by Vasyl Soloshchuk, CEO and Co-Owner at INSART
Stephen Huppert - Head of Engagement at Optimum Pensions and Director of Stephen Huppert Consulting
Stephen mainly focuses on the pension and wealth-management industry in Australia. Prior to going solo, Stephen worked in financial services for about 30 years, where he spent 10 years as an actuary at a life insurance company and the rest in consulting. He started off in a boutique consulting firm and more recently was a partner at Deloitte in Australia, providing consulting services to the big pension funds across the country.
Recently he spent 12 months in a FinTech helping with regulatory matters and infrastructure for emerging pension and wealth-management companies. As part of that, a number of innovative pension funds were launched that focus on amongst other things, millennials.
Nowadays, Stephen utilizes his years of domain expertise to help firms look into the future and understand the different influences and current trends both in the industry and beyond it.
Industry shift
The trend in wealth management in Australia is dominated by the pension industry, since the country has a compulsory contribution system. Every Australian worker is automatically enrolled in a pension fund, usually by their employer. This means many Australians struggle to even the pension fund that they are a member of. Many are members of more than one! Pension funds and wealth-management companies are trying to work out how to better engage with and connect to their client base. For the last four or five years, an incredible amount of money has been spent on their websites and member portals to enable members to get much more access to information about their pension fund, what their choices are, and how they can improve their outcomes in retirement. This can include digital robo-advice-type tools being adopted by pension funds or general education materials to help members become informed about their pension fund and what actions they can take.
“We’re seeing a lot of emerging pension funds that see the communication gap between the end users and service provider, so they try to tap into that space and start focusing on niches such as investing in technology or fossil-fuel-free investing; they create gender-specific offerings with a focus on women or a particular group; for example, millennials.”
Historically, the barriers to entry in the pension and wealth-management industry have been very high. However, technology, and especially its digital component, is greatly lowering these barriers. Thus, more and more startup businesses are emerging, and are connecting with their target segments much more easily.
Difference between robo-advice and digital advice
Stephen believes that robo-advice is not a great term to use.
“It brings to mind things like Robocop. I prefer more algo-advice, because it’s actually algorithms giving the advice, not robots.”
Talking about broader digital financial advice, or digital capabilities, in Australia, pension funds have had calculators with various amounts of personalization for a long time, where clients can get on a website, look at what their balance is now, and see how it changes in the future. There are also a few levers that they can move to try different things.
“We’ve had tools like risk profile quizzes and calculators on pension fund websites for some time.”
For over a decade, such quizzes were typically paper-based; now we are seeing increased use of digital technology to increase the ability to personalize and engage.
In Australia, several robo-advisers—from acquisition through to investment—have developed very similar models to those of Betterment and Wealthfront, adopting a full-service approach. Other firms are more focused on risk profiling and algorithms to give recommendations, but do not necessarily run right through to investing. Still others are more focused on older demographics: talking people through the transition into retirement, where it’s much more complicated.
We’re also seeing a similar trend to the rest of the world, where it’s more of an argumentation of conventional advice and where stand-alone robos are struggling to get customers; thus, mergers between robo and human advice are developing rapidly. Most wealth-management businesses and pension funds are looking at either developing their own solution or partnering with startups. Some have done so successfully, while others continue to struggle.
One of the interesting differences in Australia is that it has compulsory pensions, meaning that there’s less discretionary money to invest. It is compulsory that all employees save 9.5% of their salary towards retirement.
The market that a traditional robo-advisor is after, which is discretionary investments, is small in Australia compared to other parts of the world, since there’s so much money going into the pension system. A number of Australian robos are focusing on that, helping young people get into investing or saving for a mortgage, and thereby offering financial advice at a fraction of the cost.
On the other side, we’re seeing pension funds looking at developing their own digital advice capabilities. Again, that trend has been going on for about six years—the difference is that now we’re calling it robo-advice, rather than just online advice.
Beyond that, several startups are focusing only on education and guidance aimed at helping younger people getting into investing, children learn about investing, or parents teaching their children about budgeting.
Several larger players are looking at adopting some of those approaches.
One interesting example is Acorns, which enables micro investing. Large pension funds either partner with Acorns or develop their own incremental savings, where that incremental amount goes into the pension fund rather than an investment vehicle. Recently Acorns has announced it will launch its own pension fund.
But that’s not all. When it comes to innovation, we’re certainly seeing artificial intelligence (AI) and predictive analytics being used more and more. A lot of the more innovative companies, either at the FinTech or the company end, are trying to personalize as much as possible.
