This Startup is Turning Investing into a Lifestyle Brand

The financial services industry in Japan is pretty unsophisticated. There are relatively few options for brokerages and mutual funds, and what options there are tend to be expensive. Furthermore, since pensions and taxes are generally handled by the employer there is not much reason for the average Japanese to think much about investments.

Jin Nakamura of Money Design is trying to change that with a very interesting strategy.

In a market that is dominated by price competition, Money Design has set out to create a premium lifestyle brand that has nothing to do with finance.

And it’s working.

Money Design has become the largest robo-advisor service in Japan and is partnering with some of the largest banks here.

It’s a fascinating story, and I think you'll really enjoy it.

Show Notes

Why young Japanese are not investing Why it takes so long to launch a financial product in Japan The danger of using AI in investing How to reach $1 billion assets under management How to avoid competing on price in a price-sensitive market What it will take to get the Japanese public to believe in startups

Links from the Founder

The Money Design homepage Check out Jin's blog Friend Jin on Facebook Check out THEO. It's pretty cool.

[shareaholic app="share_buttons" id="7994466"] Leave a comment Transcript Disrupting Japan episode 98.

Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs. I’m Tim Romero, and thanks for joining me.

Today, we’re going to talk about money, about investment. It’s not about exciting things like venture funding and ICOs but about simple somewhat stuffy stocks and bonds.

Jin Nakamura cofounded Money Design as a way to introduce millennials and other young Japanese to investing. Money Design has created THEO, one of Japan’s first robo-advisors. Now, robo-advisors are a lot simpler than their name implies. Basically, all that’s happening is that you contribute a small amount of money each month and the robo-advisor will invest a certain percentage of that in stocks and another percentage in bonds and will make some adjustments if the allocations get too far out of alignment. I

t’s a simple concept, really, but as Jin explains, young Japanese have shown very little interest in this kind of investing. So to reach them, Money Design created a lifestyle brand, one that had absolutely nothing to do with finance or money, and it worked. Young investors have been flocking to the THEO system and have made it the largest robo-advisor in Japan. In fact, Jin shares some of the insight that will be very important to anyone running a fintech startup or trying to sell financial services in Japan.

But you know, Jin tells that story much better than I can. So let’s hear from our sponsor and get right to the interview.

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[Interview]

Time Romero: So I’m sitting here with Jin Nakamura, the CEO of Money Design and creator of THEO, a robo-advisory for retail investors. Thanks for sitting down with me.

Jin Nakamura: Thank you very much. Thank you for coming in our office.

Tim: Delighted to be here. I described Money Design in a very simple way but I think you can explain what you guys are doing much better.

Jin: Our product is very simple. We are providing a robo-advisory service in Japan. And then our global competitor is Betterment and Wealthfront. We are one of the first venture company to provide robo-advisory services in Japan.

Tim: For those of our listeners who don’t know, robo-advisory just means that individual investors can give you a relatively small amount of money and you invest it automatically for them.

Jin: Yes. We are providing the very simple financial product by smartphone. Once you access our website and then you answer just five questions. We showed the portfolio for each customer. Currently, we are providing over 230 portfolios for the customers. Once customer put their money into our portfolio, after that, we manage that discretionally.

Tim: Okay. You’re saying that there’s five questions.

Jin: Yes.

Tim: What kind of questions do you ask?

Jin: The first question is, ‘How old are you.’ And then second question, ‘Do you have any experience in investment?’ Third question is, ‘Are you a conservative or aggressive?’ Fourth question is, ‘What would you do if the market is going down? Are you going to put your money more or do you withdraw the money?’ And then the last question is, ‘Are you afraid of inflation?’

Tim: It sounds like basically, you’re trying to get a sense of the customer’s risk profile and sensitivity to inflation which is probably like how long they plan to invest, right?

Jin: Yes. But even you answered the very simple five questions, we put some kind of algorithm for the profiling, then we analyze not only the risk return but also your tendency for investment.

Tim: Okay. Actually, I want to dig deep into that a little later on. But before that, tell me a bit about your customer. Who’s using THEO? Who are Money Design’s customers?

