Opportunities and Threats of Shariah-Compliant Robo Advisory. The Case of Wahed Invest

Master's Thesis, 2019

25 Pages



1. Abstract

2. Introduction

3. Problem Statement

4. Literature Review

5. Research Methodology

6. Islam and Financial Technology (FinTech)
6.1 What is Islamic FinTech?
6.2 What is Robo Advisory (R.A)?
6.2.1 Digital Advisory Models and their Clients Digital Advisory Models
6.2.2 Benefits of R.A

7. Analysis and Findings
7.1 Overview of Wahed Invest (New York): A Case Study
7.2 Shariah-Compliant R.A
7.3 The Market for R.A
7.4 Market for Shariah-compliant R.A
7.5 Future opportunities of R.A
7.6 Is R.A a threat for Traditional Advisors?
7.7 Opportunity (not threat) for Traditional Advisors
7.8 Opportunity for R.A in the HNW (High Net Worth) market
7.9 Opportunity for U.S and beyond
7.10 Opportunity for Banks to implement R.A

8. Conclusion & Recommendations

1. Abstract

Robo-Advisory (R.A) is often seen as having the ability to overtake traditional human financial advisors (Patricio Robles 2019). However, what initially may be understood as a threat is in fact a great opportunity within the Islamic FinTech industry. Shariah-compliant R.A. has the potential to offer immense opportunity to many different markets including traditional financial advisories, high-net worth (HNW) clients, and Islamic banks globally as well as those individuals/banks keen to carry out ethical investment alternatives.

FinTech, within the boundaries of Shariah law, can be especially applicable for young Muslim millennials residing in the West. (Todorof 2018) notices that this particular market has difficulties gaining access to Shariah-compliant financial services. Therefore, one of the leading FinTech areas, and the most appropriate to their needs, is that of Robo Advice.

Therefore this paper seeks to highlight the opportunities of Shariah-compliant R.A. and how it could potentially revolutionize the Islamic Finance industry through its positive integration as opposed to its feared future domination, using Wahed Invest (New York) as a case.

2. Introduction

Over the last few years, Robo-Advisors have soared in popularity as a wealth advisory service. New investors, of which are mainly millennials, are enticed by small minimum investment amounts required, less charges and the possibilities of good returns. By 2015, Robo-Advisors controlled $60 billion of client assets. The market for R.A. is expected to develop to $2 trillion by 2020 (Fazmi 2019) with the capability of catering to the 2 billion Muslims situated globally (Syvänen 2017).

Robo-Advisors are artificially intelligent (A.I.), virtual financial advisors. By using software operated by algorithms, they are able to automate financial planning. Therefore, much less human interaction is needed. Robo-Advisory services that conform to Shariah laws and principles are termed ‘Shariah-compliant R.A.”, ‘Halal R.A.’ or ‘Islamic R.A.’.

The religious practice of Muslims prohibits them from using conventional investment methods. Those who follow Islam are not allowed to invest in businesses that create forbidden products e.g. firearms, tobacco and alcohol. Also, they are not allowed to use financial products that deal in interest. Therefore, there are comparatively limited opportunities accessible for Muslims intending to invest their money, particularly those residing in the West. (Syvänen 2017)

In order to fill the gap within Islamic FinTech, one of the main Shariah-compliant advisories currently leading the way is Wahed Invest. (Norafni Farlina binti Rahim, Mohammed Hariri Bakri, and Siti Norbaya Yahaya 2019). New York-based, Wahed Invest is the first automated Islamic investment platform that is overseen by Shariah law and therefore authorized as an ethically compliant wealth advisor (Friedberg 2019). Wahed is able to analyze thousands of halal securities worldwide to create portfolio allocations with maximum growth potential for its clients. Its main aim is to offer easy access to halal portfolio management for the 2 billion Muslims globally, as well as for non-Muslims who would like to explore Islamic ethical investing.

There is a dearth of knowledge regarding R.A. within the Islamic Finance context and also a contradiction in the research regarding whether or not Robo-Advisors will in future threaten to completely replace human advisors. This research is thus focused on arguing the opportunities of Shariah R.A through analyzing both the opportunities and threats of Shariah- compliant R.A. using Wahed Invest as a case. This additional significant research will bring a positive understanding of Shariah-compliant R.A. and thus be valuable within the Islamic Financial advisory industry.

