario,itispossibletoindicatefourkeymarketprioritiesonwhichtheoperatorsshoulddesigntheirnewoffers:

1. Personalisationandinvestorsengagement Marketplayershavetoredesigntheirofferbysegmentingclientsbasedontheircurrentneedsandbydevelopingservicesdifferentiatedforeachtargetcategory.

2. Convenienceandaccessibility DigitalWealthManagementsolutionsrespond

toadualmarketrequirement.Ontheonehand,theyallowcompaniestoreduceoperatingcosts,increasingprofitmargins,andontheotherhand,theyprovideaservicethatgenerallyfulfilnewmarketrequirements.

Besidesbeingconvenientandaffordable,DigitalWealthManagementsolutionsallowclientstoaccesstheirinvestmentsremotelyandwithouttimeconstraints,throughdigitalapplicationsandinteractivetoolssuchasChabotandintuitiveuserinterfaces.

3. Digitalisationandrelevanceofnetworks Agrowingnumberofpotentialcustomers

usessocialnetworksasaprimarychannelofinformationforfinancialinvestments.Arelevantexampleofthistrendaresocialinvestingplatforms,inwhichuserscansharetheirinvestmentstrategiesandachievepositivereturnsbasedonhowmanyotherinvestorsdecidetoadopttheirstrategies.Giventheongoingtransformation,industryplayerscannotaffordtoignorethesedigitalchannelstoreachtheirclients,especiallywhenitcomestoyounggenerations(18-21)andsmallinvestors.

4. Simplicityandtransparency Regulationshaveanincreasingweighton

thebusinessoffinancialinstitutionsanddeterminedseveraltransformationsas,forexample,theriseincapitalisationandliquidityrequirements.Newregulatoryrequirementshavealsoinvolved,inrecentyears,theWealthManagementsector,withafocusonthetransparencyonappliedmanagementfeesandthereductionofinducements13andconflictsofinterest.Newregulationspushoperatorstooffersimpleservices,easilyunderstandablebynon-professionalclientsandwithadetailedlevelofreportingontransactionswiththeultimateaimtoensuretransparencyandimproveclienttrustinthewholesystem.

10 Wealthincludedbetween20.000€and100.000€.11 Wealthincludedbetween100.000€and250.000€.12 Consolidatedmarketplayers.13 “Anyformofmoney,goodsandservices(otherthanfeesand

skillsnormallybilledfortheservice)thataninvestmentfirmoritsemployeesreceivefromathirdpartyinconnectiontotheserviceprovidedtotheclient“(CESR).

22 4.2 FinTech & Robo Advisory: Italian and Global market overviewThetermFinTech,abbreviationofFinancialTechnology,indicatesthe“financialinnovationallowedbytechnologicalinnovation,whichcanbetranslatedinnewbusinessmodels,processesorproducts,influencingsignificantlythefinancialmarkets,theinstitutions,ortheprovisionofservices”(Carney,2017).

ThesizeofglobalFinTechmarketisconstantlygrowingandglobalinvestmentsinthissectorhavereached25billioneuroin2016.Themajorityoftheseoperationsresultsfromtheso-called“fintegration”,theprocessofacquisition,partnershipordirectinvestmentinFinTechcompaniesbylargebankinggroupsandVentureCapitalfunds.

ThemajorityofFinTechinvestmentsin2016wereconcentratedinAmericaandAsia,withrespectively55%and36%ofthetotal.Europerepresentstheremaining9%,drivenbytheUnitedKingdom;while

inItaly,investmentsinFinTechaccountedforonly33.6millioneuro(2016),1.5%oftotalEuropeand23timeslessthanvaluesregisteredintheUnitedKingdom.However,manyfinancialoperatorsareinterestedininvestingorpartneringwithFinTechcompaniesinItalytodeveloptechnologiesforcontractsandremoteoperations,supportingtechnologies(suchasbigdataandartificialintelligence),paymentservicesandautomatedcustomerservices,includingautomatedfinancialadvice(i.e.RoboAdvisory).AmongthemajorbankinggroupsoperatinginItaly,96%havealreadystartedorareplanningtoadoptsimilarmeasuresintheshort/mediumterm,resultinginimportantgrowthanddevelopmentopportunitiesinthissector.However,only16%oftheseinitiativesare,orwillbe,destinedtoautomatedcustomerservicessuchasRoboAdvisory.

