Swanest: Technology And ETFs Will Disrupt Investment

“Not only do we aim at disrupting investment service providers, we want to push robo-advice to its next level. We may even become a family office with artificial intelligence to offer superior financial services to potentially everyone.”

So reads the website of Swanest, Europe’s latest offering in the world of technologically-driven and automated investment services. Many commentators have spoken of such firms recently with admiration and fear that they could grow to threaten the long-dominant banks and active fund management houses.

You may have heard of the likes of Wealthfront and Betterment in the U.S., who use algorithms to make investments for their clients, while we have Nutmeg in the UK, which allows smaller investors access to a bespoke investment portfolio online. Swanest aims to be in the middle – a brokerage platform which guides clients to create their own ETF-only portfolios for a flat fee.

Swanest came to market last October with a trial run for end users, who can build portfolios and simulate returns, and the four Belgian founders plan to launch the firm for real in early 2016, focusing on the UK market. ETF.com Europe sat down with co-founder and CEO Silvan Schumacher to find out more.

ETF.com: How did you start this business model and what does it look like?

Schumacher: We started last September as four entrepreneurs who were frustrated about how the banking system is working now; we saw what was happening in the U.S. with robo advisers and we wanted to bring this business model to Europe.

As we approached the end of the year, we thought we should add our own DNA and adapt it to the European market. We adopted a new value proposition that is called goal-based investment; we tested it in the market, it gathered traffic, we interviewed people – and again we changed the model. What we have now is a business model that is a smart investment platform that helps people to build portfolios.

We discovered that young people are using it, and what’s important is they have the option to state their preferences. Now we can help them to discover ETFs in sectors and countries. Based on the fund selection, they can build portfolios, the allocation of the assets is automated to help them steer and control the portfolios, and we automate the management to help them optimise their returns. There will be guidance if they need help.

ETF.com: How do you sum up your algorithmic process and use of modern portfolio theory to allocate assets?

Schumacher: Modern portfolio theory helps you optimise your returns for a given level of risk. And it is not entirely perfect as a theory but it helps you make a good trade-off between risk and return and to diversify your portfolio. It’s used by major financial institutions. At the moment we focus on using this theory to help people build portfolios and we will also build out the algorithm side of the business in the near future.

ETF.com: Do you genuinely think the future will be all about technology and robo-advice?

Schumacher: Yes, absolutely. Maybe let’s go back to the beginning – the banks messed it up. There are now a lot of people, especially young people, who have money to invest. They can either go to the banks, which are not transparent and charge high fees, and which have a narrow view on investment in general. Or they can go to a financial adviser, but an adviser may not be interested in them if they only have between £10,000 and £30,000. So what do they do? There’s a big vacuum left by the banks.

Technology can fundamentally help people to invest their money. That does not mean investment advisers will not be useful in the future. These investment platforms focus on wealth management and they will be a useful commodity, but what’s all around wealth management, like tax and real estate advice, will be brought forward by people, not platforms.

ETF.com: Why aren’t you targeting Belgium first, as you are all based there?

Schumacher: You need a large market to be a robo adviser, as you need a lot of customers to make if profitable. And Belgium is a small market, so has a limited potential for growth. People are also not as internet savvy here, so maybe won’t use the platform. On the other hand you can’t efficiently target them online in a low-cost way if they are not used to digital channels, so it also means we can’t market them effectively. In the UK people are more internet savvy and the regulatory environment differs immensely. They want the UK to become the FinTech hub both in Europe and worldwide, and the UK really does help new companies come into the market.

ETF.com: The UK regulator is concerned about the difference between advice and guidance. If you are steering customers to help them, how can you make sure you are not giving advice?

Schumacher: There is a big space for interpretation, I agree. At the moment we are still investigating this. Whether we are going to provide guidance in the form of insight and analytics or whether we become real investment advisers – there’s room to play with this. We need to check with our law firms and license providers as to how best we can make this a fit.

You can think of us like a smart brokerage platform which gives guidance, focuses on ETFs and gives you the tools to manage your portfolio. We are not just offering 10 questions, and hey, you’ve got a portfolio. It has way more customisation than that.

ETF.com: How will you pick ETFs?

Schumacher: There are lots of indicators: fund issuer, liquidity, how often they are traded on the market, how are they replicated – personally I prefer physical replication – and we will go through that criteria for each fund.

ETF.com: Why do you like ETFs over active funds?

Schumacher: A lot active funds underperformed in the past and you don’t know which fund will outperform in the future. So it’s quite clever to invest in an ETF as it offers you a great degree of diversification and you can profit from a country or an industry, which is an easy concept to understand. And we do see low costs as crucial to help customers with investing. However, our philosophy is that if someone adds shares to his portfolio on the platform, that’s fine. We are not against that, or peer to peer lending either. There are great opportunities elsewhere but generally ETFs offer a great investment tool.