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Amazon Primed to deliver a game changer in the economics of robo advice

 

It has long been predicted that the big beasts in the world of etailing and tech would at some stage leverage their enormous reach and unparalleled access to data about every aspects of our lives and add wealth management – possibly robo advice – to its proposition that has already been extended to encompass, cloud computing, TV shows and even medicine.

 

In a recent report, analysts at Sanford C. Bernstein & Co in New York said that Amazon could soon offer its customers wealth management via a super-powered robo adviser or access to cheap investment funds.

The firm argued that Jeff Bezos’ company has countless advantages that would pave the way for entering the finance space; Amazon has a massive customer base including 100 million Prime subscribers about which it hold vast amounts of data and enjoys a superior reputation.

‘We think Amazon is well placed to disrupt the industry,’ Bernstein wrote.

Managing money is a far cry from Amazon’s core business, but the prospect is considered credible on the basis that one of its biggest rivals has already made the move.

Amazon could soon offer its customers wealth management via a super-powered robo adviser or access to cheap investment funds

Alibaba’s Ant Financial has already launched a money-market fund that quickly became the world’s largest; Ant Financial used its payments service, Alipay, as a gateway to get customers to use the money market fund.

The company has since created a robo advice service that uses artificial intelligence (AI) to suggest stocks, bonds and commodities for customers based on their payment activity; Bernstein believes this is a model that other tech companies could adopt.

Amazon wouldn’t even be the first US online retailer managing money; in January, Overstock.com partnered with tZERO Advisors to launch a robo adviser that charges $9.95 a month.

Despite Bernstein’s prognosis, Amazon hasn’t announced a desire to enter wealth management, and has refused to comment one way or the other.

However, the analysts believe there are signs Amazon could be targeting finance; it is reportedly considering a person-to-person payments feature for its popular Alexa virtual assistant and could even let drivers in Alexa-enabled cars pay for fuel by using their voice.

Bernstein pointed out that Amazon has also been in discussion with JPMorgan Chase and other banks with a view to setting up Amazon-branded bank accounts as reported by The Wall Street Journal in March.

And Amazon has branched out in many directions in recent years; it recently made a big splash by purchasing PillPack, an online pharmacy that delivers medicine directly to customers.

However, managing money would be a whole new ballgame — and one with the potential to damage Amazon’s reputation if it went wrong.

‘There is a clear risk to the brand. A mistake in fund management is not the same as sending a faulty product,’ Bernstein wrote.

The tightly regulated nature of the financial services industry create high barriers to entry for companies wishing to compete and untangling the web of regulation could potentially distract Amazon from its core business, where it faces stiff competition from the likes of Walmart.

This could be a game changer in the economics of robo advice

However, Bernstein argues that Amazon’s strong status and brand awareness among consumers could give it an edge in an industry that is still dogged by a lack of trust; Amazon has been awarded the top spot in Harris Poll’s annual corporate reputation survey for each of the last three years.

Bernstein suggested three ways Amazon could move into the world of finance:

The Full Monty – use a combination of AI and Big Data to directly manage assets and offer a full suite of financial products.

Analysts think this is unlikely because of the high level of risk it brings; ironically, Bernstein believes the biggest danger is that the experiment would work so well that it would accelerate the backlash against how much user data Silicon Valley controls.

Create a financial ‘supermarket’ that would give customers the option of buying mutual funds and ETFs through Amazon that are managed by external financial professionals. Amazon’s massive reach and wealthy customer base would give it significant leverage to negotiate for lower fees from traditional asset managers, who would take most of the regulatory responsibility should investors lose money.

Build, partner or acquire a robo adviser; Amazon could launch an automated wealth management platform that makes investment decisions by selecting stocks, funds and commodities.

While robo advisers like Wealthfront and Betterment in the US have attracted billions of dollars in assets, the biggest headwind to their profitability has historically been the high cost of client acquisition; that wouldn’t be a problem for Amazon or other big tech companies that have a loyal following of customers.

‘This could be a game changer in the economics of robo advice,’ said Bernstein.

 

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