3. Problem Statement

Presently, Robo Advisors are widely recognised as one of the most important disruptive trends in the wealth management industry and the potential for growth of this trend seems very promising. (Beketov, Lehmann, and Wittke 2018).

There is currently a contradiction in the research regarding whether Robo-Advisors will in future threaten to completely replace human advisors and thus threaten the entire financial wealth management industry, or whether Robo-Advisors present a great opportunity within Islamic FinTech. There is also currently a deficiency of comprehensive academic research pertaining to the many advantages of R.A. within the Islamic Finance context. Hence, my research paper seeks to argue the opportunities of Shariah-compliant R.A. and how it could potentially revolutionize the Islamic Finance industry through its positive integration as opposed to its feared future domination.

What seems to be missing from current research is feedback directly associated with a company currently successfully practicing Shariah R.A. Therefore, this research intends to bridge this gap and provide an advanced understanding of the topic, focusing on the opportunities of Shariah-compliant R.A. This was done through both reviewing quality literature for the study from relevant sources as well as conducting primary qualitative research through an online interview with Wahed Invest, a thriving company within the Shariah-compliant Robo- advisory industry.

The aim of this research is to examine the extent of opportunities available as opposed to the seeming threats of current Shariah-compliant R.A. services using the example of Wahed Invest (New York). This current research will therefore bring forth a positive contribution towards many sectors within the Islamic Finance industry.

4. Literature Review

(A. Oseni and Ali 2019) deliberates that FinTech is transforming the financial world through complex computerised reasoning devices and new-found technologies able to make more cost-effective decision-making processes. Furthermore, according to (A. Oseni and Ali 2019), R.A. is already being incorporated within the Islamic wealth management industry for the purpose of making investment decisions more convenient and that through the help of artificial intelligence (AI), we can envision a world of Shariah R.A. where, due to software, Shariah advice is offered with minimal human involvement.

Additionally, (Todorof 2018) argues that in the present financial situation, since it is agreed that Islamic Finance and FinTech fit well together, Islamic Finance must then make use of up- to-date financial technologies, such as R.A., so that it may become even more robust.

Similarly, (CGI Group Inc. 2016) asserts that “it should not be a question of ‘if’ but ‘when’ a firm will deploy an automated advisory platform. The future of the financial advisory industry will lean heavily on technology, and those firms that lag behind are bound to miss out on the benefits to clients, advisors and the firm overall”

A large portion of high net worth (HNW) individuals are also looking to RA for their financial advice. A survey conveys that, The majority of affluent and high-net-worth individuals recognize the potential of Robo-Advisors and automated investment services to add value to their wealth management services". In their 2015 paper, Accenture further indicated that not only do many HNW investors have a preference for digital engagement but they also see it as entirely complementary to human financial advisors (Bell 2016).

Conversely, according to management consulting firm AT Kearney, Robotic -Advisor’s as well as automated online or mobile investment advisory services, will consume up to $90 billion of traditional adviser incomes by 2020 (Avery 2015). Uday Singh, from the financial institutions practice at AT Kearney, is certain that R.A. will become standard in the next three to five years. AT Kearney’s report assesses that although at present, 0.5% in investable assets are invested using robo-advisers, by the year 2018 this figure will escalate by 2.7% and by 2020 it will increase by as much as 5.6% (i.e. more than $2 trillion) (Avery 2015). These results certainly pose a threat to traditional financial advisors.

Although there is an abundance of news-related information and some literature available regarding robotic advisory, there is still a deficiency of comprehensive academic research pertaining to the opportunities and threats of Shariah-compliant R.A. This research aims to fill this gap in the literature.

According to (Norafni Farlina binti Rahim, Mohammed Hariri Bakri, and Siti Norbaya Yahaya 2019), within the Islamic FinTech landscape, one of the main Shariah-complaint R.A. services currently available includes Wahed Invest. A few news articles and pertinent information on this company’s official web pages are available regarding current practices of halal R.A; however there are contradictions in other research on whether Robo Advisors will completely replace human advisors in future. If this is true, R.A. will ultimately drastically affect the entire wealth advisory industry, including Shariah-compliant R.A.

Therefore, this research aims to shed light on this subject by exposing the opportunities available even within the seemingly threatening force of R.A, via examining the New-York based Shariah-compliant Robo-Investment platform, Wahed Invest.

5. Research Methodology

Data used for the research was obtained by reviewing quality literature for the study from relevant sources available such as Islamic FinTech books, academic journals, financial wealth planning industry reports, news articles and official websites of current R.A. services.

