Wade Matterson

Milliman, Inc. a global consulting and actuarial firm, has launched its first range of managed account portfolios, with built-in protection against volatility and capital losses.

The Milliman SmartShield series is the first managed account offering from the firm, which advises, hedges and consults across $240 billion in assets globally. It has been designed here in Australia and has launched initially on HUB24 with other platforms to follow shortly.

The SmartShield series initially consists of four portfolios (Moderate, Balanced, Growth and High Growth), with each one designed to meet the evolving needs of financial advisers and their clients.

“Financial advisers continue to face a raft of challenges, as the industry undergoes both a structural and regulatory adjustment,” Milliman’s Australian Practice Leader Wade Matterson said.

“Through our conversations with advisers, we understand that there is an intense focus on simplification and efficiency while preserving the core values and benefits of financial advice. At the same time, regulatory requirements such as the Best Interest Duty are resulting in a greater focus on the fees and benefits of investment solutions for clients.

“We’ve designed the SmartShield portfolios specifically, to assist advisers as they respond to these changes and are delighted to launch with HUB24 as they continue to gain significant interest from advisers wishing to use managed accounts, and will be announcing further alliances in the coming weeks.”

SmartShield’s portfolios are built using best-of-breed, low-cost exchange-traded funds (ETFs) that invest across Australian and international equities, Australian and international fixed income, property, and cash – and leverage Milliman’s global risk management expertise.

Each managed account portfolio contains a built-in risk protection overlay that dampens volatility and capital losses in a market downturn and, importantly, can be switched on or off as required by advisers, without their clients having to incur capital gains tax or lose dividends.

The risk protection overlay uses the same techniques that Milliman has applied for decades while working with large institutions across the globe, and through a wide range of market environments, including the Global Financial Crisis.

“This approach reinforces a financial advisers’ advice proposition by giving them the flexibility to meet each client’s unique needs through the highly efficient managed account structure. SmartShield provides advisers with the ability to give their clients much more stability and strength at the core of their portfolio, through a flexible and efficient approach. Given ongoing macroeconomic uncertainty and concerns with respect to valuations and global volatility, we are seeing increased focus on managing risk within portfolios.”

Most major asset classes surged in 2019 despite lacklustre corporate earnings as central banks around the world once again began loosening monetary policy. However, valuations are now stretched and investors face a series of new risks such as the outcome of the US election, the spread of coronavirus, and how governments will tackle climate change.

SmartShield Balanced portfolio

Advisers and investors need the ability to move quickly in this changing environment – a key reason they are turning to the more efficient managed account structure.

Managed account net flows doubled to $4.43 billion in the June 2019 half, boosting total sector assets to $71.38 billion, according to the IMAP (Institute of Managed Account Professionals) and Milliman’s six monthly Managed Accounts FUM Census series.

HUB24 was recently awarded Best Platform Managed Accounts Functionality* which ranked 18 platforms across six categories and 509 criteria.

“We are pleased to be working with Milliman on the launch of their new managed portfolio offer, our market-leading managed portfolio functionality provides the capability for Milliman to effectively execute their investment strategy. As market conditions shift it is critical that we continue to provide advisers and their clients with a wide range of investment options to meet their needs’’ said Brett Mennie HUB24’s new Head of Managed Portfolios.

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Amara Haqqani

Milliman, a global actuarial consulting firm and leading provider of risk management and retirement services, has appointed retirement expert Amara Haqqani as director of strategy and solutions in Australia.

Haqqani has spent close to two decades in financial services including four years at annuities provider Challenger, where she served as senior manager, retirement income policy, and advised chairman of retirement income, Jeremy Cooper.

She was most recently consulting to the Financial Services Council on superannuation, retirement income and funds management policy initiatives, in particular those related to the Productivity Commission’s Superannuation inquiry and the Royal Commission into Banking and Financial Services.

“Australians are retiring with larger superannuation balances than ever before but many people, particularly middle-income earners, still feel uncertainty about what to do with that money,” Haqqani said.

“In a world where many are now beginning to focus on this issue, Milliman has the deep thinking, big data, analytics and technology to actually help people build the retirement they want and to help the industry deliver the products and services that retirees need. I look forward to working with the Milliman team at this important time for the industry.”

Haqqani’s appointment comes at a time of intense scrutiny for the financial services industry as it deals with the fallout from the Royal Commission and Productivity Commission inquiry into superannuation. Meanwhile, the industry is also faced with developing a range of new income-focused products that support the sector’s new objective of providing income in retirement to substitute or supplement the Age Pension.

Milliman Australia practice leader Wade Matterson said building retirement solutions was one of the most complex problems faced by the industry.

“Building retirement solutions requires actuarial, data science, investment management, behavioural finance, communications, and digital skills. Yet, at heart, it is a human problem that requires an understanding of how people act rather than how we expect they should behave. Milliman’s expertise covers all aspects of the retirement value chain and Amara’s appointment further boosts our ability to help the industry create truly tailored retirement experiences.”

Milliman’s services include:

• The Milliman Retirement Expectations and Spending Profiles (ESP), which uses a variety of big data sources, including the anonymized bank transaction data of more than 300,000 retirees, allowing funds and advisers to better understand the spending patterns of retirees.
• Risk overlay services, which manages excessive volatility and provides a cushion against extended market downturns. These services are used by a wide range of firms including Colonial First State, Plato Investment Management, BetaShares, Maritime Super and financial planning dealer groups.
• The Milliman Goals-Based Advice Platform, which brings enterprise-grade algorithms to analyse thousands of scenarios based on clients’ personal financial position and goals. It provides deep insights and allows clients to make informed decisions about competing goals and priorities.

