With Bryan, I discussed global trends in wealth management, humans and robo components competing with one another, and expectations for the near future.> More details
WealthTech Insights #14 with Mark Fordree: Australian Outlook on Financial Robo-Advice
Mark has been in financial services for three decades, and worked for Abn Amro, ANZ and Potter Warburg (UBS) prior to starting his own company. Today, Ignition Wealth offers automated investment software to help businesses transform their operations.
We discussed with Mark the differences and similarities of wealth management players in Australia compared to the US and the UK; his opinion on the future of robo-advisory; and ways in which different generations manage their assets.
Q: Could you please introduce yourself and tell us about your role in the wealth management industry?
Mark: My background is 30 years in financial services. I worked initially in wealth management as a fund manager for eight years, and then I spent the next 20 years on the sales side working for brokers like UBS, ANZ, and ABN AMRO. I’ve always had a whole lot of interest in financial services and I started to see the opportunity to have an impact on the delivery of those services about three years ago.
“Australia is in a fairly unique position because even though historically all of the world’s banks (particularly those of the US and the UK) have been very well represented here, in a wealth management sense it’s absolutely dominated by the local players.”
Q: What kind of trends do you see prevailing in WealthTech, particularly in Australia?
Mark: A few observations worth making are as follows:
- Even though Australia is a relatively small country by population, it has the third largest pension fund globally, following the US and the UK.
- Another observation is that in comparison to, perhaps, the US, it’s a very concentrated market. We have four big banks (National Australia Bank, Westpac, ANZ, and CommBank), and if we add AMP to the wealth management space, that probably covers about 85% of the market. Our wealth management industry is split into two halves: super and nonsuper parts; both of them are worth about 2 trillion AUD.
- Australia is in a fairly unique position because even though historically all of the world’s banks (particularly those of the US and the UK) have been very well represented here, in a wealth management sense it’s absolutely dominated by the local players. We also have an environment where the local players have supported large platforms, and that’s relevant in an environment where legislative changes, particularly around this precipice in compliance, challenge those historical business models.
When we look at what Vanguard, BlackRock, and so on are doing globally, we haven’t seen a focus in the Australian context at this stage. There are two reasons for that. Firstly it’s market that is highly dominated by the local players and secondly it’s a highly regulated market. We have seen a very strong trend amongst global banks to steer clear of Australian retail investors.
The US has only really recently incorporated best interest duties in advice, whereas we’ve had it for many years, so you can’t bring an existing digital advice engine from an offshore market to Australia and just turn it on. When I had meetings with some of the major players, I could see that there’s really a need to start from scratch to build a solution and whether the cost–benefit of that weighs up to the size of the market is questionable. If they decide to come here, it’s probably more likely they’ll partner with a local, compliant, digital engine. We haven’t seen it yet.
We’re starting to see traction in the partner equation, but not with some of the large players in Australia who are likely to want to build the solution for themselves, which doesn’t always end well! We’ve seen a lot of interest from many other players who aren’t in the business of building technology solutions and are far more likely to partner, which is the background to the deal that we announced recently with BT, the wealth management arm of Westpac.
Q: Robo-advisor is a very broad term. It can be more about automation of financial advisor business processes, or data analytics algorithms to find more efficient asset allocation strategies. What would you say is the definition of “robo-advice”? What features should a robo-advisory solution have?
Mark: The term “robo-advice” is almost meaningless. Our regulator prefers to use the term “digital advice,”. It’s almost impossible to define robo-advice or digital advice using a constant set of parameters. What we see is that as an individual goes through an advice journey, technology is going to be used more and more; so heavy lifting at the front end, including data collection, aggregation, and risk profiling, leads to a set of different investment outcomes, which may or may not include speaking to a person.
We’re big believers in what we call the “hybrid model,” where a large proportion of people don’t need complex advice but just an understanding of where they are today, what their future looks like, and how technology can help them make a decision, which might influence those outcomes. Only about 15% of Australians receive any form of financial advice, and they’re being very well looked-after.
“Businesses that rely on owning the customer are going to get challenged because the customer is going to own the customer.”
