Robo Advice – Page 2 – Digital Finance Analytics (DFA) Blog

Blockchain and others will transform financial advice

The potential for distributed ledger and associated technologies has fundamental, long-term ramifications for financial planning businesses. Planners need to be across these innovations now so that when commercial solutions that use these technologies hit the market, their businesses are ready to embrace them.

Distributed ledger technology is a way of recording information that makes it easy to verify. Blockchain, which is the system that records how the virtual currency Bitcoin is stored, is one application of this technology.

Shortened Australian Securities Exchange (ASX) transaction settlement times will likely be the first real change to the market from Blockchain. Last year, the ASX invested $14.9 million to acquire 5 per cent of US-based distributed ledger technology business Digital Asset Holdings to start working on Blockchain solutions for its business. Subsequently, the ASX shortened settlement times for trades made through the exchange from three days to two.

This will improve market liquidity, reduce the cost of trading and minimise paperwork. An ASX spokesperson has confirmed an update on its Blockchain development will be included in its half-year results announcement in February.

“We’ll provide an update on our development then. In the meantime, we’re engaging extensively with stakeholders,” he said.

Tim Lea, chief executive of innovative technology company Veredictum.io says Blockchain will also streamline the conveyancing process.

“It can take up to 15 weeks to complete a property settlement now. There are use cases for Blockchain being developed that will enable automatic registration of a property’s title to an immutable ledger, which means a substantial reduction in legal work.

“There are use cases internationally being tested that put all property registrations on the Blockchain. The state of Georgia in the former Soviet Union is doing a pilot to put all property online in the form of an immutable database that cannot be altered.”

Lea says any information that needs to be formally confirmed and identified naturally fits into the Blockchain remit.

“Anything that requires provenance, a look at the history of the asset, can very clearly be defined within a Blockchain-based structure.”

Robo advice on steroids

Blockchain is far from the only emerging technology that will affect financial advice. Decentralised Autonomous Organisation (DAO) is another game-changer for the sector.

Lea calls it, “the world’s largest crowd-funding campaign that nobody’s every heard of. They raised US$168 million in 30 days on the basis of a 28-page white paper in June last year.”

The idea was to challenge the notion of a traditional company with a board and management structure and replace it with computer code.

High-net-worth investors embracing robo-advice

From Investor Daily.

Robo-advice platforms’ capacities are expected to continue growing in the coming year, according to Finovate, expanding their functionality to include broader wealth management functions and cater to high-net-worth customers.

The “myriad” financial needs facing Millennials, coupled with increasing longevity risk confronting older investors, has driven change in the robo-advice space, Finovate research analyst David Penn said, with the improving abilities of such services now extending beyond “traditional boundaries”.

“The growing capacity of robo-advisers to help manage other aspects of personal finance supports a more expansive view of wealth management and financial planning,” he said.

“This includes everything from health care planning, insurance, even real estate, education and leisure.”

As robo-advice becomes “both more sophisticated and more accepted”, high-net-worth investors are increasingly making use of these services to manage parts of their finances, Mr Penn said.

“Catering to high-net-worth clients, according to some, involves both greater technological sophistication on the part of robo-advisors as well as more extensive customer service,” he said.

“Specifically, high net worth clients may require access to more complex investment vehicles, including non-equity investments, as well as more advanced rebalancing and tax harvesting than the average investor.”

Fintech services designed to help high-net-worth individuals manage their wealth are already emerging on the market, Mr Penn said, adding that high-net-worth individuals already using these services had increased their investment from 5 per cent to 20 per cent in the last two years alone.

ANZ has little time for robo-advice

From Financial Standard.

ANZ chief executive Shayne Elliott said the bank won’t be embracing robo-advice any time soon. And opportunities are less in Australia for fintechs.

Speaking at a Reuters Newsmaker event in Sydney yesterday, Elliott told attendees that ANZ’s focus moving forward is on becoming the best bank in the world and increasing its competitive advantage – a strategy he doesn’t think robo-advice could contribute to.

“We have looked into robo-advice, and I do think there is a role for it now and in the future. But the question is whether it’s something we could do better than everybody else, and I’m not convinced. We have done a few trials and there’s a lot of exciting stuff there, but I’m not sure it’s anything that would differentiate us,” Elliott said.

“There are a lot of things we could do, but it doesn’t necessarily mean we should do them. I think there are more meaningful things we should invest in right now.”

Elliott did admit that he is concerned about the threat to the traditional banking system posed by fintech. Though, he doesn’t believe the opportunity for fintechs to thrive is as abundant in Australia due to the efficient nature of the market.