In order to accomplish the research objectives, primary qualitative research was conducted through an online interview with research questions posed to Wahed Invest. Syakir Hashim, Regional Head of Wahed Invest APAC was available for the interview.

6. Islam and Financial Technology (FinTech)

6.1 What is Islamic FinTech?

The word FinTech is a combination of the words finance and technology and it refers to the use of technology within the financial industry (Abdullah 2016). According to (Mohamed and Ali 2019), Islamic FinTech can be described as technologies that are set up in Islamic Finance to support and embed Islamic rules and values with the purpose of creating a just, robust and sustainable economy. This indicates that any product or service that arises from FinTech must follow rules taken from the Quran and Sunnah. In order to provide Islamic financial services in a more sophisticated and transparent way, Islamic FinTech platforms make use of revolutionary technologies like Artificial Intelligence or A.I. (Mohamed and Ali 2019)

(Mohamed and Ali 2019) suggests that Islamic FinTech would enable more access to Islamic financial services since it is low-cost, uncomplicated and more efficient; whilst also being in accordance with objectives of Islamic Divine Laws (Maqasid Al-Shariah). Making formal financial services accessible to everyone is essential for the economic equality of the Muslim ummah (the general public) since the spirit of Islamic finance is to inculcate inclusivity and joint prosperity.

Within the borders of Shariah law, (Todorof 2018) states that FinTech could be mainly applicable to young Muslim Millennials staying in the West. For this market, accessing financial services can be difficult. Therefore, Robo Advice is one of the key FinTech areas recognised to be most fitting to their needs. (Todorof 2018) further suggests that it is this very market which is the easiest to lose to conventional financial services. And so, using technological developments such as R.A. with the aim of serving their needs seems to be a sensible solution.

6.2 What is Robo Advisory (R.A)?

According to (Mohamed and Ali 2019), Robo-Advisors are digital platforms that provide financial planning services that are computerised and driven by algorithms. These platforms pull together data from clients, concerning their financial condition and future goals. To do this, clients must respond to a few online questions. Robo-Advisors use the data entered to then give advice. In addition, they will automatically adjust the client’s portfolio depending on when and how the market moves. (Biswas 2018)

As stated by Paul Stratford from Ernst and Young (World Finance 2016) , “ The analogy for Robo-Advice is a bit like the use of dating sites. So, on a dating site it will ask you a number of questions; you answer them, and it then makes some selections and identifies some matches for you. So I think it’s slightly analogous with Robo-Advice, in that you will be answering questions online about your financial arrangements. It’s going to work out what is important for you and then make the appropriate selection as far as portfolio and investments are concerned.”

6.2.1 Digital Advisory Models and their Clients Digital Advisory Models

Abbildung in dieser Leseprobe nicht enthalten

Figure 1 (Deloitte and Avaloq 2017)

Fully Automated R.A. models are mostly used by millennials and digital-savvy clients who prefer a fully automated solution. Conversely, Technology-Enhanced Personal Relationship Models are mostly used by traditional clients who value consistent support from human financial advisors. Lastly, the new digital advisory trend i.e. Hybrid Advisory model s (human + robot) are preferred by sophisticated digital clients who prefer occasional conversations with human financial advisors. (Ernst and Young 2018)

During an interview with Syakir Hashim of Wahed Invest, when asked about the model being implemented by the company, his reply was “A fully delegated approach”. (Biswas 2018) affirms that a fully delegated model involves individual firms that use algorithms to suggest stocks and manage portfolios, aimed at new retail customers who are not habitual investors.

This approach is the same as the Fully Automated model as described in figure 1. This type of highly automated model caters mainly to the retail and mass affluent market segments.

6.2.2 Benefits of R.A.

The key benefit of Robo-Advisors is that they are low-cost options to traditional advisors. Since it removes the need of an intermediary, R.A can be appealing to the inexperienced investor, bringing the services straight to the client (Todorof 2018). Through removing human labour, online platforms are able to provide similar services at a fraction of the price (Mohamed and Ali 2019).

Also, (Mohamed and Ali 2019) mentions that relying on an investment decision (i.e. R.A.) that is based on algorithms is possibly more rational than investors making the decision by themselves. This is because it is possible for investors to be swayed by eagerness and competitiveness, resulting in a lack of level-headedness and/or inability to make effective decisions.

