Reforming financial advice
Perhaps the biggest misconception about financial advisors is that they are essentially salespeople. When perceived that way, it’s instantly grounds for a lack of trust in the financial advisor. But the financial advisory profession is meant to be so much more than sales. Ideally financial advisors help people navigate life’s risks and achieve their financial aspirations, and ultimately, live in the way they are accustomed to, for life.
The financial advisory industry is very traditional. The way it works has been the same for decades; processes are ingrained. The industry needs an overhaul to finally make credible progression to close the perennial issues and address both protection and retirement gaps. It takes teams of actuaries, quantitative finance experts, data scientists, computational engineers and industry veterans to come together for the common good.
Not only is the industry ripe for change, the way that financial advisors work also needs disrupting. We need to earn back the trust of consumers.
When worth their salt, advisors love talking to people and are driven by success more than money. They come in different shades – some like to give advice, others to do business development. Yet most engage in building and maintaining existing relationships. The best ones consider the long run and help you to comprehensively grasp that the financial plan you’ll execute is part of the scheme of realising your personal, long term, financial goals.
It’s difficult to imagine how technology could enhance financial advisory. But it can.
Technology can reduce the reliance on manual solutioning, analysing more quickly than a human can and, based on an individual’s preferences, goals, and financial needs, can almost instantly determine what products and their configurations are the best fit for your comprehensive financial wellbeing.
Technology can verify the viability of the recommendation, rigorously simulating, realistic and relevant scenarios by taking your data and interrogating decades of insurance statistics and market data to build a picture of what you, as an individual, may experience in life.
And that builds trust. When the proposed solution and the verification process is made transparent, the customer feels in control. Ironically, trust is earned when the customer does not need to blindly rely on the expert adviser.
Even before the pandemic, which has brought changes to their work flow and the manner in which they communicate with their customers, financial advisors faced some unique challenges, such as convincing a young customer that there are no shortcuts to financial independence.
Individuals themselves are often unprepared for the intrusiveness of the process to determine their financial needs, even when financial advisors are willing to help. Things like an unwillingness to change bad habits, a lack of engagement, or reluctance to provide all their information; and a lack of commitment to take the time to do it properly, not provide accurate information, or all the necessary data, are what inhibits a financial advisor to provide apt advice.
The missing element is the customer’s motivation. Goal-based planning has, at its premise, the assumption that people have goals they aspire to achieve. Aside from fulfilling obligations, most of us are on the lifelong journey to figure what we want. While aspirations are fleeting, the mind-numbing numerical exercise one has to go through often highlights more gaps than solutions.
Faced with this quandary, technology can help. It can predict a customer’s needs with a few non-intrusive personal data points comparing them to an abundance of statistical data. With simple profile insights obtained in advance, technology can help a financial advisor to navigate the conversation, and to motivate the customer through participation – interacting with a simulation that is based on the customer’s life in the present and predicted future.
Technology can also help financial advisors condense the process from query to quote. It takes away laborious paperwork. In fact, for one insurer, the query to quote cycle lessened from three weeks to ten days, and now it can even be done in minutes. When previously an application consumed two hundred pages of paperwork per application, now fewer than fourteen pages are needed, saving at least 5,000 trees annually. And technology helps insurers to create omni-channel distribution, effectively enabling advisory to be available at any time, anywhere.
Building technology to revise the financial advisory requires a holistic approach. There’s a lot of sensitivity required to adhere to compliance, to automate the sales process, and to transform what traditionally has been a product-push and oft uncomfortable exercise for customers into a seamless process that assures and motivates them instead. It can be done. Evidentially, digitizing the financial advisory process helps people to understand what they are buying, which translates to the purchase of more comprehensive packages.
When the person who is building the software truly understands the business, these, and scalability, are just some of the assets that a financial advisor will walk away with. The whole value chain, from customer, to advisor, to the business, benefits. Along with the environment.
This is how we, at 360F, are helping banks and insurers to transform the financial advisory process. We remember the financial advisor’s true value. We seek to help them enhance the way they counsel the person, not the portfolio. We give the customer the means to make balanced, self-evidently apt choices for their long term financial benefit.
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Make financial advice trustworthy
Trust has been elusive in the financial advisory industry. According to the Global Survey on the State of Investor Trust by CFA Institute in 2018 (1), only 10% retail investors in Singapore and 7% in Hong Kong believe that their financial advisers always put their clients first. The global average was 35%. 360F adapted the survey question for insurance and presented it to the financial advisory representatives spread over Asia (2). It turned out that over half the surveyed estimated that globally, less than 30% consumers would believe their agents put themselves first.
Source: (1) Global Survey on the State of Investor Trust, CFA Institute, 2018; (2) Survey: How can the Financial Advisory Industry in Asia serve the Society better?, 360F, 2019
Uncertainty associated with complexity breeds distrust. Most financial products are complex and their returns shrouded by fine print and uncertainty. It is no surprise that consumers find it difficult to trust the advisors who sell these products for a living.
The adviser’s compensation model often comes under fire. After all, it is difficult to trust that an adviser’s product recommendations are unbiased if a successful sale rewards him with hefty sales commissions. Mature markets such as UK and Australia scrap commissions-based compensation model in favour of fee-based advice. The well-intentioned policy backfires as less well-off customer segments are shunned by advisors whose earnings now largely come from managing wealth. In 2017, Schroders reported half the independent financial advisers in UK turned away customers with less than 50,000 pounds to invest. In most parts of the world where fee-based advice is not mandatory, public receptivity is lukewarm at best. After all, financial matters are not life-threatening conditions which one would seek pay for qualified advice without batting an eye. In fact, the younger the adult, the less he or she values financial advice, even though the opportunity costs of not having a sound financial plan are higher. Financial Conduct Authority in UK () found only 6% millennials paid for financial advice in 2017.
Some markets take the middle ground. They regulate the spread of commissions over multiple years, capping the compensation in the first year. While this discourages hit-and-run sales approach, it does not weaken the association between compensation and product sale. Distrust remains.
Since the compensation models have critical shortcomings, how else can we build trust then?