Typically, people have worked on age-based segmentation, which is again very broad-brush. However, now they are realizing the benefits of collecting large amounts of data both internally and externally; they can use it in analytics and AI to be much more focused and personalized with respect to the target that they advise.
The current state of AI, machine learning, and data analytics
We’re still in the very early, probably experimental stages of these technologies; they are still fairly immature, and data analytics, particularly the actual data itself, represents a big challenge. There’s no shortage of data, but data in the right format, in the right structure, and at the right level of quality, is lacking.
Australian pension funds are no different from those in other parts of the globe, where they typically haven’t collected consumer and behavioral-type data in the past. They’ve been much more focused on age, date of birth, address, etc., and because in Australia the main distribution channel of the pension fund is the employer, the fund itself doesn’t have a very strong relationship with its clients.
This is one of the big trends that are changing, because pension funds and other wealth-management businesses are realizing the power of data and relying on predictive analytics and AI. Moreover, the wealth management and pension industry in Australia is characterized by outsourced administration; often, the pension fund itself does not have a direct relationship with the consumer but has a third party carrying out the administration and holding all the data. And getting data out of the third party is always a very difficult part of the equation.
Things like APIs, which we’re seeing being offered by tech startups, is developing this area. Some of third-party administrators and software providers are developing APIs, but it’s in the very early stages at the moment, whilst the wealth-management companies and pension funds are now developing data analytics and BI teams and bringing on board data scientists.
Stephen mainly focuses on the pension and wealth-management industry in Australia. Prior to going solo, Stephen worked in financial services for about 30 years, where he spent 10 years as an actuary at a life insurance company and the rest in consulting. He started off in a boutique consulting firm and more recently was a partner at Deloitte in Australia, providing consulting services to the big pension funds across the country.
Recently he spent 12 months in a FinTech helping with regulatory matters and infrastructure for emerging pension and wealth-management companies. As part of that, a number of innovative pension funds were launched that focus on amongst other things, millennials.
Nowadays, Stephen utilizes his years of domain expertise to help firms look into the future and understand the different influences and current trends both in the industry and beyond it.
Industry shift
The trend in wealth management in Australia is dominated by the pension industry, since the country has a compulsory contribution system. Every Australian worker is automatically enrolled in a pension fund, usually by their employer. This means many Australians struggle to even the pension fund that they are a member of. Many are members of more than one!
Pension funds and wealth-management companies are trying to work out how to better engage with and connect to their client base. For the last four or five years, an incredible amount of money has been spent on their websites and member portals to enable members to get much more access to information about their pension fund, what their choices are, and how they can improve their outcomes in retirement. This can include digital robo-advice-type tools being adopted by pension funds or general education materials to help members become informed about their pension fund and what actions they can take.
“We’re seeing a lot of emerging pension funds that see the communication gap between the end users and service provider, so they try to tap into that space and start focusing on niches such as investing in technology or fossil-fuel-free investing; they create gender-specific offerings with a focus on women or a particular group; for example, millennials.”
Historically, the barriers to entry in the pension and wealth-management industry have been very high. However, technology, and especially its digital component, is greatly lowering these barriers. Thus, more and more startup businesses are emerging, and are connecting with their target segments much more easily.
Difference between robo-advice and digital advice
Stephen believes that robo-advice is not a great term to use.
“It brings to mind things like Robocop. I prefer more algo-advice, because it’s actually algorithms giving the advice, not robots.”
Talking about broader digital financial advice, or digital capabilities, in Australia, pension funds have had calculators with various amounts of personalization for a long time, where clients can get on a website, look at what their balance is now, and see how it changes in the future. There are also a few levers that they can move to try different things.
“We’ve had tools like risk profile quizzes and calculators on pension fund websites for some time.”
For over a decade, such quizzes were typically paper-based; now we are seeing increased use of digital technology to increase the ability to personalize and engage.
In Australia, several robo-advisers—from acquisition through to investment—have developed very similar models to those of Betterment and Wealthfront, adopting a full-service approach. Other firms are more focused on risk profiling and algorithms to give recommendations, but do not necessarily run right through to investing. Still others are more focused on older demographics: talking people through the transition into retirement, where it’s much more complicated.
We’re also seeing a similar trend to the rest of the world, where it’s more of an argumentation of conventional advice and where stand-alone robos are struggling to get customers; thus, mergers between robo and human advice are developing rapidly. Most wealth-management businesses and pension funds are looking at either developing their own solution or partnering with startups. Some have done so successfully, while others continue to struggle.
