Wealth Management – Page 29 – Digital Finance Analytics (DFA) Blog

Strong Demand For Robo-Advice May Cannibalise Financial Advisors

Robo-Advice, the concept of using computer automation to provide tailored financial advice has been hitting the headlines recently. DFA has researched household demand for these digitally delivered services, and today we share some of the results.

By way of background, a robo-advisor is an online wealth management service that provides automated, algorithm-based portfolio management advice without the use human financial planners. Robo-advisors (or robo-advisers) use the same software as traditional advisors, but usually only offer portfolio management and do not get involved in more personal aspects of wealth management, such as taxes and retirement or estate planning. Robo-advisors are typically low-cost, have low account minimums, and attract younger investors who are more comfortable doing things online. The biggest difference is the distribution channel: previously, investors would have to go through a human financial advisor to get the kind of portfolio management services robo-advisors now offer, and those services would be bundled with additional services.

ASIC’s chairman Greg Medcraft says computer-generated financial advice, or “robo advice” could slash investment costs and eliminate conflicts of interest in the maligned financial planning industry. They have established a “robo-advice taskforce”, which is investigating the suitability of potential entrants, who use computer algorithms to match investors with suitable assets at a lower cost than human advisers.

A number of Australian players are experimenting with different offers and solutions. For example, according to the AFR, Macquarie is creating a robo-advice platform that puts in one place more than 30,000 local and international investment choices. Unlike other robo-advice platforms, which are really vehicles for gaining funds under management and charging an asset management fee, Macquarie has opted for genuine portfolio advice that does not discriminate between particular fund managers or show any bias towards particular stocks or sectors.

Midwinter’s “Robo-Advice Survey” from 2015, which comprised of responses from over 288 advice professionals, representing over 65 licensees showed the majority of advisers (55%) surveyed were aware of Robo-Advice and not concerned about its potential to disrupt the advice industry, with 12% of these advisers actually excited about its arrival. Around a quarter of advisers were aware and concerned of the impact of Robo-Advice on their business. Only a small amount of advisers (5%) considered themselves apathetic towards the rise of Robo-Advice.

Fintech’s such as Decimal which was founded in 2006 by former Asgard senior executive Jan Kolbusz, provides new capability to the financial advice industry utilising the power and affordability of the cloud. Decimal has subsequently entered into an agreement with Aviva Corporation that saw the company listed on the ASX in April 2014 as Decimal Software Limited (DSX).

So turning to our analysis, DFA has been examining the prospective impact of Robo-Advice, from a household perspective using data from our household surveys. We have found that currently those who have received financial advice already, and who are most digitally aware would readily consider Robo-Advice services. Our conclusion is that rather than growing and extending advice to more Australian households, the first impact of Robo-Advice will be to cannibalise existing advisor relationships.

To start the analysis,we looked at overall estimated net worth by household segment. Those households with higher balances are more likely to have sought, or are seeking financial advice. On average a quarter of households have at some time sought advice.

Next we looked at the technographic trends across our household segments using our digital segmentation, between those who are digital natives (always used digital), migrants (learning to use digital) and luddites (not willing or able to use digital). The chart below shows the relative distribution by segment across these three. The more affluent, and younger are most digitally aligned, and so are more likely to embrace Robo-Advice.

Next, we combine the data about getting financial advice and technographics. We find a greater proportion of households who are digitally aware have sought advice.

Finally, we asked in our surveys about households awareness and intention to consider Robo-Advice solutions if they were available. The results are shown below, with young affluent households, young growing families and exclusive professionals most likely to consider such a service. The proportions for each segment are those who would consider Robo-Advice, across all the digital segments.

However, the analysis showed that those with existing advice relationships AND high digital alignment were most likely to consider Robo-Advice. Those who are digitally aligned, but not seeking advice showed no propensity to use such a service – at this point in time.

So two observations, first there are many different potential offerings which should be constructed on a Robo-Advice basis, as the needs, of young affluent, and very different from say exclusive professionals. So effective segmentation of the offers will be essential, and different personas will need to be incorporated into the systems being developed.

Second, the bulk of the interest lays with those who have had advice, so it may not, in the short term grow the advice pie. Indeed there appears to be strong evidence that existing advisors may find their business being cannabalised as existing clients switch to Robo-Advice. This is especially true if the range of options are greater, and the price point lower.

We therefore question the assumption expressed within the industry that Robo-Advice is not a threat, as it will simply expand the pie to segments which today do not seek advice. In fact, we suggest the clever play is to make it a tool, and aligned to Advisors, rather than a substitute for them. In addition, the marketing/education strategies need to be developed carefully. There is a lot in play here.

ANZ extends partnership with Macquarie to provide wrap solutions

ANZ today announced it has entered into an agreement for Macquarie Investment Management Limited to develop a new wrap platform for ANZ’s advice partners that will be available from May 2016.