Instead of focusing entirely on the human advisor, we should pay ample attention to the financial advice itself. Financial advice can be made explicitly trustworthy.
Help consumers evaluate advice
Consumers can trust advisors, albeit the product-based compensation model, if the former can evaluate the latter’s advice easily.
Empowering the consumers is a powerful way of building sustainable trust
It is unrealistic to expect consumers to understand how the proposed financial product works, but it is very viable to help them understand how the product will impact their financial lives. Consumers and even advisors need not struggle to compare complex product features which render price comparisons meaningless. Instead they can compare the difference the products make. For example, 360F’s HappinessScore® models the individual’s profile including financial goals, obligations, priorities, constraints and attitudes, enabling a hyper-personalized context to forecast the status quo and recommendations on his/her key financial health indicators which are tangible, easily relatable and even comparable.
Run realistic stress testing
Nothing can inspire more trust than objective facts. The future is unknown but probabilistic planning offers comfort. The 360F modules rely on statistical rigor by simulating millions of insurance-and-investment risk scenarios constructed in the context of the individual’s profile and time horizon. The 360-ProVestment® recommendation engine uses the scenarios to stress test the possible insurance and investment products on the individual’s financial happiness function. The 360-HappinessScore® forecasts the financial health indicators by simulating scenarios exhaustively.
A preview of the 360-HappinessScore® module
We like the doctor with great bedside manners. However, we also expect the doctor to not only have the minimum qualifications, but also the reliable tools that help him measure our vitals, diagnose and monitor our conditions.
We trust the doctor who keeps abreast of the latest technology and medicine innovations and uses them to improve his diagnostic skills, formulate and execute the best viable treatment plans possible.
As a professional, the financial advisor is a financial doctor from whom we expect no less.
Change management will be the main hurdle for financial institutions that aspire to make financial advice trustworthy. In this day and age, financial advisors constantly feel the threat of being displaced by technology. Furthermore, the art of selling tends to overshadow the scientific rigor required behind financial advice. Short of mandating usage and running the risk of backlash, institutions need to structure a change management program that builds up the advisors’ technical knowledge and thus their confidence to use tools that make the transformational difference for their business.
 Where millennials turn for financial advice, Financial Times, 2019
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Hooked on Fear, Optimism and Financial Happiness
Which do you fear more? Living too long or COVID-19?
We suspect more people would pick the latter option than the former. Anders Sandberg, computational neuroscientist from Oxford University, described how we have learnt to be fearful of the tangibles but not the abstract notions. This learning is reinforced by immediate rewards such as avoiding sudden death. To run out of money when one lives too long is not as urgent and concrete threat as a virus that has made the headlines for killing individuals within weeks.
Everything is relative though. Death is not always the most feared. In an US-based poll, Americans ranked debt as most feared in their daily lives. Death was second place but tailed more than 10% behind. In a local survey, Singaporeans reported fearing germs more than death.
The nature of our fear may explain the customer resistance financial advisers often encounter. The way of dying is scarier than death itself. Hospitalization plans are thus easier to sell than life cover. In addition, our fear of loss makes us rather forgo gains than risk losses. As a result, we prefer status quo to change. An unskilled financial adviser then falls into the trap of fear of rejection, product pushing and objection handling.
Also contributing to the resistance is optimism bias, an evolutionary survival trait in most of us who are not clinically depressed. The belief that “it will never happen to me” is persistent. In fact, if statistics suggest a more positive view of the future than one’s own belief, the latter is even adjusted to be in line with the statistics. However, the reverse does not happen. After all, despite the fact that 31% of all deaths worldwide is due to cardiovascular disease, many are not in a rush to eliminate sugary drinks, tobacco or meat from their daily lives.
It turns out that whether fear and optimism bias drive behavior depends on visibility. The public’s discriminatory response to COVID-19, even towards their own fellow citizens, reflects fear instead of optimism bias. While people do not usually warm up to facts and figures, sensational headlines and real-time breaking stories crafted to generate revenue-generating readership, do an excellent job in triggering emotions and urgency.
Likewise, until our financial future is sensationalized, we remain unfazed and passive despite the high probability of living longer than we can afford. Financial advisers can use scenarios to enrich their customers’ imagination of the otherwise abstract future. However, be forewarned of simplistic and single-minded extrapolations. Life is random. It would be dangerous to allay fears based on hypothetical scenarios with single outcomes. 360F advisory applications simulates hyper-personalized and multi-risk scenarios across a broad time horizon so that one’s financial future is as real as it gets.
In moderation, fear and optimism bias have their evolutionary purposes. Left unchecked, they become obstacles to financial happiness, a self-defined state of financial wellness which many aspire to attain. It is not just the customer’s own fears and bias at fault. If the customer’s financial adviser fears rejection, resists new knowledge and ignores transformational technology, the customer will never improve his or her chance of achieving financial happiness.
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When can the customer trust the financial advisor?
During the ongoing disease outbreak, the experts, authorities and well-intentioned peers flood the information channels. How do we know if the information is trustworthy and reliable? Most of us would not know and never know. Instead we trust by virtue of the labels that suggest expertise and official sources. Never mind that some opinions are more exaggerating than others.
Health care is an example of a credence good, characterized by deep informational asymmetries between the consumer, usually a layman, and the provider who is the expert. Typically, we trust the expert unless we have reason to believe otherwise. Financial advice falls in the same category as health care.
2 in 3 customers do not trust their advisor
The consumers’ lack of trust in the financial advisor, presumably the expert, is consistent across investment and insurance. According to the Global Survey on the State of Investor Trust by CFA Institute in 2018, only 10% retail investors in Singapore and 7% in Hong Kong believe that their financial advisers always put their clients first. The global average was 35%. The Geneva Association 2018 Customer Survey showed only 32% surveyed across seven mature economies consider their agents trustworthy.
