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:
-
accessible
-
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.
SUMMARY
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.
No comments:
Post a Comment