Figure 7

FinTech investments projects by category (units)

Source:Bancad’Italia

23 Yet,itisinterestingtoanalysetheItalianRoboAdvisorymarketinordertodetermineitsintrinsiccharacteristicsandtocompareitwithotherdevelopedeconomies,identifyingtheareaswiththegreatestgrowthpotentialinthenearfuture.Onagloballevel,theAssetsunderManagementmanagedbyRoboAdvisorsareexpectedtogrowbymorethan350%inthenextfouryears,movingfromtheactual371billiondollarstonearly1,350billiondollarsby2022.Today,theAmericanRoboAdvisorymarketisthemostdevelopedone,accountingfor72%oftheabove-mentionedAuM,whiletheEuropeanmarketonlyrepresents3%ofit.

Figure 8

Compound annual growth rate of AuM managed by Robo Advisors (2018-2022)

However,focusingongrowthpotentials,theperspectiveUScompoundannualgrowthrate(CAGR)isexpectedtobesignificantlylowerifcomparedtoothercountries’,duetothehigherlevelofmarketconsolidation.BesidestheUS,allothercountriesoftheselectedsampleshowgrowthrateshigherthan40%,withItalyleadingthegroupwithaprojectedCAGRof70.5%,whichwouldboosttheAuMfromtheactual191millionto1,620milliondollarsin2022.Thankstothisgrowth,theabsolutevalueofItalianAuMwillovercometheSwedishone,whichcurrentlyis1.35timeshigher(Figure8).

Intermsofclients,Asiaprevailswith17.9millionusers,activelyadoptingRoboAdvisorysolutionsfollowedbyNorthAmerica,where97%ofclientsareconcentratedintheUnitedStates,andlastlybyEuropewhichhaslessthanonemillionofcurrentcustomers.

Figure 9

Compound annual growth rate of Digital Wealth Management clients (2018-2022)

ThecompoundannualgrowthrateofRoboAdvisoryclientsforthenextfouryearsisalsoveryencouragingforfinancialindustryplayers:theUSwillexperienceaCAGRof18%,whilethisratewillexceed28%inallotherareas.Onceagain,Italyseemstohavethehighergrowthpotential,withacompoundannualgrowthrateofnearly60%,almostdoublethanthatofGermanyorUK(Figure9).

Nevertheless,ItalycurrentlycontinuestobefarbehindotherdevelopedcountrieswhenitcomestothenumberofplayersofferingRoboAdvisorysolutions.Inparticular,Italyonlyhasfiveoperatorsactiveinthisindustry,sixtimeslessthanGermanyandfourtimeslessthantheUnitedKingdom(Figure10).

Source:Statista

Source:Statista

71%

Italy

55%

Sweden

46%

UK

42%

Germany

21%

USA

58%

Italy

45%

Sweden

28%

UK

33%

Germany

21%

USA

24 Figure 10

Number of players offering Robo Advisory solutions

Basedonthethreementionedparameters(i.e.AuM,numberofclientsandnumberofactiveRoboAdvisors),theItalianmarketofDigitalWealthManagementsolutionsisstillatitsearlystage,despitebeingcharacterisedbysubstantialgrowthpotentials.ThismakesItalyoneofthesixmostappealingcountriesforplayerswillingtoredefinetheirbusinessmodelsandofferinnovativesolutionstokeepupwiththedigitalisationwavethatcharacterisesthefinancialindustry.

However,differencesamongthecountriescannotbereducedtothedegreeofdevelopmentandgrowthpotentials,butareessentiallydrivenbythediverserangeofinvestors’needsandpreferences.Inthisregard,threedifferentclientprofilescanbeidentified:

1. Traditionalcustomers Traditionalcustomers’primaryinvestments

objectiveiscapitalconservation.Theyareriskadverseandlookforsecureandtransparentservicescharacterisedbydirectinteractionwithhumanfinancialadvisors,thustraditionalbusinessmodelsusuallymeettheirneeds.TheydonotseekautonomousinvestingopportunitiesandtheyaregenerallynotinterestedinDigitalWealthManagementsolutions.

2. Multitaskcustomers Multitaskcustomersarenotfullysatisfiedby

thetraditionalfinancialservicesoffer.Themainfinancialobjectiveistoincreasewealthoverthelongtermhorizon,withamedium-lowriskinvestmentstrategy.Theyvaluemulti-channelapproaches,withparticularreferencetoremoteservicesconstantlyaccessibleviauser-friendlydigitalinterfaces.Theylookforsolutionsthatallowthemtohavedirectcontroloftheirinvestmentswithoutgivinguptheexpertadvice,whichstillactsasapointofreferenceforinformedinvestmentsolutions.