 United States, the United Kingdom, France, Germany, Italy, Japan and Switzerland
The lack of trust has many possible reasons. A commentary by Andres Velasco summarizes the list well and applies to the financial advisory industry. The advisor may have good intentions to educate the need for life and health protection products or in fear of losing the prospect’s attention, commit the cardinal sin of hard selling a product upfront. The product jargon alone leaves a bad taste in the prospect’s mouth. Sometimes the prospect may even have had bad claims experience and relate it to bad advice. If the advisor gives the pronounced impression of biased motivation, distrust from the prospect deepens. Overall, if the prospect does not perceive that the advisor understands his or her own world, any advice will fall on deaf ears.
 If experts know so much, why don’t people trust them?, Business Times, Jun 2019
5000-customer-study shows gaps in advice quality
A recent 360F study highlights how the consumer’s distrust backfires on oneself.
In co-operation with a tier-1 insurer in a mature market, 360F ran its 360-FinHealthCheck® module to analyze financial planning and policy data points from 5,000 customers. Core findings include: (1) Incidence rate of overselling and mis-selling is insignificant, (2) The needs for investments and life protection are not systematically and holistically addressed. The siloed approach creates low needs fulfilment and (3) Needs fulfilment rate, while consistently low, differs largely even within sample clusters of similar affordability
From the customer’s perspective, his or her affordability has not been optimized to maximize his needs fulfilment. From the distributor’s perspective, there is a lot of room for cross- and upselling.
The low needs fulfilment rate can be easily attributed to the advisors’ technical competency, but trust plays a significant role. Unable or unconfident to win the prospect’s full trust, the advisor elicits too little information to truly understand his or her world. The advisor opts for an easy sale which frequently means proposing a small sum insured or regular savings that takes an insignificant portion of the prospect’s affordability but cannot cover the latter’s protection or retirement readiness gap.
An advisory autopilot for holistic, hyper-personalized and easy-to-evaluate financial advice
To win the prospect, the advisor must be able to demonstrate tangibly that his or her advice is trustworthy. The prospect must be able to understand and be understood.
360F’s advisory autopilot addresses these requirements. It captures the prospect’s profile in a mathematical function, expressing the financial happiness as uniquely defined by the individual. The autopilot then runs some 40 million rigorous simulations of personalized multi-risk & multi-year scenarios, including death, critical illness and even unemployment, to stress test the advisor’s proposed product(s) on the happiness function. The outcome is a score that indicates the impact of the advice on the prospect’s lifetime financial happiness. A series of indicators including forecast goal achievement and lifestyle sustainability is visible for the prospect and advisor to compare the effect of taking up the recommended product(s). This high level of transparency supported by an easy-to-understand journey enables the customer to not only make decisions confidently but also gain trust in the advisor.
Both the advisor and the prospect can compare, with statistical confidence, the impact of advice and product(s) on the latter’s lifetime needs and wants
The 360F advisory autopilot enables my clients and I to have enjoyable and productive discussions. Instead of handling objections, I get to discuss with my clients the engine-generated solution, and can show them instantly the impact of their preferences on their holistic financial outcome. As the recommendations have been exhaustively stress-tested, my clients feel assured to make their purchase decisions swiftly.”
Asfar Ibrahim, Advisory Manager, Zurich Insurance Distribution Partner
Closing the protection and retirement readiness gaps
In this day and age, consumers are aware that they have financial gaps, and they want to participate in the solutioning process. While they may struggle to understand product jargon, they will not take advice on blind faith in the expert. Helping consumers understand the tangible impact of financial advice, indirectly enabling advice quality to be scored objectively and therefore trust in the advisor to increase, may well be the breakthrough that nations worldwide need to close the protection and retirement readiness gaps.
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Where can the Financial Advisory Industry innovate better?
The financial advisory space does not lack innovations. Financial planning tools transform from spreadsheets into customer-friendly user interfaces that supports goal and scenario-based planning. Robo-advisors evolve from providing auto-rebalancing services to algorithmically optimized investment recommendations to both advisors and customers. Aggregation capability helps to consolidate not only the product carriers for comparison but also one’s financial assets constantly updated in one view. Accordingly, the financial advisory industry today should be more empowering and effective than a decade ago.
A look at the global retirement readiness and mortality protection levels reveals otherwise. The 2018 Aegon Retirement Readiness Survey involving 14,400 participants from 15 countries across emerging and developed markets yielded, on a scale of 0 to 10, a low readiness score of 5.9. In 2012, the score was 5.2. While wealth accumulation for retirement has not made remarkable progress, the mortality protection gap lags behind economic growth. It is estimated that the world population is underinsured by USD 114 trillion. Swiss Re forecasts this gap to increase 0.8% annually over the next six years. Overall, the global financial wellness, being a composite of mortality & morbidity protection and wealth management, is at dismal levels.
To expect that the innovations in the financial advisory space to-date contribute to improved financial wellness, one has to make three critical assumptions – the individual’s financial awareness and literacy, the financial plan’s solutioning and its consistent reviews.
Financial advisory is only embraced when the recipient is aware that he may have a significant problem and has the ability to understand the cause(s). The basis of such awareness and ability is a reasonable baseline level of financial literacy which cannot be taken for granted. Only 30% of the global participants in the 2018 Aegon Retirement Readiness Survey managed to demonstrate correct understanding of compound interest, inflation impact and risk diversification. Financial advisers will find it worthwhile to first ensure that their customers have a good grasp of the basics, before diving into the depths of needs analysis.
Needs analysis and data aggregation have lately become the favorite innovation space, giving rise to tools competing on sophistication and user experience. Like how televisions are furniture unless there is content to display, needs analysis tools are mock displays unless there is sufficient and quality data to analyze. The pre-requisite condition deserves more innovative efforts than there is today. On one hand, customers who have the motivation or sufficient knowledge to use the tools independently are few and far between. On the other hand, advisors who have the time, skill and aptitude to gain the customer’s confidence to share personal and sensitive financial information with them are also few and far between.
Having entrusted his information with the advisor, the customer naturally expects an analysis of significant value-add and recommendations of decent alignment with the analysis. The former is typically well taken care of by the needs analysis tools. The latter is rarely assisted by technology, and when there is, it is no more than a shortlisting automation based on high-level product suitability checks. The recommendation’s suitability may check out but without generating relevant alternatives in all permutations and combinations, subjecting the possibilities through an exhaustive and realistic series of stress-testing and comparing the value outcomes as perceived by each customer in his own way, there is no factual proof that the recommendation is indeed the best one possible to meet the customer’s aspirations and protection needs.
