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.