New era of Retirement (and Investment) Solutions

We are just launching our new era of technology solution to support what we see as a new era of retirement and investment solutions.....


What's new ?


Well, a few things are happening around the world:

1) that it is increasingly being recognized that many consumers are asking more questions about the fees that they are paying for advice and investment services, and assessing value for money. In fact not only is it consumers, but regulators are onto this also and there have been some high profile cases recently where providers are being caught out. Ultimately it is being recognized that across the investment industry, it is moving to you have to be doing something ongoing to get paid on going.

2) Services are getting personal. In reality if a service isn't personal, it looks rather like a product, which is a problem given the above. And personal means that it means something to the person, which is most likely to be different for each investor depending on their circumstances


3) this is encouraging those who recruit clients to introduce an ongoing service into their proposition, which in many cases is about portfolio management as opposed to product selection


4) regulators globally are reconsidering the terms of retirement solutions in terms of the mandating of annuities, timing of releasing retirement pots etc, introducing more options for consumers and their advisers


5) whilst people who are accumulating assets may be regularly seeking to increase their investment or retirement pot, increasing numbers of people are relying on drawdown of capital to fund retirement or lifestyle needs in a low interest environment


6) this is encouraging a new era of investment / retirement solution that combines active portfolio management, personalized to each individual, to their level of investment sophistication, with the cash flow realities of monies being placed into and withdrawn from the investment and retirement pot


Now combine this all together, recognise that everyone's timing and cycles of cash flow adjustments is likely to be different, the assets may be held in multiple platforms for different investment types, multiply by thousands of members / investors, and overlay the increasing demand from regulators to ensure that this all operates squeaky clean....


If you are recognising this problem, and looking for a solution, I'd be happy to talk.










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A blast from the past

I was just looking back on some of the articles I wrote nearly 10 years ago. Check this one from August 2006 out and compare with what happening in the industry today..

Is portfolio compliance a 'state' or a process ?

A lot of people are asking me at the moment about what portfolio compliance is, and you may want to read my white paper here

Well for professional money managers to date, simply put portfolio compliance is making sure a client's investment portfolio is in accordance with any mandates or instructions that you agreed with them.

Simple ? Sometimes yes, but not that easy in a world of volatile markets, changing investment policies and research, and also changing investor circumstances, especially if that investor is a tax payer in the western world of modicum wealth. This is all highlighted with increased regulatory scrutiny also.

Why do these things make it harder ? Well apart from the simplicity of 'Does the investment portfolio fall within the prescribed asset allocations and densities' at a point of time, there are the issues like the below that need to be considered:

• if and when I want to change the investment portfolio, I may need to think about some sensible thresholds for trading so the portfolio does not get negatively impacted from transactional costs (often brokerage). Many would argue that there is little point in keeping in mandate if the costs of doing such are adversely detrimental to it's health !
  
• If the owner of the portfolio is a taxpayer, perhaps paying as much as 50% in capital gains tax for poorly timed sales, then my reputation as a money manager may be at risk if I am not considerate of this when trying to keep within asset allocation mandate. I am sure that consumers would be happily outside mandate to avoid paying a tax bill that after consideration of such would significantly impact the portfolio value or desired outcomes

So is portfolio compliance a state ? Yes from an investments perspective, is it a process ?, well probably if you want to lead your client to their outcomes as opposed to just investment outcomes based on an investment mandate.

Clearly there is an introduction of 'other' items now to be considered in consumer portfolio mandates if a money manger is going to seek to deliver the best outcome (not necessarily performance) for an investor, and these need to be put in the context of that investor.

We are already seeing with the more forward thinking clients of Financial Simplicity that in consultation with their clients, it is not only about agreeing an investment mandate, but also agreeing to what extent that mandate is legitimately deviated from in the investor's best interest.

So back to the question, then is compliance a 'state' or a 'process' - well in my view, moving forward for consumers, it is more about a continual process of trade offs that need to be carefully and constantly considered to resolve whether the portfolio is in a state that would be regarded as best fit for the consumer's desired outcomes.

If you are facing these challenges in your business and  wondering also how to achieve constant 'compliance' monitoring of investor portfolios considering this new era of mandates, with more regulatory pressures, drop me a line.

Implemented Portfolios

I am a really big fan of all of our clients. One, Implemented Portfolios has some great videos. See them in action here..

https://www.youtube.com/channel/UCK5hLVWoEkfWLzmFyBRdkoQ

http://player.vimeo.com/external/111703116.hd.mp4?s=4933298f6f5ba821fa23f7b0777b81cc

http://player.vimeo.com/external/111702624.hd.mp4?s=9fdacecec8224ced37a2b18a28b9cb6f

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:

-        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.

 

 

 

 

 

And the Future is about......

So, here is my call for the next decade.....The future of wealth management discussion (even policy) and  marketing will shift from people's wealth to their financial 'well being'.

To some extent we are already seeing this. Some examples include in the latest AFSA retirement blueprint report (great report !) it talks not about wealth in retirement but affordability of income streams , and increasingly also there is much reference in governments that are being concerned about what is the burden on governments (and hence future tax payers) of supporting those who have retired from work. There are many more cases where we are seeing these macro considerations coming to the front.