3. Smartcustomers Smartcustomersarenotsatisfiedbythe

traditionalfinancialoffer.Theyareconfidentofmakingautonomousinvestmentdecisions,thustheyarelikelytoinvestwithoutanyexternaladvice.Theylookforsimple,accessibleanddigitalservices,thereforeinnovativemanagementsolutions,suchRoboAdvisors,seemtomeettheirneeds.

Source:BurnmarkDigitalWealth

25 Figure 11

Inordertomeetclients’needsacrossallsegments;playershavedevelopeddifferentRoboAdvisorysolutionscharacterisedbyadiversedegreeofautomationandclients’target.Thesesolutionscanbegroupedintothreemodels:

1. B2B Automatedcapitalmanagementsolutions

offeredtotraditionalplayers,whoneedtoimplementnewdigitalservicesfortheircustomers.Theautomatedsolutionisaddressedtofinancialmanagers,whowilluseittooptimisetheirconsultingactivitiesandeffectiveness.

2. B2C RoboAdvisoryservices,addresseddirectlyto

retailinvestors,abletomanageportfoliosinacompletelyautonomousway,withoutanyhumanintervention.Thissolutionrepresentsthefrontierforapurelyautomatedfinancialadviceservice,completelyfreefromahumancomponent.

3. B2B2C(Hybrid Advisory) Hybridsolutionsthatincludebothan

automatedservicetosupportthebankerandauser-friendlyinterfacetoallowclientswithanindependentaccesstohis/herportfolio,controllingtheperformanceandcustomisingtheperiodicreportsavailable.

Movingfromthesecategories,thetwomainRoboAdvisorymarkets,USandEurope,havebeenanalysedintermsofofferingsandclientsegmentsandthencomparedwiththeItaliancase.• USA:themarketispopulatedbothbynew

FinTechcompanies(e.g.WealthFront,Betterment)andbyAssetManagementincumbentswhoenteredtheRoboAdvisorybusiness(e.g.CharlesSchwab,Vanguard),introducingtechnologicalsolutionsmainlytargetedtoretailcustomers(B2C).Thesolutionsofferedpresentloworminimuminitialinvestmentrequirementsandlowmanagementfeesandtheyusuallyrelyonstandardfinancialproducts,mainlyExchangeTradedFuds(ETF).Smartcustomersarethemaintarget,infact,havingastrongattitudetoadoptdigitalsolutions,theyallowmarketoperatorstominimisetheinterventionofhumanadvisorsandthereforeoffercompetitivepricingsolutions.Inadditiontosolutionsaimedatdirectlyservingfinalcustomers,Americanplayers(especiallyincumbentswhohaveintroducedanautomatedsystemwithinthebankingservicesalreadyofferedbytheirnetwork)alsoofferB2Bandhybridsolutions,potentiallyappealingforTraditionalandMultitaskscustomers.

• Europe:themarketishighlyfragmentedandoffersbothB2BandB2Cservices.ThespectrumoffinancialproductsonwhichRoboAdvisorysolutionsrelyisbroader(includingmutualfunds,shares/holdingsandbondsaswellasETFs)inordertomeettheneedsofamorediversifiedcustomerbase,rangingfromyounggenerations,veryinclinedtowardstechnologicalsolutions,toTraditionalcustomers.ApeculiarfeatureoftheEuropeanmarketistherelevanceofonlinefinancialcommunities:blogsanddigitalplatformsplayafundamentalroleincreatingasystemthattiessocialnetworkingandWealthManagement.MostofEuropeancustomerscanbeclassifiedasTraditionaland/orMultitasksandtheypreferdiversifiedandmulti-channelsolutionsthatarenotfullyautomatedbutpreserveahumancomponent.