Constructing the best recommendation possible, or technically known as the optimum, should be of utmost gravity in the advisory process. Financial products require contractual commitments and are intended to meet life priorities. Considering that the customer’s aspirations and needs are typically greater than what his budget permits, his advisor must help him make optimal trade-off decisions. To understand his customer, the advisor exercises empathy. To provide an optimized recommendation and cross the last mile towards financial wellness, the advisor needs the backing of science and technology. The financial advisory industry has to appreciate and embrace the technicalities of optimization, such as stochastic and behavioral finance models.
The optimal financial wellness is a dynamic state. It changes with life circumstances, good and bad. Financial institutions find their wallet shares lagging behind customers’ affordability because the touchpoints have been tactical and financial reviews irregular and unproductive. To keep its fingers on the pulse of its customers, the institution must seek bi-directional interfacing innovations that support an omni-channel journey, beginning with periodic reviews of its in-force business to maximize customer value.
Impactful innovations are human-inspired, science-backed and technology-enabled. They augment the human intelligence and enhance the human capabilities to transform and scale the business. In the next two to three years, advanced science and technology will be applied en masse to the industry, reshaping the nature of the financial advisor’s work. The art of advisory tapping on communication skills unique to humans will make a grand comeback.
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The Secret Ingredient – A Financial Consultant’s Life Lessons
We had the pleasure of meeting Jaslyn, a senior financial consultant from Prudential Singapore. Before the interview, it would be reasonable to describe our relationship as strangers – we had introduced ourselves over LinkedIn just days before. Jaslyn, being in the running for Court of the Table(1), was having a very hectic year-end. Hence we thought it might be our lucky stars that she accepted our interview request.
It turned out to be more than just our stars. A driven and sincere lady, Jaslyn lives her life by a couple of pillars, amongst them are family, health and fitness and social relationships. Making time for new friendships (with us) is part of her balanced and very productive life.
Jaslyn’s life philosophy is cultivated from a conscious reflection of her past experiences. A regional HR director of an MNC just less than two years ago before she called it quits, Jaslyn defies the stereotypical perceptions of her next and current career as a financial consultant. Her motivation behind the mid-career switch stems from her genuine belief in the importance of life insurance and desire to steer away from the energy-wasting corporate politics.
In fact, it was during a retrenchment exercise she had to organize as a HR personnel that she witnessed the vulnerability of a salaried position. She recalls the emotional turbulence vividly and her struggle to keep an emotionless façade. Rather than being made helpless by corporate decisions, she decided she had to be in control to make a meaningful impact in her career.
Jaslyn has first-hand experience in appreciating life insurance. When her daughter was diagnosed with a congenital heart defect, Jaslyn was devastated but thankful that her Prudential consultant had gotten her to purchase critical illness coverage before her daughter was born and hospitalization coverage thereafter. The insurance payout eased the financial impact and enabled Jaslyn to focus on bringing up her daughter. Hence when she decided to become a financial consultant, Prudential was an obvious choice for her.
The 30-minute-turned-an-hour long interview with Jaslyn made us realize the secret ingredients for her uber accelerated success as a financial consultant. Jaslyn is crystal clear about her motivation to succeed – this clarity sustains her drive. As importantly, she understands the paradox of work-life balance – that it takes smartness, courage & discipline to be productive, open-mindedness to renew perspectives and self-love to rejuvenate.
1Court of the Table (COT) is a prestigious membership status in the Million Dollar Round Table (MDRT). MDRT is a global and independent association of more than 66,000 of the world’s leading life insurance and financial services professionals from more than 500 companies in 72 nations and territories. COT members achieve three times the requirements of a MDRT member.
The Genie in Asia
Financial institutions seeking to scale in Asia may find the magic in the Asian values for the family and community. 360F explains how an institution can achieve cost-effective and naturally scalable client acquisition in Asia through its wealth advisory platform “Multi- Generation Investment Genie”.
For Jon’s 6th Birthday, Grandpa Jack wants to give some “red packet money”. He wishes that the money is put to meaningful use for Jon. Jack’s wish is fulfilled on a platform known as the “Multi-Generation Investment Genie”. The Genie platform offers community-and family-based accounts with individual app access. Jack gets Jon’s mother to invite him as an ad-hoc sponsor towards Jon’s education investment fund. Whenever he sends money to the fund, both Jon and his mother are notified on the app and prompted to respond in-app to Jack. He receives not just smiley emoticons and phone calls but also in-app updates, the level of detail controlled by Jon’s mother, about his grandson’s goal progress. On the same platform, Jack owns an investment portfolio account tailored to see him through retirement. His eldest and unmarried daughter working in London sends funds to this account every month with a video message. She has a soft spot for her nephew, Jon who wisely sends her a blinking love emoticon regularly to remind her to get him the premier e-stickers with her in-app credits.
The Asian Family as a natural Group Unit
Jack’s family interaction and support for one another is typical of a modern Asian family. In Asia, the family is the society’s basic unit. The Singapore’s White Paper “Shared Values” tabled in 1991 describes the family’s role in nurturing the child, passing on wisdom and experience and caring for the elderly. Almost three decades later, as the society evolves, so has the family structure and form but the importance of family continues to endure. In particular, the financial conversations extend beyond the traditional nuclear unit to include the extended family and even cross-border.
When the financial conversations are captured on a single platform, family members gravitate towards that platform. In other words, the Asian family unit is a natural group unit that kickstarts the referral network effect. In the digital world of distribution that do not have the benefit of human interaction to nurture relationships, a referral network is key to a cost-effective client acquisition strategy – a critical component that has eluded the robo-solutions copied from the West and constrained by the Asian market readiness.
360F introduces Multi-Generation Investment Genie for Asia
The Multi-Generation Investment Genie is a wealth advisory platform made for Asia. It embodies the Asian idiosyncrasies – strong family values, inexpressive love language and digitally engaged lifestyles. It supports the sensitive financial conversations within the family network, from educating the young to appreciate the money efforts for them to giving the adults personalized guidance to resolve trade-off dilemmas such as how savings can be optimally allocated between insurance and investment, or between the child’s education and own retirement bucket.
