Financial System Enquiry in Australia – Another Catalyst for Financial Simplicity
With the Murray report out just before Christmas, it has now given me some time to digest it and some of the recommendations.
Clearly there is notable mention of the retirement income system, superannuation, and some of the key components that support such and just general investing, which I suspect will have some fairly considerable ramifications across the investments and wealth management industry. Whilst I understand that there is much more work to be done in determining which recommendations will be adopted, and how they will be implemented, I thought I’d take my interpretation of some of the points with a view to outline what the emerging industry structure could look like, and highlight how Financial Simplicity is well positioned to be the cornerstone of wealth management business models moving forward.
If we look at some of the recommendations and objectives relating to investments and retirement that come from the report, we could break them down into a number of levels, each with key themes:
SOCIETAL = resilient
REGULATORY = tool sets
INDUSTRY STRUCTURE = data access, efficiency
INVESTMENTS = Product target markets and impact investing
WEALTH PRACTITIONER / PROPOSITION = Efficiency, alignment with consumer outcomes, suitability and appropriateness
CONSUMER = engagement, technology neutrality, scaled advice, digital identity,
And for each item, let me put a certain perspective on them:
RESILIENCE – a take on resilience is meaning that not only is this about resilience from shocks in the markets, but also resilience in terms of the combined public and private investments supporting a population for many generations to come. Whilst there are many angles on this, a key desired outcome for this has to be about reducing overall costs of the process of investing and holding investments, whether for retirement or other investing. You could look at this challenge in another way: for every dollar that is lost in an investor’s account to fees, it is potentially another dollar that the government may have to provide in the future to support the investor. Another aspect of resilience is about simplification of the industry structure to have less layers between investors and their monies (in order to reduce risk of failures), and remove repetition of costs.
REGULATORY TOOL SETS – a take on this is to extend current regulation and monitoring about the sale of individual investments to investors, to that of overall ‘whole of client portfolio’ regulation. We are increasingly seeing this being introduced into the regulatory agenda around the world, and the FSI report is perhaps suggesting that either the regulator themselves may be equipped with the tool sets (and technologies) to monitor investment advice on a holistic basis, or the need for organizations, in a similar way that public companies are required to have independent audits of accounts, to have independent audits of the way clients are provided holistic investment solutions.
DATA ACCESS- Whether it be about performing better analysis to improve decision making, or just keeping people informed about investments with improved transparency, the processes and technologies to perform such activities are very much dependent on data access. My take on this is that the industry will both be easier to deal with, will foster innovation, and service consumers and their advisers with increased and cheaper data access. Whilst the trend is going this way regardless as business seek to achieve operational efficiencies, I’d like to see that there even be an obligation on different participants in the investments industry to make data available to consumers or their authorized service providers in order to accelerate innovation and openness.
EFFICIENCY – going hand in hand with data access and availability is the natural pressures on the investments industry to become more efficient. With a related impact on overall societal resilience, and technology neutrality, I’d suggest that investment proposition models or offering types that are operated with greater levels of efficiency should be encouraged, and where appropriate (i.e. in consumers clear interests) even given preferential treatment or relief from the overheads and process that has been accumulated over the years in more conflicted investment offerings. A good example of this is the opportunity to introduce a lighter compliance framework associated with the provision of an investment portfolio to a consumer that follows an agreed and published (often from a third party) mandate with the investments held by the consumer themselves, and perhaps even monitored by the regulator. Whilst this requires the operator of the proposition to have a level of ‘discretion’ to adjust the portfolios when required, it is a far cry from the risks associated with providing an investment adviser with discretion as to what may be bought and sold from the entire investment universe.
PRODUCT TARGET MARKET – I really like the idea that where an organization is manufacturing an investment product, that it is done so with a target market and / or even specific purpose in mind, rather than just seeking to outperform a benchmark. I guess from this we may see different benchmarks emerging that are more consumer orientated, and we will see I suspect increasing obligations on product or proposition manufacturers to ensure their products are being ‘used’ appropriately. I do however question if such overhead is introduced, whether this is just a stepping stone to the collapsing of the product distribution industry model to a point where all players are having to develop consumer relationships (with the associated margin of doing so) in order to cover such costs. I suspect that this will be the case and we are already seeing many asset managers go ‘back to retail’.
Clearly a product or proposition that is designed to adapt to specific consumer needs has a larger market, and so the growth of client customized investment solutions I suspect is inevitable.
The debate between active and passive investing is not new, however clearly when looking at investment products consumers will not only want to be aware of asset class exposure, but also are they exposed to the risks and costs in their product of seeking to achieve outperformance and whether this is appropriate for them.
IMPACT INVESTING – I just like the idea of this, and think that more consumers will be attracted to invest in initiatives that can bring societal and social benefits rather than just financial ones. I wouldn’t be surprised also over time if the charter of shareholding, or that of having investments in something include the ability for shareholders / unit holders to represent their views on subjects to help management make decisions that are in the interests of their investing stakeholders.