The opportunities are in the next segment of people who have reasonable quantities of money to invest but fall below the threshold of being a possible client because the cost of tailored advice and compliance is going up and up. The cost of delivering advice presents a significant barrier to the bulk of the population receiving advice. The real change that we’re going to see over the next few years is that technology is going to monetize lower balance clients, as is going to significantly lower the threshold. We can drop these thresholds dramatically and profitably.
There’s a massive opportunity for the wealth management industry to embrace technology to significantly grow the advice market. It’s going to reach all different generations. Some of the surprises we’re seeing are that:
- We’re getting older and older groups of people with much larger balances than we initially anticipated on our platform.
- We’re seeing millennials with a completely different approach to how they want to engage with advice, since they generally don’t want to sit down and speak to a person but want to do the whole thing on their smartphone instead.
Licensed adviser groups, like Ignition Wealth, haven’t had the capability of reaching all these different groups and speaking to them in the way that they want to be spoken to.
There’s one major thing that I see happening over the next few years: businesses that rely on owning the customer are going to get challenged because the customer is going to own the customer. And they’re going to want to deal with providers who have that agility to give them what they want at a price point that is acceptable and that is a fraction of what the industry currently charges.
Q: Do you think that in the future there is a possibility that B2C WealthTech and robo-advisor offerings will totally replace B2B solutions because there will be no need for human touch at all?
Mark: Globally, across all industries, anything that is repetitious and low in value and can be automated will be automated. We don’t need to spend thousands of dollars to have someone sitting down and generating a risk profile, which can be done by an algorithm far more accurately and in a couple of seconds. That sort of role is going to disappear completely.
In the short to medium term, high-value and complex issues, like tax, for instance, or the consumer preference for a human advisor, will remain. Human advisors, however, are going to focus on the more complex part of the equation, and digital engines automate all the repetitive tasks.
Q: What kind of WealthTech solution is Ignition Wealth?
Mark: At Ignition Wealth, we have a hybrid advisory model where you start out with a digital journey and you get to a pivot point, where you either reach the capacity of the engine or, by preference, want to speak to somebody. At that point, the decision is generally driven by the consumer. It is all about preparing consumers to decide the level of services that they want, the regularity of those services, and their price point.
Everybody is different, so the successful engines going forward are going to have flexibility to give the consumer a product that matches their needs, rather than offering something and saying: “Here is what we have; take it or leave it.”
“We’re already seeing half the world’s funds in passive management and exponential growth in ETFs. The trends are really like that, so I see no reason why that’s going to slow down.”
Q: You mentioned that risk profiling should be done by algorithms as a routine part of the equation. Do you think we need more sophisticated methods, such as Big Data analytics, to calculate users’ risk tolerance in order to provide more custom-tailored asset-allocation strategies based on these calculations?
Mark: These engines are going to get more and more sophisticated over time. For example, BlackRock is the world leader when it comes to using data analytics to help with portfolios. It doesn’t matter how complex your analytics are, the one thing that’s impossible to predict is the behavior of the markets.
- On the one hand, the connectivity between value sources increases, which means we will get a much more sophisticated approach to asset allocation.
- On the other hand, it’s likely that the funds-management piece will be commoditized in a broad sense.
We’re already seeing half the world’s funds in passive management and exponential growth in ETFs. The trends are really like that, so I see no reason why that’s going to slow down.
Q: Do you see a difference between the ways older and younger generations use financial advice? How can technology help millennials start investing earlier and smarter?
Mark: We’re going to try to use our data analytics to get users a more accurate profile of what these returns look like going forward, but any of these predictive tools are only as good as the inputs. Many people don’t appreciate that investment cycles aren’t driven by generational time frames. We’ve had massive global growth since World War II, so we’re looking at 50- or 60-year cycles. We see demographics of wealthy baby boomers along with the rest of the world. China is probably the best example globally of an aging population that doesn’t have that problem.
There’s no one-size-fits-all answer to this. In Australia, if you were born in the ’60s, you’ve probably got a house and many millions of dollars. And Australia’s in the same boat as Canada and many other countries, where millennials are completely locked out of the real estate market. In terms of globalization, however, and a single approach to monetary policy, we’re going to get some economies really out of step and others doing very well.
“Funds management faces the same challenges everywhere.”
Q: Let’s talk a bit about the differences and similarities you see between the Australian market and US or European markets. What does a typical investor in Australia look like compared to in the US market? What amount of money are they willing to invest?