“I worry about fintech just as I worry about any kind of competition. But I do think the opportunities are less in Australia for fintech than in other regions, we don’t have the kind of glaring inefficiencies that you see – even in parts of the United States – that make them a much more attractive place for disruption,” Elliott said.

However, Elliott acknowledged the “really good thinking” occurring in fintech and hinted at a potential partnership in the future.

“We do think that there’s an opportunity for us to possibly work with them. You have to understand that we’ve got something of enormous value, which is a lot of customers that trust ANZ,” Elliott said.

Placing a move into robo-advice on the backburner comes as part of the bank’s decision to downsize, with the recent sale of its branch network across five Asian countries to DBS Bank and the potential sale of its wealth business, and is also part of the institution’s strategy for transforming the business’ culture.

Elliott said that the bank’s conglomerate presence in the past caused a failing in terms of visibility across all aspects of the business, saying that the complex structure of the organisation meant there was no way of really knowing what was going on at all times but ANZ is working towards changing that.

“We’ve made a lot of symbolic changes in terms of making us a more humble organisation, in terms of how senior executives behave, how we interact with people and what we talk about…We’re changing that in two ways, having less things to do – less products, less places, less product groups – and making sure that the way we run them is appropriate,” Elliott said.

“We actually want to be smaller, to be better. And we want to do what we’re good at even better. I figure a smaller bank and a simpler bank will be easier to manage.”

Aussie robo-advisers are ‘horribly manual’

From InvestorDaily.

A CoreData shadow shop of domestic robo-advisers has concluded that automated advice is at least six to eight months away from “working” for the typical Australian consumer. Speaking at the Calastone Connect Forum in Sydney, CoreData principal Andrew Inwood said Australian robo-advice processes are “pretty prosaic” and have not yet managed to deal effectively with ‘know your client’ rules.

CoreData has spent the past six months conducting a shadow shopping exercise on the Australian robo-advice sector, Mr Inwood said.

“We’ve been communicating with them, asking them questions, going through the process of setting them up, closing the funds down, opening them again, putting in money, changing systems, and changing bank accounts,” he said.

“Once you open your account you’ve got to go through the whole process of identifying yourself as a client, which is horribly manual,” he said.

Clients are often required to fill in a paper form and send it to the robo-advice company in order to prove their identity, Mr Inwood said.

There is only one exception – Acorns Australia – which has managed to circumvent lengthy processes by using the banks’ existing knowledge, similarly to UBank, he said.

“There is still a long way for [Australian robo-advice] to go. It’s not true of the US, and it’s not true of the UK – but it’s certainly true of Australia,” Mr Inwood said.

“We’ve kind of rushed into this space [in Australia]. A lot of people used to be [online financial] calculator businesses and they’ve rushed into this space to try and be the next robo-adviser.

“But it’s not quite working. I would suggest that we’re six to eight months away from actually having it work.”

That is not to say there will be a “big future” for robo-advice in Australia, he said.

“It systemises and robotises the whole front end of the sales process. The bit which is expensive for the banks and implies risk for the banks,” Mr Inwood said.

“The bit where the mis-selling is – the bit where the ASIC inquiries are. The more that [wealth management firms] can do that, the better off they’re going to be. My sense is that this wave is coming but it’s still some way out.”

Banks Can’t Ignore Robo-advice

Robo-advice is just as important to the future of Australian banks as the integration of superannuation platforms was in the 1990s, argues robo-adviser Clover. We agree, but cannibalisation and effective segmentation are the key issues yet to be addressed, as shown in results from our surveys.

Robo-Advice

Speaking to InvestorDaily, Clover chief executive Harry Chemay said the major Australian banks will have to address automated advice sooner rather than later.

“Robo-advice is as important to the future as superannuation was to the banks in the 1990s, when every bank started to buy a superannuation fund or platform to gain entry into the market,” Mr Chemay said.

“Now we’re seeing that the next stage is the technological implementation of wealth advice and wealth management.”

Mr Chemay predicted that many banks will attempt to build a robo-advice platform in-house, with Macquarie Bank “the first cab off the rank” with the launch of automated advice service Owners Advisory in 2015.

However, it will be “fundamentally difficult” for a bank to build out an automated advice solution for two reasons, he said: “You do need a very customer-centric approach, which is very user experience-driven design, and you need to be fairly agile,” Mr Chemay said.

“There’s no doubt that banks could do it, but if they adopt the traditional method of product development it will be slower to market and it will require substantial resources.”