Families aside, the Genie platform also tackles the advisory model conundrum in Asia. While consumers acknowledge the importance of advisory, take-up rate and satisfaction levels are low. In Asia, human relationships are emphasized but it takes time to build the trust before genuine data is disclosed and sizable sale cases closed. Wealth advisory in the purest and traditional form in Asia is therefore an inefficient business model for the mass and even emerging affluent segments.
However advisory has shown to increase retirement savings by up to 50%. To preclude specific customer segments from advisory services directly or indirectly would be short-sighted. Genie enables hybrid advisory in the context of behavioral finance and blockchain technology. A combination of individual-calibrated gamified profiling and utility optimization functions automate parts of the advisory process that are prone to bias and competency failures. Zero knowledge protocol runs on blockchain to enable selective disclosure of verified data, thus giving the Asian consumers (and likewise the providers) absolute trust that the advisory relationship would not be taken advantage of.
An open architecture platform is in the works to provide new revenue streams to service and product providers, an integrated experience for end clients and enriched data analytics to support product development. The Asian values endure the test of time. A recent 360F supported study on millennials’ investment attitudes illustrates the generation’s inclination to put families before self. Financial institutions will find that positioning themselves in Asia takes more than taglines and clever advertising. The institution that builds its wealth management business on the Asian concept of family and community will be a heartbeat away from becoming the Netflix of financial services.
The Future of Automation in Investment Services
Robo-Advisors vs. Digital-Assistants
Robo-Advisor as Game Changer?
The investment services industry has been buzzing with automation ideas for a while. There are two general types of market solutions. In the FinTech world, simple and slick ‘Robo-Advisors’ grab headlines. In the incumbent camp, functionality-rich ‘Digital-Assistants’ help banks to automate service operations. Both solutions have yet to prove their sustainability. Can either or both solutions disrupt the traditional wealth management model? The question nags at investors and financial institution leaders, cautious not to be caught up in the FinTech storm of hype which venture capitalists conjure with excess capital.
In this context, 360F gets up close with these solution providers to understand their business models and offerings to make a grounded assessment.
Simplify vs. Enhance
Robo-Advisors trumpet their successes in simplifying investment services. At the last count, among the 14 FinTech start-ups delivering Robo-Advisors in Asia, a majority touts simplified client experience, low flat fees on ETFs (0.25%–0.75% fee on AUM) and automated advice on digital content for direct to consumers.
However before a bottomless pit of fire, the same trumpet sound causes plumes of smoke to block the sunlight. Conceptually, Robo-Advisors enable direct-to-consumer models by providing the basic elements of wealth management advice. They eliminate the traditional reliance on human advisors and ultimately generate fundamental economics of scale to penetrate the underserved segments. Realistically, they are prone to underestimate the complex environment they are in. (See Table 1)
In UK where Robo-Advisors have had an early start, the regulatory watchdog notes that many appear to stray into giving advice without possessing the requisite regulatory permissions or following the appropriate regulatory procedures1. A sample of 10 UK Robo-Advisor firms reveals evidence of misleading performance calculations, questionable statements regarding fees, missing pages of key legal documents, and questionable claims. 8 out of 10 of websites use risk questionnaires as basis of recommendations but 25% of these firms do not possess the regulatory permission to give advice to retail clients.
While one camp trumpets, another camp toils. Established far before the FinTech storm, Advisor-assisted digital wealth managers (“Digital-Assistant”) have a track record of several years. Unlike Robo-Advisors which are standalone solutions for the retail client, Digital-Assistants are already integrated into the advisory processes of the financial institutions and fully governed under the latter’s compliance umbrella. Digital-Assistants thus do not independently run into unknown regulatory complexities experienced by the Robo-Advisors.
Digital-Assistants are expert tools rich in functionalities. They support elaborated analysis across an universe of standard and non-standard financial instruments, enabling the human advisor to make sound recommendations and create customized solutions ranging from pricing to lending. Digital-Assistants also offer value-added services such as data aggregation capabilities to facilitate a comprehensive view of client assets and liabilities and even expense tracking. (See Table 2)
Such services build the basis of holistic advice – the foundation of financial planning which Robo-Advisors, to date, have not addressed comprehensively. The sophisticated capabilities come at a price though. Digital- Assistants fall behind Robo-Advisors in terms of ease of use. While Robo-Advisors are simple enough to be used as a B2C tool, Digital-Assistants are far more complex such that only trained experts can understand and use. The customer journey offered by Robo-Advisors are therefore much more slick than that of Digital- Assistants.
“Robot or human: which is the best wealth manager?”
— FT, August 2016
The fundamental difference between the Robo-Advisors and the Digital-Assistants lies in their advisory concepts. Robo-Advisors declutter the customer journey to simplify advisory and reduce cost while Digital-Assistants enhance the journey to support the complexities and customization needs. Both concepts can co-exist in view of customer segmentation needs – the retail vs. the affluent & high net worth investor.
The Retail Investor
For the typical retail investor, transaction costs make or break an investment. The investor with a wealth of 100,000 USD will generate on average an investment revenue of around 2,000 USD per year. In the wealth management industry, one service hour covering all required front, middle and back office functionalities cost between 500 and 1,000 USD. Hence, a retail investor with 100,000 USD can afford to consume two to four hours of advisory per year. This amount of time is sufficient for a one-off sale, but not for tracking or manual adaptation of the investments following market or profile changes. The only way to stay in touch with the retail clients over time is to automate services to keep the transaction costs low.
Banks can support the need for low transaction cost by integrating robo-based investment advisory tools into the customer journey. Automated advisory is in fact a logical extension of the savings account. While almost everyone has a savings account, only 32% of the retail segment hold investments, contrasting the behaviour of the affluent segment where more than half invest. (See Chart 1)
To illustrate the possibility, consider OCBC’s 360 Account. It rewards customers’ commitment with OCBC. Account holders earn bonus interest by linking the account with salary deposits, bill payments, OCBC credit card spending, insurance policies or investment products purchased from OCBC, and increasing their average balance each month. The aggregation of transactions pre-disposes the bank to understand its customers’ financial profile. It also shapes up a customer journey with multiple automated touchpoints. Leveraging the data and journey, an integrated Robo-Advisor adds synergistic value by offering investments at a low cost with some customizations, e.g. five to seven Model Portfolios based on ETFs.