One of the interesting differences in Australia is that it has compulsory pensions, meaning that there’s less discretionary money to invest. It is compulsory that all employees save 9.5% of their salary towards retirement.
The market that a traditional robo-advisor is after, which is discretionary investments, is small in Australia compared to other parts of the world, since there’s so much money going into the pension system. A number of Australian robos are focusing on that, helping young people get into investing or saving for a mortgage, and thereby offering financial advice at a fraction of the cost.
On the other side, we’re seeing pension funds looking at developing their own digital advice capabilities. Again, that trend has been going on for about six years—the difference is that now we’re calling it robo-advice, rather than just online advice.
Beyond that, several startups are focusing only on education and guidance aimed at helping younger people getting into investing, children learn about investing, or parents teaching their children about budgeting. Several larger players are looking at adopting some of those approaches.
One interesting example is Acorns, which enables micro investing. Large pension funds either partner with Acorns or develop their own incremental savings, where that incremental amount goes into the pension fund rather than an investment vehicle. Recently Acorns has announced it will launch its own pension fund.
But that’s not all. When it comes to innovation, we’re certainly seeing artificial intelligence (AI) and predictive analytics being used more and more. A lot of the more innovative companies, either at the FinTech or the company end, are trying to personalize as much as possible.
Typically, people have worked on age-based segmentation, which is again very broad-brush. However, now they are realizing the benefits of collecting large amounts of data both internally and externally; they can use it in analytics and AI to be much more focused and personalized with respect to the target that they advise.
The current state of AI, machine learning, and data analytics
We’re still in the very early, probably experimental stages of these technologies; they are still fairly immature, and data analytics, particularly the actual data itself, represents a big challenge. There’s no shortage of data, but data in the right format, in the right structure, and at the right level of quality, is lacking.
Australian pension funds are no different from those in other parts of the globe, where they typically haven’t collected consumer and behavioral-type data in the past. They’ve been much more focused on age, date of birth, address, etc., and because in Australia the main distribution channel of the pension fund is the employer, the fund itself doesn’t have a very strong relationship with its clients.
This is one of the big trends that are changing, because pension funds and other wealth-management businesses are realizing the power of data and relying on predictive analytics and AI. Moreover, the wealth management and pension industry in Australia is characterized by outsourced administration; often, the pension fund itself does not have a direct relationship with the consumer but has a third party carrying out the administration and holding all the data. And getting data out of the third party is always a very difficult part of the equation.
Things like APIs, which we’re seeing being offered by tech startups, is developing this area. Some of third-party administrators and software providers are developing APIs, but it’s in the very early stages at the moment, whilst the wealth-management companies and pension funds are now developing data analytics and BI teams and bringing on board data scientists.
The possibility of shifting to more customized and active wealth management
The trend of more customized wealth management is emerging in various ways. In Australia, the move to passive investing is not as widespread as in other parts of the world. Again, this is partly because a lot of the money invested in Australia is in large pension funds that need to justify their investment teams, and they primarily have active investing.
One of the big challenges with passive investing in Australia is the stock exchange, which is dominated by four big banks and a few other large industrials.
A number of large pension funds in Australia offer what they call “member direct” services, wherein clients can actually choose their own individual stocks in their pension fund. This is another example of the personalization trend we are seeing.
From the FinTech end, there is an emerging option of investing themes, such as a high-tech theme or a theme around entertainment. The topic of value-based investing is also becoming more popular. For example, customers may prefer a fund that doesn’t invest in tobacco companies.
One pension fund in Australia has just introduced the option for members to choose from 10 to 15 different portfolios depending on their particular values. Whether it’s climate based, carbon-based, more political, or more activist investing, portfolios can be tailored to those specific aspects.
The biggest challenge for FinTech companies and the wealth-management space
First, a large challenge is regulation and cost of acquisition. To beat that and become successful, FinTechs collaborate when they can while remaining focused on the particular technologies that they specialize in.
“In wealth management, the greatest friction at the moment is the costs.”
Willingness to use things like machine learning, robotics, AI, seamless integrations, and APIs can result in cost reductions.
“The way we use data to do better behavioral or predictive analytics can help the consumer ring.”
There’s a lot of value hidden in data, as well as in the use of data analytics internally to improve processes so as to reduce costs and identify areas that need work.