• Italy:themarketisstillhighlycharacterisedbythefeaturestypicalofthetraditionalWealthManagementsystemintermsofboththeoffering(variedrange,butstrongrelevanceofmutualfunds)andtheapproachto

The Robo Advisory market

Source:PwCAnalysis

26 customers.IntheItalianmarket,tailoredservicesareofferedtowealthierclients,whilestandardisedsolutionsareusedtotargetretailcustomers.ThemajorityofItaliancustomersareagedbetween40and50yearsandembodyatraditionalinvestmentprofile.Asexplainedearlierinthischapter,theseinvestorsdonotseektomanagetheirportfolioautonomouslythroughdigitalplatforms;instead,theystillpreferformsofadvicestronglybasedonthehumantouch.Thus,low-costB2Csolutions,whichdominatetheUSmarketandtargetSmartcustomers,wouldnotbecurrentlyappropriatefortheItalianreality.TheEuropeanmarketismoreinclinedtowardshybridmodels,whichallowcustomerstoremotelyaccesstheirinvestmentsondigitaldevicesaswellastorelyonhumanmanagersforadvices.ThesesolutionsseemtobeappropriatetotargetItalianmillennials,whocanbeclassifiedintheMultitaskclients’segment,aswellasItaliancurrentclients.Asaresultofthetransferofresourcesacrossdifferentgenerations,Millennialswill,inthenearfuture,havecapitalstoinvest.Infact,accordingtotheEuropeanCentralBank,todayabouthalfoftheEuropeanwealthisheldbypeopleover55andinthenexttwentyyears,thiswealthwillbetransferredtoyoungergenerations.

4.3 Automated investment: analysis of Robo Advisor performance

ThetraditionalWealthManagementmodelisevolvinginordertoadapttoanewcompetitiveenvironmentandtobeabletofacetheincreasingdemandthatcharacterisesthisindustry.Thus,itisinterestingtoanalyseandcomparetheperformanceoftraditionallyversusdigitallymanaged(i.e.RoboAdvisors)investmentportfolios.Infact,whenconsideringfinancialliterateclients,portfolioreturnisthemaindriverinfluencingtheirfinancialpreferencesanddecisions.

Historicaldatashowthatonlyfewtraditionallyactivelymanagedfundshavebeenabletooutperformtheirbenchmarks14.andthatthepercentageofmanagersunderperformingtheirrespectivebenchmarksincreasesastheinvestmentshorizon

getslonger.Giventheseevidences,ItalianmanagersperformbetterthantheirEuropeanandAmericancolleagues.Italyisinavirtuousposition,havingapercentageofactivelymanagedfundsbeatenbythebenchmarktwicelowerthantheUnitedStates,withreferencetoallthreetime-horizonsconsidered(Figure12).TheUSrealityisquiteconcerningwith84%oftheactivelymanagedfundsunderperformingtheirbenchmarkovera5-year15investmentperiod.Moreover,lessthan0.87%ofUSfundsareabletooutperformtheirbenchmarkssystematically16,highlightingthedifficultyoftraditionalplayerstomaintainresultsabovethestandardsyearafteryear.

Althoughhistoricalperformancemaynotbeagoodrepresentationoffutureresults,traditionalsystemsdonotseemtoguaranteeregularsatisfactoryreturnscoupledwiththeirgeneralinabilitytomeettheemergingneedsofyoungergeneration17.

14 Anobjectiveparametertoassesstheperformancemadeupofavirtualportfoliocomposedbyfinancialassetsofdiffe-rentnature,butofsimilarcompositiontotheportfoliowithwhichneedstobecompared.

15 S&P Dow Jones Indices.16 The0.87%representsthequotaoffundskeptinthefirst

quartilefrom2013to2017regardingreturns.Thus,itappearstobethemostoptimisticestimatetoindicatethosefundscontinuouslybeatingtheirbenchmarkovertheconsi-deredperiod.

17 Chapter4.1:TheevolvingcustomerneedsintheWealthManagementindustry.

27 Figure 12

Actively managed funds above their benchmark index over 3 time horizon [%]

Assaidabove,thetraditionalAmericanWealthManagementmarketseemstobetheworstperformerbut,atthesametime,theUSistheworld’sleadingRoboAdvisoryservices’market.Theseapparentlycontrastingevidencesmaybeexplained,atleastpartially,ifRoboAdvisorswereabletoobtain,onaverage,higherreturnsthantraditionalmanagers.Inordertoprovethisthesis,theperformanceofthetopfourAmericanRoboAdvisors,intermsofAssetunderManagement,wereanalysed(i.e.Betterment,WealthFront,CharlesSchwabandFutureAdvisor).