As part of the agreement, Macquarie will also provide administration services that are currently delivered through ANZ’s wholly owned business, Oasis.

As services are transitioned to Macquarie, staff numbers in the Oasis business will be progressively reduced over the next 18 months. At the end of the transition the majority of services provided by the 146 roles currently supporting the Oasis business will be provided by Macquarie.

ANZ Managing Director Pensions and Investments Peter Mullin said: “Detailed plans are being developed to support staff during the transition, which ensures they have time, support and notice to consider other options. Their entitlements are protected and a full range of career support services will be provided.

“The decision to partner with Macquarie was made following an extensive business and market review and is the right decision for our customers. We are now focussed on making sure the transition to the new business is done in a respectful and well-organised manner,” Mr Mullin said.

Oasis currently has $6.9 billion in funds under management and serves more than 50,000 customers. Transition of the Oasis wrap platform to Macquarie’s technology and administration services is expected to take up to 18 months.

National Australia Bank to implement a large scale Financial Advice Remediation program

ASIC has announced that from today, National Australia Bank (NAB) will be contacting customers who may have received non-compliant advice since 2009. Affected clients will have their files reviewed to determine if compensation should be paid. NAB will also provide affected customers with financial assistance to seek professional independent advice where appropriate.

ASIC has worked with NAB to develop their Financial Advice Customer Response Initiative (CRI), a large review and remediation program for customers affected by non-compliant advice. ASIC will ensure that the CRI will provide a fair and effective mechanism for customers to be properly compensated (REF: MR15-101). The CRI will also be subject to independent scrutiny by an external consultant, which will report its findings to ASIC. ASIC acknowledged NAB’s co-operation in this matter. This action is associated with ASIC’s broader Wealth Management Project (refer MR15-081).

Background

The Wealth Management Project was established in October 2014 with the objective of lifting standards by major financial advice providers The Wealth Management Project focuses on the conduct of the largest financial advice firms (NAB, Westpac, CBA, ANZ and AMP). ASIC’s work in the Wealth Management Project covers a number of areas including; (i) ASIC’s work with other the Wealth Management participants to address the identification and remediation of non- compliant advice. This is in addition to the work ASIC is doing to ensure appropriate customer remediation where fees have been charged and no advice service has been provided; ii) Seeking regulatory outcomes where appropriate against Licensee’s and advisers. For example, since ASIC’s Wealth Management Project commenced ASIC has banned the following advisers from the financial services industry:

NAB to offer “Robo-Advice”

According to Money Management,

NAB has become the first of the ‘big four’ banks to announce a digital advice offering, stating that 40,000 selected customers would be given free access to the service via the bank’s internet banking service, with an expectation of providing the service to its 3 million customers in due course.

The service, named NAB Prosper, has been labelled as digital advice with the bank distinguishing it from robo-advice by stating the advice would be personalised and tailored to its customers via a range of specific questions relating to their current financial situation and future goals.

The service would also be distinguished from robo-advice in that it would not provide transaction services nor would it direct people to purchase any product.

Rather the service would provide an up to date view of a customer’s financial position and provide a range of broad advice options based around risk profiling and financial modelling with customers directed to personalised advice if they require it.

The initial phase of the service will provide advice on super and insurance and will be available from early October and will eventually expand to cover debt, cash flow, investments and estate planning in 2016.

NAB executive general manager – wealth advice, Greg Miller, said NAB Prosper was designed to provide advice to the 80 per cent of people who did not have an ongoing relationship with a financial adviser and would complement the face to face advice process.

“The personal relationship between a consumer and an adviser is crucial, and we know this relationship will continue to be a fundamental part of the advice process,” he said.

“Allowing people to see their current financial situation has the ability to trigger a conversation with an adviser. With only one in five Australians currently seeking financial advice, this can only be a good thing for customers and the industry more broadly.

“Advisers benefit from this by being able to capitalise on changing customer segments and deliver targeted, relevant advice, simply and efficiently. It supports growth, strengthens capabilities and will improve efficiencies across our network.”

Miller said the move to provide digital advice was driven by changing consumer needs and behaviours and the advice sector was not immune but would continue to play a role dealing with major and important events and decisions for clients.

“The shape of the advice industry is changing and it will be largely driven by consumers, whose needs are evolving. Different consumers want to access financial advice in different ways, and we need to adapt our offering so consumers can choose when, where and how they deal with us,” he said.

“We’re continuing to look at ways to evolve our business to meet these changing needs. This evolution will continue to include advisers for those life-stage events where a customer wants to sit down and have a face-to-face discussion with their adviser.”