Mark: What’s different here is most people walk into their local bank branch and that’s where they ask for investment advice and buy that bank’s investment product in a very highly concentrated fashion. That applies to the US and to the UK as well, but there’s a bit more diversity over there in terms of the local players. However, funds management faces the same challenges everywhere.
I see the domination of the major players being challenged by big compliance issues. It’s going to remove the barriers to entry, and we’re going to see nonfinancial services distribution tapping into wealth management technology.
In Australia, we’ve got two big retailers now selling insurance, tapping into the data on their millions of customers and cross-selling financial services to the market. This tendency will continue.
Q: What unique capabilities compared to other wealth management solutions do you offer to financial advisors and your end users at Ignition Wealth? What is your strategy for the next couple of years?
Mark: In the Australian context, Ignition Wealth differs from other market players that don’t actually provide advice, while we see the disruptive opportunity in actually doing so. It’s not about wealth management, it’s about advice. That’s our key difference. If we can bring down the cost in delivering that advice and make it more accessible, then that’s a very large opportunity.
The last part of the equation is that we are B2B-focused, and keen on providing and partnering with existing distribution, which can utilize our capability to monetize their existing distribution, which they already own. With all these engines, I believe the hardest part is customer acquisition, which is well outside of what we can afford. Instead we are going to join forces with large existing businesses to bring them the highest-caliber bank rate solutions.
We’ve been doing this for seven or eight years now. We’ve provided advice to over a million clients and partnered with some of the largest industry funds in Australia. We have a partnership in place with LINK which is the largest superfund administration engine in Australia. These are the conversations that we’re having now. Who can we really give an advantage to? This is a win–win situation here. We can partner with someone who’s not a financial services business. It could be any business—it could be a supermarket with massive distribution. They just plug in their distribution and we plug in the robo.
“Research shows that active management doesn’t outperform passive, and half the globe’s money is now going into passive. I think the conclusions speak for themselves.”
Q: In the WealthTech area, we can identify two groups of people. On the one hand, we have financial and business people with knowledge about the wealth management portfolio and everything related to financial services. On the other is software engineers who are actually building the technology, creating software solutions for wealth management. Do you see any gaps between those two groups of people? Is it important for business people to have deeper knowledge and understanding of the technological part of the business, and vice versa? Should software development staff have more knowledge on capital markets in order to innovate further?
Mark: There’s undoubtedly a gap because they’re different worlds. In the Australian context, it’s the same with really old, established, big institutions who are generally wedded to legacy systems. They don’t have the agility to move quickly and they are not necessarily interested in accelerating the challenge.
But the regulator sits in here as well; our regulator has a number of things going on. One is called the Sandbox, where they get different players involved in trying to work out solutions. Our general business is talking to large groups about how we can help them solve this issue. We’re very fortunate to have a lot of strength in both financial services and technology within our business. And quite often we find that customers can’t quite see the wood for the trees in terms of how it fits in with them and we are able to clarify the business advantages for them.
Q: If we talk about the companies and the landscape of wealth management, could you please name a few firms in WealthTech that you think are more innovative than others? What will WealthTech look like in the next five years?
Mark: We’re not really in the wealth management but rather in the advice business, with wealth management being just a piece of the puzzle. In the next five years, wealth management is probably going to become commoditized and be given away. It’s being given away even now. You can go to the major players and they’ll give you basic portfolios, risk profiling, and everything for free. Wealth management is in for an incredible disruption because analysts and fund managers are very expensive, and you can’t pass the cost on. I don’t see that wealth management is going to be spared at all from a significant disruption from technology. If wealth management or funds management is primarily there looking at different data sets and taking a view on returns and asset classes and industries, then the robot can certainly do that equally, and more efficiently.
Price point is going to be the big thing for fund-management businesses, which is very in line with cost, in that it is going to be difficult to play with. Research shows that active management doesn’t outperform passive, and half the globe’s money is now going into passive. I think the conclusions speak for themselves.
Interviewed by Vasyl Soloshchuk, CEO and co-owner at INSART, FinTech & Java engineering company. Vasyl is also author of the WealthTech Club blog, which conducts research into Fortune and Startup Robo-advisor and Wealth Management companies in terms of the technology ecosystem.