Itisessentialtohighlightthatthefourplayerspresentsubstantialdifferencesintheservicesofferedaswellasinthebusinessmodeladopted.Infact,whileBettermentandWealthFrontarepioneersoftheB2Cservice,CharlesSchwabintroducedanautomatedB2BsolutionwithinitsexistingbankingofferbecomingoneofthefirstinstitutionalplayertodevelopaneffectiveRoboAdvisorysolutioninternally.Byleveragingitscustomerbase,CharlesSchwabquicklybecametheleadingplayerintermsofautomatedAuM.Finally,FutureAdvisor,startedasaFinTechpioneer,wasrecentlyacquiredbyBlackRock.

ThestrategyadoptedbyBlackRockisanexampleofoneofthepossiblestrategies(“buy”strategy)thattraditionalplayerscanpursueinordertointroduceinnovativesolutionsintheirportfolioofservices.

Figure 13

Source:SPIVAReport

AuM managed by Robo Advisors ($ mln)

Source:TheRoboReport

13,455

Betterment

10,233

Weathfront

1,213

FutureAdvisor

27,000

Charles Schwab

Pioneers Incumbent

28 Asawhole,thefourprovidersmanageatotalof51.9billiondollars,applymanagementfeesthatrangebetween0%and0.5%andrequireaminimuminvestmentthatvariesfrom1to10,000dollars.Thesepricingconditionsmeettheneedsofaffluentandmass-affluentcustomers:alow-cost,yetvalid,assetmanagementsolution.Infact,traditionalassetmanagersrequiremuchhigherminimuminvestmentandapplymanagementfeesthatareinverselyproportionaltotheamountinvested.

However,traditionalcommissionfeesprofilesarealwayshigherthanthoseappliedbydigitaloperators,evendoubling,incertaincases,themaximumamountchargedbyRoboAdvisorysolutions.Infact,evenconsideringaninvestmentofover30milliondollars,managementfeesappliedbytraditionalmanagerswouldremainonaveragehigherthanthefeeschargedbythefourAmericanRoboAdvisorsanalysedonaninvestmentofonly10,000dollars(Figure14).

Thesedata,thoughrevealinghowRoboAdvisorsrepresentacompetitiveoptionfromapricingperspective,donotgiveanyinformationontheircompetitivenessbasedonarisk-returnapproach.

Figure 14

Fees per amount invested | Traditional Model

Priortoexaminethisaspect,thedifferentportfoliomodels,assetallocationandportfoliorebalancingstrategies,wereanalysed.EachRoboAdvisoryplatformhasaproprietaryalgorithm,accordingtowhichitdistributesandmanagestheinvestedcapitalleveragingontheeconomicprinciplesofportfoliooptimisation,givenaspecificriskprofile.Ingeneral,theactionsencodedbytheproprietaryalgorithmscanberepresentedasafour-stepprocess:

1. Selecttheinvestmentcategories Inthisphase,theriskprofileandtheinvestor’s

objectives(customerprofiling)areexaminedandthetargetareastoconsiderareselected,basedonclients’riskprofile,expectedreturnandthecorrelationbetweenthedifferentactivitiesandthefiscalprofile.

2. Selecttheinvestmentvehicle Thegoalofthisphaseistoselectthebesttool

foreachinvestmentclass.ThefourplayersmentionedadoptonlyfundsandETFstomaketheirinvestments.Atthisstage,thealgorithmidentifiesthemostappropriateETFforeachinvestmentcategory.

Source:Advisoryhq

29 3. Set-upoftheoptimalportfolio Duringthisphase,theefficientinvestment

frontier18isidentifiedandthealgorithmdefineshowtomaximizereturns,consistentlywiththeclient’sriskprofile.

4. Portfoliomanagement Thisphaseincludesalltheactivitiesrelatedto

monitoring,rebalancing,reportingandtax-loss harvesting19forthedefinedportfoliomodel.

Givenamoderateriskprofile,theanalyzedRoboAdvisorsshowcomparableassetallocations,withtheexceptionofCharlesSchwab,thatincludesasignificantcashcomponent(Figure15)initsautomatedportfolios.ThispeculiarfeaturecanbeexplainedwiththeinheritedbankingmodelofCharlesSchwabandtheresultingbenefitstohaveextraliquidityinsupportofitsbusiness.

Figure 15

Moderate profile portfolio composition

Source:TheRoboReport,Barron’s2018

18 Setofinvestmentbasketsthatdonotpresentalternativeswiththesameriskandgreaterreturnorwiththesamereturnandlowerrisk.

19 Saleofsecuritiesatalossinsuchawayastooffsetshort-termgainsfromotherinvestments,andthereforeminimizethetaximpactonthereturn.