Regulations in Australia
Australia has a fairly strong licensing regime. There are plenty of regulators, and two important ones from a licensing perspective. To have a wealth-management business, as in any other part of the world, there are a lot of regulations to comply with. Companies also need to have a license to operate, and whether the company is a pension fund, a managed investment scheme, or a financial advisor, to get that license they need to be able to demonstrate they have the experience and prove that they’ve got the right skillset and capabilities.
Startups, especially those from outside the industry, bring a lot of fresh air and many great ideas, but they have to be confident that, especially with pensions, it’s long-term savings that they have to protect. It’s not the same scenario one would have with a dating or a restaurant app, for example.
If it doesn’t work out, the company can shut it down and people just delete the app from their smartphones. Taking people’s money, especially money that needs to be there in 40 years’ time when those people retire, needs a strong regulatory and credentials framework.
“There will be tension between innovation, consumer focus, emerging technologies, and the regulatory and credentials environment that you have to work in.”
But instead of ignoring that tension, it is necessary to recognize it and work with it—and the regulators in Australia have also recognized that. They are now trying to establish innovation departments; for instance, there is regulatory sandbox framework in Australia where some parts of the industry can experiment a bit. There hasn’t been a big take-up of it yet, since it’s fairly restrictive in terms of what can be done, but that will evolve once the regulator gets a bit more comfortable.
“Regulators need to keep up to date so they realize that they can benefit from some of these emerging technologies.”
Blockchain in wealth management
The most likely application area of blockchain in the wealth-management industry is at the back end, where an enormous amount of time, money, and effort is being spent on reconciliation: finding and fixing errors.
Many large custodians have got projects, the banks of all sizes look into the area of distributed ledger technology, even in Australia where the banks are part of the R3 consortium. Stephen says,
“I know a couple of the banks here have been experimenting with Ripple for things like trade financing.”
However, local wealth-management companies and pension funds are fairly conservative and skeptical about emerging trends. They are still very interested and want to be involved, but are not necessarily early adopters. They’ll be looking very closely at what’s developing both in Australia and, more specifically, in other parts of the world.
“There will be some applications for blockchain-related technologies in the custody-reconciliation and -processing parts of the wealth-management operations.”
Australian FinTech startups: Movers and shakers
With respect to consumer-facing pension funds, players include Spaceship and GROW Super funds.. Other similar companies include Future Super and Good Super.
In the robo-advice space is Stockspot, Clover, SelfWealth, and some other firms that are disrupting the industry.
On an analytics side, Stephen had a chance to collaborate with Laneway Analytics, which is looking at developing analytics and dashboards as a service. On the product side, Stephen is involved with Optimum Pensions which has developed an innovative pension that has investment flexibility and longevity protection.
And another thing that is emerging in Australia is third-party administration, which comprises actual registry systems that aim to eliminate the inefficiency of legacy systems. Companies such as Capital Road and Recreo have, in the last couple of years, aimed to offer much more modern database structures and very open API technology that are hoped to replace some of the legacy systems.
A company called PractiFI is using Salesforce by tailoring it specifically to wealth management and the financial advice industry. Several others are emerging in the CRM space.
Besides WealthTech, there are a number of other players exploring more of the RegTech side using AI and machine learning. Red Marker is one such company. They offer real-time compliance monitoring from financial advisors, rather than just reviewing files after the fact.
There are also a couple of FinTech-specific incubators in Australia. The biggest is called Stone and Chalk, a FinTech hub that has several big pension funds, banks, insurance companies behind them. Finally, FinTech Australia is an industry association that promotes innovation and is open to partnering with interesting companies.
Further development of wealth management
Two key areas are likely to see the best use made of technology to reduce costs and friction.
First, for many decades, much of the back office hasn’t changed at all. A lot of paper is still being shuffled around. Additionally, costs can be lowered using distributed ledgers, AI to improve processing, or APIs to better integrate multiple systems. This should in turn improve the customer experience.
Second, personalization of the investment journey is key. People understand that they’re not just giving their money to a large institution, but are more actively involved in the process of growing wealth or saving for retirement.
In addition, we’re going to see improvements in consumer-facing parts of the business, such as better personalization, education, and guidance, as well as access to that information when it’s needed.
Interviewed by Vasyl Soloshchuk, CEO and co-owner at INSART, FinTech & Java engineering company. Vasyl is also author of the WealthTech Club blog, which conducts research into Fortune and Startup Robo-advisor and Wealth Management companies in terms of the technology ecosystem.