The Asian Affluent and High Net Worth Investor
In contrast to the retail investors, the affluent and high net worth investors need tailor-made portfolios and can afford advisory. The typical Asian affluent and private banking customers seek holistic service and solutions including lending, single equity, thematic strategies, non-liquid investment opportunities etc. They expect not only tailor-made solutions but also personal attention dedicated to service their portfolios actively.
The need for advice will be more rigorous in Asia than in other parts of the world. Digital-Assistants are strategically positioned to support this need. Backed by an annual growth potential in wealth of 10.3% until 2020 in Asia compared to the 3.6% in Europe and 4.5% in the US, the Asian market is a fertile ground for tailor-made or customizable investment solutions. Replicating one-to-one the classical Western wealth management model in Asia has yielded little, if at all, success. In Asia, the first generation holds the bulk of the wealth. Wanting direct control over their hard-earned money, this generation does not favour the discretionary mandate adopted broadly in Europe. Their next generation, i.e. the millennials who will inherit the wealth, desires control too. They want to make their own investment decisions but are open to advice. It is expected that the advisor task force will grow by 15% annually on headcount until 2020 to cope with the demand for expert advice. However a talent recruitment overdrive is expensive and incurs compliance cost exponentially. Integrating Digital-Assistants into the advisory process will support scalability, increase efficiency and control (compliance) risks.
The Asian investor segment is generally sensitive to cost, even including the affluent and high net worth investors who can afford it. Hence low transaction-cost solutions suitable for the retail segment can also appeal to the affluent and high net worth segment, as part of the latter’s portfolio mix. It is in the spirit of financial advisory to offer a modular service model and serve the customers according to their needs and affordability. (See Chart 2)
A Bold Forecast for Robo-Advisors and Digital-Assistants
Depending on customer segments, Robo-Advisors and Digital-Assistants can co-exist. However the solutions’ sustainability in the market goes beyond their positioning. To drill further into the disruption potential of Robo-Advisors and/or Digital-Assistants, 360F assesses their underlying future distribution models.
Robo-Advisors: An Unscalable Future
Robo-Advisors will enjoy initial double-digit growth rates in the retail investor segment. The growth will be based on low-cost distribution channels with significant customer base — social media, online retail platforms and partnerships with employers to name a few. The US market has proven how the Robo-Advisors benefit from such channels. Wealthfront partners with Facebook, Google and Twitter while Bettermind works with Uber. Wealth-front manages, to date, 4 bn USD AUM and Betterment 5.1 bn USD. Online-Platform Schwab Intelligent Portfolios takes the icing on the cake, managing in less than one year 5.3 bn USD.
The strategy to cooperate with partners in a digital eco-system will kick off the growth momentum but is only viable as a door-opener. To sustain the momentum, Robo-Advisors must integrate into customer financial journeys which are in first contact with customers’ funds. Accordingly, banks are attractive candidates, as illustrated in the example of OCBC’s 360 Account.
However, Robo-Advisors will not have easy access to banks’ customer base. Established banks remain reluctant to cooperate with Robo-Advisors in spite of the latter’s active sales efforts. High entry barriers exist. Regulatory complexities surrounding Robo-Advisors will require active management. Existing legacy IT systems are far from ready to support the direct channel with slick customer journeys offered by Robo-Advisors. Banks also refrain from fragmenting the IT landscape to support different customer segments. Huge investments and deep expertise are therefore needed to develop the technology for the banks, as in the case of the strategic alliance between SigFig and UBS US. Some consultancies step into the gap to support the banks to develop from scratch a new customer journey.
Robo-Advisors will have some but limited success by cooperating with players without an established core banking system. External Asset Managers (EAMs) are alternative candidates, as in the case of wealth manager Crossbridge Capital teaming up with Bambu, a Singapore-based Robo-Advisor. However, the EAMs account for only 3-5% market share in AuM. Taking an assumption that 20% of the investors in the market will use a robo-advisory solution, the total market impact will be below 1% to 2% in the long run.
In view of a distribution model which sustainability will depend on overcoming high entry barriers, 360F predicts that in a few years’ time, only a handful of Robo-Advisors will survive, where 1 or 2 will be the market makers.
Digital-Assistants: An Arduous Journey to a Bright Future
Having demonstrated their Raison d’etre in the existing banking environment, Digital-Assistants now need to prove that simplification of the customer journey (even including products) and semi-automation is possible with the core IT systems. This will require web-based technology and flexible & customer-driven development processes. Furthermore, this will also demand skills which are new to the established private banks and the current core banking system providers. Digital-Assistants thus have the opportunity to penetrate this market. 360F predicts that in 5 years’ time, every private bank and wealth management player will use Digital-Assistants enhanced by Robo-Advisors functionality.
Today, however, private banks and wealth managers underestimate the organizational challenges and adaptation needs. Giving the customer the choice of a flexible service model requires sophisticated technology, strong compliance structure, documentation & processes and universal access to investment instruments. The organization can leave no stone unturned.
In the next article, 360F will share an overview of the key killer functions a Digital-Assistant needs. Showing successful use cases today will shed light on the future of automation in the wealth management industry.
Killer Features for Robo-Advisors and Digital-Assistants in Investment Services
In the last article, 360F assessed the automation solutions in the investment services industry, namely the Robo-Advisors and Digital-Assistants. The former faces a non-scalable future while the latter an uphill struggle towards an otherwise viable future. To resolve the automation solutions’ challenges, it is necessary to identify the required “killer features” in the industry. What are the criteria for deciding if a feature is absolutely necessary and significant? 360F asserts that the critical criteria must be based on value generation.