FOCUS ON CONSUMER OUTCOMES – Whilst a lot of shift in mentality and behavior comes around from the removal of commission on products (as dealt with by FOFA) – which eventually means if your customer doesn’t really value what you are doing, you don’t get paid !, The implied point here is that if a business is part of an investments supply chain, if what you are doing doesn’t create consumer value then you will have to question the sustainability of your business model. I notion that there are in general 2 types of functions in the supply chain, ones which are procedural and ones that require an element of consultation with (or consideration of) the end consumer. If one follows that the best person to best deal with the consumer is the one who has the relationship with them, then we will naturally see a gravitation of the consumer facing decision making processes towards either the consumer themselves, or the advisers and service providers that service them. This is likely where the higher risk, higher value activities will occur in the future, and require as the report suggests increased educational and quality standards to deal with such. But what does it say for everything else in the supply chain. This shift to consumer empowerment means downward margin pressure and commoditization on the industry supply chains as the consumer outcomes are often (within the bounds of risk management and regulation) about lower costs, less fees and more retained value in their investments.
SUITABILITY – this is the other side of the coin from the discussion about product providers needing to define target markets for their products. My thought process here is that suitability will extend beyond not only risk profiling of individuals, but more about ‘pots’ of monies with specific purposes, outcomes and attitude to both asset class risk, but also what degree of speculation is sought within such asset classes, liquidity etc.
CONSUMER ENGAGEMENT – Whilst the report mainly focuses on superannuation fund member engagement, there are clear tones that increased engagement is good for confidence in the overall system and consumer experiences, perhaps even leading to consumers taking more responsibility for their financial affairs. My thoughts are that this engagement has to be:
– simple to understand
– supports consumers understanding the decisions that they have to make, and helping them make them
– be coupled with educational materials
If some of the new websites around the world are something to go by, consumers are increasingly making decisions about their providers on the consumer engagement experiences, and combining this with further choice and data access, means that the consumer engagement experiences could have material impact on customer recruitment and adoption moving forward.
SCALED ADVICE – Coupled with consumer engagement above will be growth and acceptance of on-line algorithmic decision making about investments. Whether regulation gets ever to the point of prescription of any formulas will be doubtful, however I suspect many organisations will travel the trajectory of the scaled advice path, adapting to various glitches and cases along the way that will start to define the acceptable boundaries for such. Whilst we are seeing a number of on-line sites that essentially blend some form of scaled advice with their investment offerings to make it commercially viable, it will be interesting to see what emerges in terms of isolated scaled advice on it’s own as a process without being tied to any investment, what will be it’s cost, and what protections it comes with. I think we will see considerable challenge to the various models and philosophies that emerge, and suspect over time such scaled advice processes will need to adapt to the knowledge base of a consumer user.
TECHNOLOGY NEUTRALITY – The mentions in the report about technology neutrality I think are great, and perhaps will push the investments industry to move in line with payments and other financial services. This is a complex one when it comes down to disclosure, but in terms of post account set up authorizations, however like the payment industry, I suspect we will see considerable innovation in terms of consumer approvals via mobile phones or other electronic devices.
DIGITAL IDENTITY – Should this eventuate, I think it would be excellent in terms of consumer outcomes and efficiencies across the wealth and investment industry. This is not an insignificant challenge though and will take some effort.
Whilst the above points is not exhaustive or complete, and I have applied a broad degree of interpretation, the general themes that I see progressing can be summarized as:
1) the industry will continue to move from professional sellers to professional buyers on behalf of their clients, placing cultural and change on industry participants that have grown from a sales orientated history
2) increased obligations for consumers will bring much of the subjective decision making closer to the consumer in order to be practical and cost effectively compliant
3) Consumer interaction and on line experiences will significantly impact customer recruitment and satisfaction
4) Such consumer centric subjective decision making will be increasingly under the scrutiny (and monitoring) of the regulators, perhaps with regulatory technologies with detect and prevent controls
5) The industry structure supporting such consumer interactions will be increasingly automated and open architecture
6) Government, consumer and societal resilience pressures will continue to drive down costs and margins on this infrastructure
FINANCIAL SIMPLICITY READINESS FOR A POST FSI WORLD
I very much welcome the FSI report as further encouraging and opening mindsets of change in the overall investments and wealth industry. I see such advancements being a) a good framework for incremental changes; and b) essential to ensure long term resilience of the country and the role of the financial system in supporting the countries people and activities.
At Financial Simplicity, we have been working hard for over 10 years now in anticipation of a lot of these trends, and helping investment industry participants develop wealth and retirement propositions, with associated operating models, to support such driven largely to date by their own instincts and values, which now may be form part of regulation and law.
Our whole concept of mass tailored portfolio management combines many of the themes furthered in the Murray report, that of consumer interests, efficiency and regulatory controls in a way that ultimately provides better outcomes for all stakeholders. With increased data access and industry connectivity, we see a bright future for wealth and investment advisers that can use our techniques and technologies to provide better consumer outcomes, better business outcomes and with some advancement, most likely a much improved regulatory outcome in terms of risk management and costs to implement.