Jin: Yes. Actually, 51% of our customer is under 30s and then 15% of our customer is 20s. Compared to our competitor like a large financial institution, when we look at the THEO customer, only 5% or 7% of customer is 20s. So we provide our service for the younger generation.

Tim: For example, you used to work at Nomura, which is the largest, probably most conservative securities firm in Japan. Do you think that the interest traditional financial companies have and these kind of robo-advisors is the new technology or do they think of it more as a way to reach millennial and younger investors?

Jin: That’s a good question. When we talk about the robo-advisory service, it is very easy to create. You can put some algorithm for their profiling. It’s very easy. Actually, in Japan, there’s over 20 robo-advisory services; however, almost all of the services is just providing for their customer. There’s no new customers. For instance, 89% of our customer doesn’t have extensive investment. 43% of customer has little experience for the investment; however, maybe they fail investing in FX.

Tim: Sure. Almost everyone fails at FX.

Jin: When we look at our customer, very young generation started the investment services for the first time and then choose THEO. That’s our customer demographic.

Tim: Okay. So it’s reaching a whole new and important customer base. You mentioned that robo-advisors themselves can be made using very, I don’t want to say, low technology but it’s simple algorithms.

Jin: Yes.

Tim: You guys were founded in 2013. You didn’t raise the first ground until the end of 2015, and you’ve launched THEO, congratulations, February 2016.

Jin: Thank you very much. Yes.

Tim: What took so long? What was going on during that time?

Jin: Before that, we didn’t have any license, local transfer license. We can advise to the clients but we cannot provide a product to the clients. First, we studied advisory services. Clients opened account in the United States and then we advise them how to invest. We got the license 2015, and then we can provide here in 2016. That’s the reason. It’s very tough to get the license in Japan.

Tim: So strictly for compliance reasons?

Jin: Compliance reasons.

Tim: I would imagine that with your first minimum viable product, it must have been very hard to reach that millennial demographic.

Jin: We differentiate, two strategy. First is a UI and the UX, second is the branding. Our UI/UX is very simple. Large finance institutions maybe put something and put something and put something and then the website get complex. Almost all of our competitors provide a very complex UI and UX. First, we make it very simple and easy to register and easy to start. That’s our first differentiate strategy. And then second is the branding. THEO is the name of Vincent Van Gogh’s younger brother. Vincent Van Gogh could sell just one picture when he lived. However, Theo supported for the mental side and also the money side. That’s the reason Gogh could write a picture for his whole life. Our concept of the THEO is we care about the money, you can enjoy the life.

Tim: Well, I can certainly see the appeal. You’re telling people who are confused by the complexity, “No, no, it’s very simple. We’ll handle it,” easy to understand interface, doesn’t cost much to get started. Let’s talk about that complexity. On the website, you’re talking about over 6,000 ETFs around the world. Is your trading universe really 6,000 ETFs, because most robo-advisors stick to between 20 or 40 ETFs.

Jin: Our ETF universe is 6,000; however, we traded about 30 to 40 ETF per customer.

Tim: So THEO really looks at 6,000 ETFs?

Jin: Of course.

Tim: All over the world?

Jin: Yes.

Tim: Wow. Some are denominated in yen, some in dollars, some in pounds?

Jin: Of course. Now, we use almost New York-listed ETF. Currently, we didn’t use Tokyo-listed ETF because the liquidity is poor and the cost is too much for the trade and the performance is not good compared to the New York --

Tim: Management fees are very high in Japan.

Jin: Yes.

Tim: Most robo-advisors like Wealthfront, for example, they seem to be based on very traditional asset allocation models with as you’re mentioning X% to US equities, Y% to international equities and bonds, and then they rebalance once a quarter or once a month.

Jin: We rebalance allocation every month. We set that balance first, right? Maybe growth 40%, income 40%, and inflation hedge 20%. And then maybe next month, the market collapse or up and then we rebalance it 40:40:20.

Tim: You mentioned that THEO uses AI to do portfolio construction. Is it actually an AI or is that something that’s more aspirational,