So, what does this really mean and what is really different in financial 'well being' from 'wealth management' ? Well strangely enough what it means is that one moves to the end investor's 'being' and not just their wealth being an increasing part of the puzzle, but as you may ask, what does this 'being' mean in practical terms ?

Well as a friend and adviser of mine (an Actuary married to a professional in social welfare) in the UK commented at the end of a talk about the future of the industry, it means less about numbers and statistics, and more about counselling and human welfare. Yes, it means actually moving from beyond those who manage other peoples monies being a 'record' in a system (ie a unit holder of a fund), and more about understanding the people, their motivations, their way of communicating, their inner beliefs, their drivers, where money fits into their lives and minds, their ..... 'being'.

So then, how does one test  whether a business can really practice what they may preach in this regard ? Can we just put a new term up on a website and brochure and suddenly say we are in the business of financial 'well being'. I suspect the answer for many will be just that, but  in the same way that we all know the difference between those people who say they are 'good friends', and those who actually really are, I think that earning the right to allowing people to help them with their 'being' will have to be demonstrated before really being believed.

And this largely comes down to behaviours and reputation. Behaviours that over time show that providers have earnt the right for consumers to open up about the 'being' and reputation that they have not performed acts that would conflict with a position of improving people's 'well being'. Consistency I think is key here to be believed. But this is not easily achieved, and especially hard to achieve if a firm has been in a position where many would argue that the practices of the past have perhaps swayed the balance of stakeholder towards shareholders rather than consumers and their 'being'.

I expect to see a raft of  new brands, new terminologies, perhaps even new regulations in this very difficult formula about a person's 'well being'. I suspect over time it will also require greater accountabilities of consumers (and disclosures) to also both help providers determine and communicate what their 'well being' is, and take responsibility for such as well.

Future Proofing Your Business From Regulatory Change

One of the fundamental pillars of financial markets working is consumer confidence in the integrity of systems and participants. Without this confidence, there is a lack of participants, it has for capital to be raised or traded and confidence in markets and the systems can be dented - we may remember  what happened to the credit market in 2008 due to the discovery of the in-transparent nature of credit default swaps, leading to a ‘run of the banks’ in some parts of the world.

In July, I introduced on the blog the concept of the ‘Social Regulator’ and how the industry is reforming – not only in response to regulation, which is largely reactionary, but also through leading indicator of how business models should develop is relation to what is reasonably acceptable to both consumers and public opinion generally (who are increasingly being championed by the media in the face of high profile advice scandals).

The latest validation of this thinking in Australia is the defeat of widely anticipated watering down of Future of Financial Advice (FoFA) laws in the Senate, which means Financial advisers must now fully comply with Labor's original version of FOFA. With the ammunition of recent scandals still very much in the papers and social consciousness, Labor, the Greens and four crossbenchers, argued the Coalition's proposed changes would leave investors vulnerable to a future financial collapse.

It means that on balance, the politicians believe that the fundamental pillar of confidence, which is so necessary in properly functioning financial markets, is broken. In the case of CBA and Macquarie, despite the vast resources of these institutions, if they cannot be trusted to act in the public’s best interest in the pursuit of profits, how can anybody argue something isn’t broken here?

Some anecdotes being prescribed for the industry point to more training, regulation and red tape, and some, such as a public register of advisers, are an attempt by the industry to appear more professional and transparent.  Our views are that whilst a step forward, these seem more like a band-aid solution when what is really needed is a fundamental rethink. 

For firms trying to decide on a winning business model going forward, the environment may appear stifling, with FOFA still around and FSI and who knows whatever else around the corner. This creates a dilemma in many financial advice organisations in terms of how can I achieve the right balance of compliance and business competitiveness? The trend at the moment is to hire more compliance staff (at the expense of advisers and other revenue generating headcount) and commit to ‘higher training and professionalism standards’. With margins in financial services already compressing fast, the last thing advice businesses need are more non-revenue generating costs.

Financial Simplicity believe compliance cost blowouts are first and foremost a cultural problem – not necessarily at the organisational level but rather at the industry level – and to improve compliance requires taking a step back and considering compliance in sometimes completely different ways.

If compliance frameworks exist to regulate and monitor the quality of advice provided to clients, but are largely administered manually through compliance teams, documentation and training programmes, this becomes a non-scalable and expensive solution, that will most likely have some holes in it's approach. The compliance effort is also a product of the organisational culture and leadership, and pressure to produce results can also see compliance pushed to the bottom draw.

Rather, Financial Simplicity views compliance as a fundamental embedded part of a firms operating model (ie EVERYTHING IS COMPLIANT) rather than a framework that is imposed on top with costly checking resources.. And because everyone else is so pre-occupied by keeping their compliance frameworks up to date, those with compliance embedded into their operating model, operate at a competitive advantage, with resources directed towards client and revenue generating activities.

Financial Simplicity has, for more than a decade enabled embedded portfolio and investments compliance to be automated and systemised in our clients’ businesses, to the extent that they don’t even have dedicated compliance resources or think about compliance in terms of explicit costs or periodic audits - they just know it is all OK. It is embedded directly into their revenue generating advice activities and often taken for granted as compliance is an ‘outcome’ that is systematically applied through automated and technologically-driven processing.

If you are currently concerned about how to ‘future proof’ your business and revenue against future regulation, it may be time to talk to Financial Simplicity about how we can radically reduce your compliance costs while positioning your business for growth.