The alternative is for banks to look at third parties such as Decimal or Ignition Wealth to provide an ‘out of the box’ white-label solution, he said.

That could, however, create compliance headaches down the track, Mr Chemay said, noting that ASIC has made it clear that the operation of advice algorithms is the responsibility of the wealth management firm, not the robo-adviser.

“Unlike a human-to-human interaction across a table, robo-advice is running 24/7 – it can potentially be generating advice all the time around the clock,” he said.

“And if something goes wrong with an algorithm, there is the potential for many people to get incorrect advice.”

Concerns such as these prompted Clover to apply for its own managed discretionary account licence from ASIC, with the licence approved by the regulator last week, according to Mr Chemay.

Clover will be moving a select few of its clients into a beta testing environment in the next few weeks, with a full launch targeted for July or early August 2016, he said.

Clover also has a relationship with industry fund Equipsuper, which is in the process of rolling out an automated advice solution to its members.

The additional point we would make is the potential cannibalisation of existing customers. Analysis we completed earlier in the year 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.

Beware ‘rogue’ robo-advisers: StockSpot

From Fintech Business.

In a submission to ASIC’s consultation paper on regulating robo-advice, Stockspot chief executive Chris Brycki said it is important that several of the existing guidelines for human advisers also apply to digital providers.

“Relevant disclosure as well as best interest duty are equally important for digital and human-delivered advice, so we strongly believe that the principles should be applied equally to both types of advice rather than allowing service providers to ‘hide’ behind digital advice to avoid complying with specific product or advice regulatory requirements,” he said.

Mr Brycki said he has seen a number of “copycat” robo-advisers in the industry that are not acting in the best interests of clients.

Stockspot has had to issue copyright infringement notices to three separate businesses in the past for stealing information from its website, he said.

“We are concerned that there are a growing number of digital investment businesses with flashy websites that may not have robust systems, compliance and controls in place,” Mr Brycki said.

“The last thing we want is for one of these businesses to do the wrong thing by its customers, which would lead to a bad outcome for clients and also the entire robo-advice industry.

“Many robo-advice clients are first-time investors so [they] require more education and safeguards compared to more experienced investors,” he said.

Mr Brycki added that there are others who are taking advantage of the fact that some investors do not understand the difference between personal and general advice.

“This is leading to a situation where some new product providers are collecting customer information and advertising themselves as robo-advice but not actually providing any personal advice at all,” he said.

“It would certainly be in Stockspot’s interest, and I believe in [that of] everyone else involved in digital advice, to create a stable, well-regulated globally recognised environment that is fully trusted by investors and all other stakeholders. This will support a creative, trusted and globally recognised digital advice industry here in Australia.”

YBR acquires brightday as part of their digital strategy

Yellow Brick Road (YBR) has acquired online advice platform brightday from News Corp.

The addition of brightday is the latest in a series of acquisitions for YBR. While previous acquisitions have contributed to the business’ scale, this acquisition will provide an important capability for the company’s digital strategy the company says.

Executive Chairman Mark Bouris says Yellow Brick Road’s and brightday’s common partnership with OneVue, an independent investment software platform, allows for a logical and simple integration.

“This acquisition is a key part of our direct and online strategy to be launched to consumers in FY17,” Mr Bouris explained.

“brightday serves a similar customer segment to Yellow Brick Road. Our 2020 customer strategy ensures we can serve customers via the means and channel they prefer: many will prefer face-to-face support which is why we will double our branch network by 2020, while others have a bias towards direct-digital product, and the majority will seek a blend of both. The acquisition of brightday helps enable this.”

Consistent investment in consumer-facing advertising over five years has built a strong brand which Yellow Brick Road intends to leverage in the digital space. Mr Bouris said that this brand awareness is already yielding direct inquiries from many customers for insurance, as well as some funds management and superannuation product.

“This digital push is focussed first and foremost on accelerating our wealth business growth. We want 30 per cent of our customers accessing our wealth services by 2020. Wealth is a real differentiator for us and a major focus over the next four years.”

“Giving customers superior digital access and tools for investments and superannuation is an important tactic in building our wealth volumes. We have already seen great engagement through Guru, our robo pre-advice tool. brightday is the next enhancement,” Mr Bouris concluded.

ASIC consults on proposed guidance about ‘robo-advice’

ASIC today released a consultation paper and a draft Regulatory Guide on regulating digital financial product advice (also commonly known as robo-advice).