Value of Managed Funds Fell in June 2015 Quarter

The ABS released their data on the managed funds industry. It shows the impact of recent falls in stocks, and exchange rate movements. At 30 June 2015, the managed funds industry had $2,622.2b funds under management, a decrease of $21.2b (1%) on the March quarter 2015 figure of $2,643.4b. The main valuation effects that occurred during the June quarter 2015 were as follows: the S&P/ASX 200 decreased 7.3%; the price of foreign shares, as represented by the MSCI World Index excluding Australia, decreased 0.1%; and the A$ appreciated 0.6% against the US$.

At 30 June 2015, the consolidated assets of managed funds institutions were $2,059.9b, a decrease of $18.6b (1%) on the March quarter 2015 figure of $2,078.6b. The asset types that decreased were shares, $29.6b (5%); units in trusts, $4.0b (2%); overseas assets, $2.7b (1%); derivatives, $0.3b (10%) and other non-financial assets, $0.3b (2%). These were partially offset by increases in other financial assets, $7.2b (24%); land, buildings and equipment, $4.1b (2%); short term securities, $2.6b (3%); loans and placements, $2.4b (5%); deposits, $1.3b (0%) and bonds, etc., $0.6b (1%).

At 30 June 2015, there were $534.3b of assets cross invested between managed funds institutions. At 30 June 2015, the unconsolidated assets of Superannuation (pension) funds decreased $25.8b (1%), life insurance corporations decreased $6.5b (2%); friendly societies decreased $0.1b (2%) and common funds decreased $0.1b (1%). Cash management trusts increased $1.4b (4%) and public offer (retail) unit trusts increased $1.0b (0%).

NAB Wealth refunds additional customers

Following an independent review, NAB has refunded customers who were impacted by errors dating back to 2001 and are centered on processes and controls relating to Navigator – a platform NAB inherited from the Aviva acquisition in 2009.

ASIC said National Australia Bank’s wealth management business (NAB Wealth) has announced the resolution of its compensation program due to issues with its Navigator Wrap platform, with $25 million in compensation to be paid to approximately 62,000 customers. The issues relate to tax estimation and income estimation errors on its Navigator Wrap platform.

Following ASIC’s request, NAB Wealth appointed PriceWaterhouse Coopers to independently review the payout process, systems integrity and breach reporting and governance.

Commissioner Greg Tanzer said, ‘ASIC expects banks to vigilantly monitor their platforms for issues such as this. Any issues identified should be swiftly and pro-actively reported to ASIC, with a view to promptly compensating customers.’

ASIC acknowledged NAB Wealth’s cooperation in this matter.

In NABs statement, they said as part of this review, NAB has identified errors and processes dating back to 2001, which was prior to NAB’s 2009 acquisition of Aviva, which included the Navigator platform, and when Aviva was eventually integrated into the NAB business in 2011.

These errors and processes relate to how income and tax was being allocated to customers’ accounts on closure. This resulted in surplus monies being held within the Navigator Platform Funds for the benefit of fund customers, rather than being attributed at the individual customer account level. At no stage have these monies been held by, or accounted for, as part of the assets of any NAB Group company.

The review undertaken by NAB over the past 12 months has now resolved this, with all affected customers to be paid their due allocations. In total, approximately 62,000 customers will receive funds to the value of approximately $25 million.

One-third (34%) of customers will receive a payment of $50 or less, 50% of customers will receive less than $100, and 75% of customers will receive less than $350. The average payment per customer is $400, which includes interest.

Group Executive, NAB Wealth and CEO of MLC, Andrew Hagger said that NAB will write to customers and advisers over the coming weeks to explain this legacy issue and what NAB has done to fix the problem.

“NAB Wealth has applied significant focus to our breach identification and reporting processes, which is what led to NAB originally reporting this legacy issue to ASIC,” Mr Hagger said.

“These errors date back to 2001 and are centred on processes and controls relating to Navigator – a platform NAB inherited when we acquired Aviva in 2009. Our teams have worked extensively, with oversight by PwC and ASIC, to ensure the right processes, systems and controls are now in place.

“While this is a legacy issue, we took deliberate steps to make absolutely sure we could get the fairest outcome for our customers.

“These errors are in no way related to the quality of NAB Wealth’s advice to its customers.”

The only customers impacted are customers who closed their accounts on the Navigator platform between 30 September 2001 and 30 April 2015. The majority of money now being distributed to customers is being distributed from within the Navigator Platform Funds to the entitled customers. Given that the majority of the $25 million is being reallocated from the Navigator Platform Funds, this payment is immaterial to NAB.

Australian Hedge Funds Snapshot

ASIC today published their report into the Australian Hedge Funds Industry. It draws from aggregated industry data and a survey to September 2014. Hedge funds comprise about 4% of managed funds in Australia, $95bn compared with $2,407bn. Superannuation funds accounted for approximately three-quarters of this total with nearly $1,789 billion in assets. The average Hedge Fund return last year was 4.2% (though with significant variations).There were 473 funds in operation and there are a large number of small funds.