5 9%

41%

ProfiloModerato

65 %

35%

62%23%

10%5%

Bonds Cash Ot h erEquity

Betterment Wealthfront

CharlesSchwab FutureAdvisorModerate Profile

58%

1%

41%

30 Startingfromtheseassetallocations,thereturnsofthefourRoboAdvisorsweresimulatedalongtheinvestmenthorizonbetween2011and2016.Moreover,returnssimulatedwerecomparedtotheperformanceofthreedifferentbenchmarks,eachresemblingtheperformanceofactivelymanagedfundsforthreedifferentriskprofiles(i.e.Aggressive,ModerateandConservative).

Inparticular,benchmarkshavebeenset-upwiththefollowingallocations,weightingdifferentindexesforeachassetclass:

• Aggressive benchmark (90% shares, 10% bonds)• Moderate benchmark (70% shares, 30% bonds)• Conservative benchmark (50% shares, 50%

bonds)

Lastly,themacro-categoriesoftheabove-mentionedassetswerebroken-downintomorespecificinvestmentcategories1and,foreachofthem,specificETFswereselectedtosimulatethereturn.

20 SubdivisionfollowingtheclassificationproposedbyMorningstar.

20

Figure 16

Automated managed historical portfolio yields | Moderate profile

Source:TheRoboReport,SpivaReport

80

90

100

110

120

130

140

150

160

170

180

2011 2012 2013 2014 2015 2016 2017

Betterment Wealthfront Schwab

FutureAdvisor Benchmark-Moderate Benchmark-Conservative

Benchmark-Aggressive

31 Theresults,displayedinFigure16,showthatthefourmainUSRoboAdvisorshavegenerallyobtainedbetterreturnsthantherelativebenchmarks:75%ofRoboAdvisorysolutionsoutperformedallbenchmarks,eventheaggressiveone,alongtheinvestmenthorizonconsidered(2012-2017).CharlesSchwabrecordedthepoorerperformance,asaresultofthehigherweightassignedtothecashcomponentofitsportfolio.However,CharlesSchwaboutperformedtwooutofthreebenchmarks,obtainingapositivereturnofabout50%overtheconsideredtimeframe.Startingfrom2015,allplatformshaveperformedsystematicallybetterthanthemoderatebenchmark.ThisresultisevenmoremeaningfulifcomparedtotheperformanceofactivelymanagedUSfunds.Indeed,only6.39%21oftraditionallymanagedinvestmentfundshaveregularlyobtainedhigherreturnsoverthesamereferenceperiod.

Inconclusion,theanalysissuggeststhatRoboAdvisorsareavaluablealternativetotraditionalinvestmentsolutionsintermsofbothcostandreturn.Giventheseresults,thediffusionoftheseautomatedsolutions,ifwidelyapplied,couldincreasemarketefficiencyforplayersandcustomerswithinthefinancialserviceindustry.InItaly,althoughmanagershaveprovedtobegenerallyabletoobtainbetterreturnsthanthoseoftheircolleaguesinothercountries,DigitalWealthManagementsolutionsrepresentakeyopportunityfortheindustry.Inparticular,hybridsolutions(B2B2C)wouldbeabletofulfilthegrowingdemandforassetmanagementexpectedinthefuture22,guaranteeingcomparableperformancesandavalidandtimelysupportformanagers.TheB2B2CsolutionsarethemostsuitablefortheItalianmarket,characterisedbyaninvestorbasewhichisnotyetreadytogiveupthe

intermediationofahumanadvisor.Furthermore,thesesolutionsmayleadtoagreaterinvolvementofusersintheinvestmentmanagementprocessand,ifadoptedasastandardbykeymarketoperators,maybeleveragedtoconveyjust in time23learningsessions,improvingtheleveloffinancialeducationandhence,supportingthecreationofaclientbasefullyawareofitsinvestmentchoices.

21 6.39%representstheportionoffundsthataremaintainedinthefirstquartilefrom2015to2017,regardingreturns.Itisthereforethemostoptimisticestimatetoindicatethefundsthatcontinuouslybeattheirbenchmarkduringtheperiodconsidered.

22 Chapter4.3:InnovativepositioningofItalyvsmarketin/extraEUintermsofinnovation.

23 Chapter1.3:FirstresultsoftheNationalStrategyadoptedandfollow-up.

32

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