Digitalization: Awash in Gimmicks, Thirst for Value
The digitalization theme in today’s market is awash in gimmicks and neglects to focus sensibly on value generation for either or both the financial institutions and the client. This observation is reminiscent of the dot-com days when “internet” was a buzzword as commonly abused as “digital” today. Venture Capital (VC) funding exacerbates the situation. In the third quarter of 2016, Asia was flooded by US$1.2 billion of VC funds, up from US$800 million in the previous quarter.
The hype will however come to a screeching halt as the thirst for value becomes unbearable. Take the case of the market enthusiasm for Robo-Advisors. Autonomous Research estimates Robo-Advisors spend at least $500 to acquire just one new client. Assuming an average annual charge of 0.25 per cent on assets of $25,000, it would take eight years to break even on the cost of client acquisition alone. It may have been easy to win investors’ initial favour but it will be trying to ask for their patience.
The Fourth Industrial Revolution: A Value-Generating Digitalization Reality
In 2016, the CEO of ING declared, “Employment in finance will decrease”. His statement sums up the current industry dynamics. Overall, as many as 1.7m jobs are expected to disappear as banks digitalize operations. While automated production dominated the third industrial revolution, the fourth industrial revolution creates infinite possibilities, thanks to unprecedented processing power, storage capacity, connectivity and access to knowledge. The fourth industrial revolution connects the dots among digital, physical and biological systems and leverages customer insights to create tremendous value for both demand (customer-related) and supply-side (efficiency and productivity) economics.
What does this mean for the financial industry? Banks are still trapped in the third industrial revolution, where automation is synonymous with “digitalization”. Now that the decreasing returns of automation have set in, banks in general are not optimistic that their profitability can rebound to pre-crisis levels. Between 2012 and 2015, the revenue margin in Asia dropped from 64.7 the return on equity (ROE) dropped significantly below 10%, which is even below the cost of capital (WACC). To stabilize profits, costs are reduced to a level of 66.3% (Asia).
While the world’s biggest banks “digitalize” to cope with profitability, relatively new players digitalize to mark new heights of success. Ant Financial, the digital payment arm of Alibaba, China’s e-commerce colossus, gained about 100m clients in 2016, taking its total above 500m, almost 10 times the world’s biggest banks. Positioned as a digital “ecosystem orchestrator”, Ant Financial transcends the gimmicks of digitalization, skips over the third industrial revolution to focus on value generation (see Market Sample 4).
Value Generation: A New Look at an Old Concept
The concept of value dates back to the mid-seventeenth century, beginning with the objective classical theory and then overshadowed by the subjective value theory as the mainstream approach today. The objective approach determines value by the labour inputs – a house is 100 times more valuable than a car because it takes 100 times as much labour to produce as the car. The subjective approach assumes that individuals seek to maximize their utilities (satisfaction from acquiring/ consuming the economic good) and maintains that their preferences determine the fundamental value of economic goods – an individual who must catch the last flight home to attend a workshop early next morning is willing to pay twice as much as another individual who has no urgent schedule.
After close to 400 years of existence and evolution, the value concept sits firmly at the heart of modern value management methodologies, specifically Lean Management and Customer Lifetime Value (CLV). Retaining the essence of objective and subjective value theory, Lean Management seeks to maximize customer value by ensuring that processes are value-adding and result in output which customers are willing to pay for. Unlike Lean Management which can be deployed throughout an organization, CLV is usually applied in the sales and marketing space. Defined as the “present value of the expected benefits (e.g. gross margin) less the burdens (e.g. direct costs of servicing and communicating) from customers”, CLV subscribes to the subjective approach and underpins the importance of not only understanding customers’ profiles but also predicting their future individual and network behaviour to maximize effectiveness of marketing expenditure.
Considering the pragmatism of Lean Management and the forward-looking orientation of CLV, 360F proposes to integrate both methodologies’ understanding of value to yield an all-encompassing concept – “360 Value” which is capable of making sense from revenue and cost perspectives in space and time.
After intensively scanning the market for best-of-breed-examples, 360F has identified five killer features which fulfil the “360 Value” criteria.
360 Value Criteria: Understand what the customer perceives as value
Matching Killer Feature (#1): Customer insights as currency
Customers are willing to share their personal data – as long they receive something in return. Effectively creating customer insights will drive the financial institutions’ valuation in the near future. Currently, client preferences are barely retrievable in a structured manner and hence not used to engage the customer. In an optimistic scenario, the financial advisor will have an intuitive understanding of the customer profile including the customer’s life goals, investment objectives, fears and concerns and his/her desired communication method and pattern with the financial institution. If such insights are sourced for and analysed systematically, they will facilitate the development of tailor-made products, increase cross-selling effectiveness and pre-empt destructive emotional behaviour.
360 Value Criteria: Capture the excess surplus
Matching Killer Feature (#2): Customization driven by customer insights
Lean management focuses on perceived customer value while CLV measures the captured value. A potential gap exists as firms can fail to capture the full perceived value, leading to excess consumer surplus i.e. the price a consumer actually pays is less than what they would have been willing to pay. The airline industry does a fine job of capturing such excess surplus by engaging in price discrimination methods – made possible by offering product and service differentiation supported by structured client insights. In the investment space, the motivation to capture excess surplus will be born out of both push and pull factors. While stiff competition from passive funds such as Vanguard and Blackrock has started to erode incumbent Asset Managers’ market share, availability of customer insights will encourage these Asset Managers to offer customization.
360 Value Criteria: Eliminate waste which undermine the whole
Matching Killer Feature (#3): Workflow automation to orchestrate processes
In Lean Management, waste (“muda”) refers to non-value adding work which not only reduces profitability but also does not serve the customers. In financial services, the bulk of waste comes from manual interventions and passive processes. The growing stringency of regulations, contributes to at least three types of muda – defects, over-processing and waiting. Work flow automation eliminates these muda by embedding system intelligence and flexibility for future adaptations.
360 Value Criteria: Co-create value
Matching Killer Feature (#4): Customer empowerment made possible
When customers are helped to understand their products, they are more likely to stay loyal and give repeat business. This empowerment is especially critical as financial institutions do not have simple products. Even if complexity is seemingly eliminated by skimming on details, the products remain fundamentally challenging to understand. Selling such products to poorly informed customers creates the “Lehman-Bonds-effect”, permanently staining not only the reputation of the affected financial institutions, but also the whole financial services industry.