Robo-Advisors are also more easily reached. If the user has an internet connection, they are accessible 24/7. In addition, it takes substantially less capital to start. On the other hand, human advisors would need a high minimum amount of investable funds. Human advisors normally choose clients who are high-net-worth individual (HNWI) and have enough money to pay for their range of wealth management services. (Mohamed and Ali 2019)

Another important benefit of digital advisory platforms is efficiency. For example, prior to Robo-Advisors, if clients needed to carry out a trade, they would have to physically meet or call a financial advisor, describe their needs, complete some paperwork, and wait (Mohamed and Ali 2019). Nowadays, this can all be done in the comfort of one’s home by clicking a few buttons.

According to (Cocoa Invest 2019), online Robo-Advisors present information in a clear and accurate format that can be checked anytime by means of a smartphone. This will help investors to be aware of their current funds until finally reaching their financial goals.

7. Analysis and Findings

7.1 Overview of Wahed Invest (New York): A Case Study

Wahed Invest is based in New York. As described by (Friedberg 2019), Wahed is a Shariah-compliant Robo financial advisory company, and hence the world’s first automated Islamic investment platform overseen by Shariah law (Islamic law that governs not only religious rituals, but also everyday aspects).

Wahed Invest was established by Junaid Wahedna. The advisory platform began on 26 September 2016. According to (Friedberg 2019), the company is authorised as an ethically-compatible wealth advisor and the investments are inspected by a team of Islamic and ethical scholars.

This halal Robo-Advisor analyses thousands of halal securities globally so as to create portfolio allocations with the maximum amount of growth for its customers (Mohamed and Ali 2019). Wahed’s central objective is to offer an easy entry to halal portfolio management aimed at the 2 billion Muslims worldwide, along with non-Muslims who are eager to explore Islamic ethical investing.

Wahedna relates a story about a Bangladeshi taxi driver. The man had relocated to the U.S. and preferred not to keep his savings in a bank account, but also did not know what to do with his extra funds, “The leader of the mosque told him Apple stock was Sharia compliant… So he put all of his savings in Apple stock.” Wahedna continues, saying that: “people literally keep their money in cash and forgo the interest. They lose out over time, just because of their religion. There shouldn’t be a cost of being Muslim.” (Syvänen 2017)

(Vizcaino 2019) notes that Wahed Invest currently has registered users within 48 U.S. states. Wahedna mentions: "Around 10 percent of our clients are coming from existing Robo-Advisers, but 90 percent are not. Many are first-time investors or come from old-school advisory products."

The facility has a $7,500 minimum investment and therefore the services are adapted for the smaller investor (Friedberg 2019). Also, according to Wahedna, Wahed Invest portfolios performed better, and with less risk than compared with their traditional competitors.

How Wahed Invests

(Friedberg 2019) explains that the investor starts by answering a number of questions regarding risk. The main questions focus on investment goals, liquidity needs, time horizon and risk appetite. Making use of the modern portfolio theory, the Wahed method enhances the investor’s portfolio through Shariah-compliant investments, providing the highest returns for the least amount of risk.

The general investment groups available include global equity, emerging markets equity, REITs, U.S. equity, commodities and fixed income. Using investments from these groups, investors' percentages in specific asset classes are established according to their risk type i.e. very conservative, conservative, moderate, moderately aggressive, aggressive or very aggressive. E.g. a very conservative portfolio would hold 15% equity, 72.5% fixed income, 5% gold, 5% REITs and 2.5% cash. (Friedberg 2019)

What is the Wahed Fee Structure?

Wahed’s yearly management fee according to (Vizcaino 2019) varies from 0.29 % to 0.99 %. This is similar to other Robo-Advisers but less than the rate of the majority of Islamic mutual funds.


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Opportunities and Threats of Shariah-Compliant Robo Advisory. The Case of Wahed Invest
Masters of Islamic Finance Practice (MIFP)
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A.I Rahman completed her Masters of Islamic Finance Practice (MIFP) with multiple distinctions at The Global University of Islamic Finance - INCEIF, located in Kuala Lumpur, Malaysia. She achieved her Bachelor of Commerce degree in conventional Financial Management at the University of Johannesburg, South Africa. She is currently authoring a number of books on Islamic Finance and Fintech. When she isn't writing, she teaches Mathematics to school and university students as well as English to Speakers of other languages (ESL)
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Aneesa Rahman (Author), 2019, Opportunities and Threats of Shariah-Compliant Robo Advisory. The Case of Wahed Invest, Munich, GRIN Verlag, https://www.grin.com/document/540407


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