Nearly 80% of the operating single-manager hedge funds and funds of hedge funds were domiciled in Australia. In terms of assets under management, just over 81% of single-manager hedge funds and 99% of funds of hedge funds were domiciled in Australia.

Since 2012, assets under management for funds of hedge funds have remained relatively flat at around $12 billion. This does not mirror the global sector where assets under management for funds of hedge funds have fallen by approximately 17% to US$457 billion over the same period

The majority of the Australian hedge funds sector comprises small-sized funds, with just over half (54%) of the sector holding assets under management of less than $50 million

The most common strategy employed by managers for operating single-manager hedge funds and funds of hedge funds was equity long/short (53.8%), with multi-strategy in second place (10.6%) and fixed income in third place (9.5%).

In the 12 months to 30 September 2014, the average annual net return for single-manager hedge funds and funds of hedge funds was 4.2%. This was down from the previous year when funds on average achieved a return of 14.4%. The third quarter of 2014 was the worst performing quarter for the year for the global hedge funds sector, posting returns of –0.4% for the year. Concerns over Greece leaving the Eurozone during this period caused equity markets to fall, which may have affected hedge fund investments. The year to 30 September 2014 saw returns for hedge funds globally fall to 3.3%, which highlighted the weakness in the sector in 2014 in comparison to the previous year when an average of 7.8% was posted for the same period.

Turning to the survey, Retail direct investors accounted for 17% of the investors by net asset value in the surveyed hedge funds. This is a 7.3% increase from the 9.7% reported in ASIC’s 2012 hedge funds survey.

The vast majority of funds’ reported turnover was in interest rate derivatives and fixed income derivatives. Interest rate derivatives were the most highly traded individual asset class at $510.5 billion, reflecting their importance in managing interest rate exposure.

ASIC enhances Financial Advisers Register

ASIC has now launched the second stage of the Financial Advisers Register (FAR) which now includes information about advisers’ qualifications, training and memberships of professional bodies.

The register, which has been available to the public since the end of March this year, can be searched on ASIC’s MoneySmart website www.moneysmart.gov.au. To date there have been more than 60,000 visits and more than 100,000 searches undertaken on the register.

There are more than 23,000 financial advisers now on the register. It contains details of persons employed or authorised – directly or indirectly – by Australian financial services (AFS) licensees to provide personal financial advice to retail clients on investments, superannuation and life insurance.

ASIC Deputy Chairman, Peter Kell said, ‘From today consumers will be able to see the qualifications and professional memberships in addition to the basic information about advisers already available on the register. We want consumers to be able to make an informed decision in their choice of adviser and the register is a good starting point.’

ASIC has also made available data from the Financial Advisers Register to the Australian Government website www.data.gov.au which can be downloaded free of charge. The data snapshot will enable easy and quick analysis of aspects of the financial advice industry.

The transition phase for the new register will end at the end of September 2015. From 1 October 2015 late fee penalties will apply. ASIC can take action for providing a false or misleading statement to ASIC under the Corporations Act.

Managed Funds Up By 5% To $2.6 Trillion At March 2015

The ABS data today shows further substantial growth in managed funds. At 31 March 2015, the managed funds industry had $2,618.7b funds under management, an increase of $114.2b (5%) on the December quarter 2014 figure of $2,504.5b.

The main valuation effects that occurred during the March quarter 2015 were as follows: the S&P/ASX 200 increased 8.9%; the price of foreign shares, as represented by the MSCI World Index excluding Australia, increased 1.8%; and the A$ depreciated 6.9% against the US$.

At 31 March 2015, the consolidated assets of managed funds institutions were $2,073.0b, an increase of $100.3b (5%) on the December quarter 2014 figure of $1,972.7b.

The asset types that increased were shares, $45.8b (8%); overseas assets, $34.2b (8%); units in trusts, $10.8b (5%); other financial assets, $3.4b (13%); short term securities, $3.3b (4%); bonds, etc., $2.9b (3%); land, buildings and equipment, $2.7b (1%); loans and placements, $0.9b (2%); and derivatives, $0.7b (34%). These were partially offset by decreases in deposits, $4.3b (2%); and other non-financial assets, $0.1b (1%). The chart below shows the unconsolidated mix at end March 2015.

At 31 March 2015, there were $536.7b of assets cross invested between managed funds institutions. At 31 March 2015, the unconsolidated assets of superannuation (pension) funds increased $106.2b (6%), life insurance corporations increased $14.3b (5%), public offer (retail) unit trusts increased $8.9b (3%), cash management trusts increased $1.4b (6%), friendly societies increased $0.2b (2%), and common funds increased $0.1b (1%).