360 Value Criteria: Scale for lifetime and network value
Matching Killer Feature (#5): Ecosystem integration
Scalability is possible via network effects and cross-selling powered by an ecosystem. Customers will interact with each component of the ecosystem to fulfil their daily needs (banking, insurance, driving, shopping, etc.), creating a digital footprint which reveals not only personal preferences to support customized offerings but also opportunities for cross-selling. In contrast to traditional financial service companies, clients’ needs are identified at an early stage with the help of information acquired from adjacent players in the ecosystem. Easy social share functions strengthen the network benefits and thus value of a customer.
Or why we should learn to love anonymity
You wake up on a late Sunday morning with a hangover. The news is on TV: “Lion City Life Co. reported IT system breach. Over a million Singaporeans’ financial information is suspected to be leaked.” You fumble around the bed for your phone and see 37 unread messages from your bank informing you of withdrawals totaling over $200,000. Your mind reels from the shock at the loss of your entire net worth.
The hypothetical scenario should strike you with an uncanny sense of déjà vu. We watch data breaches unfold in the US and Europe. Cambridge Analytica and Facebook. Equifax. Google+. It is apparent that regulators are ill-equipped—be it in knowledge or technology readiness—for the unenviable task of playing watchdog to an ever-burgeoning security threat, akin to attempting to tame Goliath undergoing a growth spurt with a flimsy tree branch. Cyberattacks have no geographic bounds. The massive security breach at Singhealth reported in July 2018 exposed the vulnerability of our public institutions entrusted with sensitive personal data.
With increasing severity and proximity of these breaches, data privacy has been thrusted to the forefront of our consciousness. Why should we care about data privacy? Why is it more important now than ever? How can we protect our data? Before these burning questions can be addressed, we need to examine the role of data in our modern economy.
The price of privacy
For tech giants like Facebook, Google and Amazon, user data is the currency they deal in. In a business model that is predicated on monetizing data, user data is transmuted into digital gold. This phenomenon becomes evident when we scrutinize the players in the data-driven marketing economy. Facebook is not just a social media platform, but also a comprehensive personal data collector and aggregator offering user data to the highest bidder; Google is no simple search engine, but monopolizes personalized browsing history to promise targeted and focused ad delivery.
The adage that there is no such thing as a free lunch, is timeless. If we recognize our personal and sensitive data (such as financial, health, biometric) as modern currency, we need to be cognizant that we actually pay for ‘free’ services and platform with privacy. Over time, aggregators’ appetite for more (and increasingly personal) data intensifies. How much is your data worth, and are we getting a fair deal?
Extrapolated advertising revenue in the US estimates that your data is worth at least US$240 annually. This does not factor in mutiple transactions for the same dataset. Data aggregators can reconstruct accurate profiles by amalgamating piecemeal data crumbs from various sources on the same individual. Users themselves also perceive a higher value of their data than the estimate. A research reported that users, profiled to use social media regularly, valued their data to be worth over US$500.
The value of privacy should however, go beyond monetary concerns. Data privacy protects your reputation by keeping the sensitive information anonymous. It protects you from harm, escalating from unwanted spam mail to illegal surveillance and identity theft. It is about having the power to decide what to reveal, to whom it is revealed, and how others can use that information.
Restoring your privacy
To have that power, we need the knowledge, beginning with understanding our data privacy rights when dealing with organizations, businesses and public institutions.
PDPA and GDPR
In Singapore, the Personal Data Protection Act 2012 (PDPA) establishes the regulatory framework for how organizations can collect, use and store customer data. The Act establishes the Personal Data Protection Commission, an independent watchdog providing guidance and advisory.
The General Data Protection Regulation 2016 (GDPR) updates decades-old data privacy laws in the EU to keep pace with challenges consumers face in a data-driven and technology-based environment. Recognizing the data risk mitigation benefits of GDPR, some US-based companies call for a similar comprehensive federal privacy law in the United States.
To minimize our digital data footprint, here are some tips and tricks you can use to protect your digital anonymity:
- Ever had that creepy feeling that the ads you see are based on recent conversation or search history? Use end-to-end encrypted messaging platform like Signal or Telegram, and try pro-privacy alternatives like DuckDuckGo for other services.
- Use a VPN to cover your browsing tracks. Use add-ons like uBlock Origin, Ghostery to reduce the impact of ad trackers, and clear cookies regularly.
- Delete obsolete and unnecessary accounts, and avoid using repeated passwords. Use 2-Factor Authentication security protocols when necessary to enhance security.
Blockchain – not just HODLs, Moons and Lambos
Picture this – you can approach any bank or insurer to purchase a policy or invest in a mutual fund without any financial disclosure, and yet the counter-party can accept your application with full confidence. How is it possible?
The secure and trusting relationship between you and the institution is built on Self-Sovereign Identity (SSI) and decentralized trust. In 360F, we have piloted SSI on Sovrin blockchain. In the world of SSI, individuals enjoy full control over their data—with whom, when and how they share it. Let’s say you want to purchase a policy from insurer X. You need to prove that you can afford it. You will retrieve a digital certificate from your bank. This certificate is a verified and revocable credential – it verifies your bank account balance. This verified credential is then fed into a kit based on Zero-Knowledge-Proof (ZKP) protocol. The kit outputs a proof based on the verified credential to a requesting party. In other words, ZKP allows individuals to disclose verified information about themselves without sharing the data itself. Currently 360F has created ZKP pilot cases around the sales advisory and application process for banks and insurers.
Privacy – A fundamental freedom
Everyone has the right to privacy because it is a fundamental freedom. To sacrifice it for the convenience of using free digital platforms and accepting subsequent data breaches or leaks as an inevitable norm is tantamount to relinquishing an intrinsic human right. We may have nothing to hide, but that is not reason enough for letting the ever-vigilant Big Brother into your everyday life. Surely one can see the ignominy of living in a world where your neighbors are aware of your fertility issues and your employers of your peculiar preference in porn.