ASIC Commissioner John Price said, ‘ASIC is keen to see a healthy and vibrant digital advice sector. We see digital advice as having the potential to offer Australian consumers access to good quality, low-cost, financial advice.’

As part of its commitment to encouraging innovation that may benefit consumers, ASIC has developed draft guidance on the provision of digital product advice to retail clients. This guidance follows direct engagement with digital advice providers about their business models. During that engagement it became clear that digital advice providers would benefit from additional ASIC guidance specific to digital advice.

ASIC’s draft regulatory guide brings together some of the issues that persons providing, or intending to provide, digital advice to retail clients need to consider when operating in Australia—from the licensing stage (i.e. obtaining an Australian financial services (AFS) licence) through to the actual provision of advice.

ASIC is also seeking feedback on issues that are unique to digital advice businesses, in particular:

the organisational competence obligation that applies in a digital advice context; and
the ways in which digital advice licensees should monitor and test their algorithms.

‘ASIC is committed to helping industry take advantage of the opportunities offered by robo-advice while ensuring that investor and financial consumer trust and confidence is not compromised. We encourage industry and other stakeholders to take part in this consultation process,’ Mr Price said.

The closing date for submissions is 16 May 2016.

Download

Consultation Paper 254 Regulating digital financial advice and draft Regulatory Guide 000 Providing digital financial product advice to retail clients

Background

Digital advice (also known as ‘robo-advice’ or ‘automated advice’) is the provision of automated financial product advice using algorithms and technology and without the direct involvement of a human adviser. It can comprise general or personal advice, and range from advice that is narrow in scope (e.g. advice about portfolio construction) to comprehensive financial product advice.

The provision of digital advice has grown rapidly in Australia since 2014, with a number of start-up AFS licensees and existing AFS licensees developing digital advice models. This growth is expected to continue.

ASIC’s consultation paper and draft guidance coincides with the release today of the Australian Government’s statement on Australia’s FinTech future.

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.

Robo Advice – Good or Bad?

From Australian Broker Online.

Robo financial advice is one of the fastest growing digital disruptors in the international finance sector, but concern over automated advice is growing, with a senior financial adviser at a leading accountancy and advice firm saying a “one-size-fits-all” approach will put consumers at risk.

Adrian Frinsdorf, Wealth advisory director at William Buck, says robo advice can be a useful tool for financial advisors and savvy consumers, however amateur consumers should “steer-clear” of automated services.

“We’re all aware of digital disruption, and in most cases it’s a good thing,” Frinsdorf said.

“But I think consumers should be cautious when digital products are claiming to offer impartial consultation in the financial sector – particularly when owned and implemented by product providers.

“When it comes to finances, the consumers who are looking for cheap outcomes are usually those who can’t afford for things to go wrong – so unless you’re a sophisticated investor, my advice would be to steer-clear of automated services.”

Frinsdorf told Australian Broker that an amateur investor’s lack of understanding about risk will be a major risk factor when it comes to robo financial advice.

“The major risk is [consumers] really understanding that the information they give will determine the outcome. Sometimes – and I’ve looked at a number of the robo advice platforms – some of the questions can be misleading. They’re open to interpretation and I tend to find that individuals can be very optimistic about their situation,” he told Australian Broker.

“In the end, a lot of them ask to [the consumer] determine their risk profile – would they prefer to make 20% or 5%, and most people are going to answer 20%. The danger though, is to try and achieve 20% they have got to take a large amount of risk. My view is that individual investors just do not understand risk.”

Last week, major mortgage and wealth franchise Yellow Brick Road (YBR) launched its robo advice tool Guru nationally, after a successful pilot which began in June.

But whilst Frinsdorf is warning amateur financial consumers to steer-clear of robo-advice, that is the market YBR’s Guru is targeting. According to YBR executive chairman Mark Bouris, Guru will be targeted to those “80% of Australians [who] don’t have a financial plan because they see it as cost prohibitive and confusing”.

And whilst Frinsdorf told Australian Broker that he does agree with Bouris about the prohibitive costs of financial advice, robo advice is not the solution.

“Mark Bouris is right, the cost of getting financial advice for people who can’t afford it is just too much and therefore they don’t take it on. But what I would say is robo advice will not be financial advice. It will end up being investment advice and those people that can’t afford it, what they need most is financial advice. The advice might not be about investing, it might be that the best thing to do with their $100,000 is to pay off their debt. It might be that the best thing to do is to put it into superannuation or pay off personal debt. All of these strategies are far more important than if they are going to put it into an Australian share fund, an ETF or direct shares.”