The post Milliman appoints retirement expert to lead retirement strategy and solutions appeared first on AdviserVoice.

Wade Matterson

After more than a decade working with Australia’s leading institutional players, Milliman is bringing its unique experience, sophisticated tools and big-picture thinking to bare for Australia’s advice community in an effort to markedly improve retirement outcomes.

Milliman Australia Practice Lead, Wade Matterson, acknowledged the entire industry is emerging from a bruising few months in the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

“There’s no doubt we’re arrived at a tipping point for our industry,” said Practice Lead, Wade Matterson.

“The advice business must grow and develop in sophistication to match market expectations. Technology and big data will play a huge role in rebuilding trust and giving advisers new ways to understand and present advice to clients. Leveraging both now will be the differentiator between success and failure in future retirement outcomes as well as advice practices.”

On moving into the retail space, Mr Matterson said “Milliman’s investment solutions are based on data driven algorithms and research, that really support financial advisers to deliver superior client outcomes in a complex and fast-changing environment.”

Milliman sees the speed of the change as a clear opportunity to help shape the market by finding solutions to the biggest challenges facing advisers and their clients including managing sequencing and longevity risk.

The post Where to now: Australia’s advice industry at a tipping point? appeared first on AdviserVoice.

Wade Matterson and Manish Prasad

Milliman Australia Practice Leader Wade Matterson and Ignition Wealth CEO Manish Prasad have announced a global collaboration between their two firms to combine Ignition Wealth’s integrated bank grade white label digital engagement and advice solutions with Milliman’s analytics, data and consulting prowess.

Wade Matterson, Practice Leader, Milliman Australia and Manish Prasad, CEO, Ignition Wealth said, “We are delighted to announce a symbiotic new collaboration between Milliman and Ignition Wealth. Our businesses share a commitment to enrich the advice experience and enable better financial outcomes for every consumer.”.

The relationship has grown naturally from multiple synergies including an emphatic consumer-centric focus, growing global footprints and equally matched best in class status as industry leaders.

Prasad is looking forward to the improved client value, saying, “Milliman is one of the world’s leading actuarial firms and the Milliman platform offers the most robust actuarial technology in the market. Underpinning Ignition Wealth’s bank grade enterprise solutions with the Milliman data platform ensures that we deliver world beating digital decision making and advice at scale, with an enviable actuarial pedigree. Our existing and new clients will enjoy tremendous value and be recognised as leading their respective markets.”.

The alliance combines Milliman’s quantitative expertise and ability to analyse and understand big data with Ignition Wealth’s digital advice and intuitive user experience to create the next generation of rich goals-based engagement, decision support and advice.

Developing digital engagement and advice solutions based on rich datasets allows complex comparisons. Benchmark data will allow consumers to gain meaningful insight into their position as compared to their peers, to develop a real understanding about normal spending patterns in accumulation and into retirement.

Speaking to the current market, Matterson says, “With global and Australian scrutiny of the financial service industry at an all time high, everyone, especially advice providers, has to change. Increasingly advisers and large institutions need technology that is robust and powerful to help them deliver better outcomes for their clients. Our collaboration will deliver robust digital advice technology to meet this need across multiple markets.”

Ignition Wealth and Milliman share a global view of the advice market; Milliman is well established internationally while Ignition Wealth has extended its core Australian business with a growing European presence based out of Dublin. Unique global intelligence and thought leadership from Milliman data and analysis will inform and support the development of Ignition Wealth’s global multi-language, multi-currency engagement and advice platform.

Prasad continues, “This alliance will greatly benefit our clients’ consumers. Ignition Wealth aims to give people actionable help and advice that suits their circumstances, at the time and in the manner they need it. Starting from a strong basis of understanding, education and knowledge, our ambition is to move to meaningful behavioural change, significantly impacting consumers’ financial outcomes and lifestyles.

“Working in partnership with the world’s leading enterprises, especially those with large client bases, allows Ignition Wealth to make the biggest impact on consumers globally.”.

Milliman and Ignition Wealth have begun to design and build a broad spectrum of next generation solutions, with artificial intelligence, machine learning and leading data analytics at the heart of the development roadmap.

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In this newly created role Mr Whelan will spearhead the development and management of retail and wholesale partnerships nationally, with a key focus on financial advisers and their dealer groups.

Principal of Milliman Australia, Wade Matterson, commented, “We are delighted to have secured Andrew for this exciting new role. Andrew’s understanding of the financial advice landscape in Australia is unrivalled, and his vast experience and success in previous roles positions him perfectly to expand Milliman’s services.”

“Our focus on retirement solutions in Australia has led to the development of a range of unique offerings across investment solutions, advice algorithms and data driven research. We’re seeing growing interest in our work from financial advice businesses as they seek to deliver superior client outcomes in a complex and changing environment.”

Mr Whelan joins Milliman from CCUBE Integrated Wealth where he held the position of General Manager, Sales and Marketing, responsible for all business through the adviser channel. This followed a lengthy tenure with MorningStar Australasia where Mr Whelan held the roles of Head of Adviser Solutions & Head of Deal Desk.

Mr Whelan commented: “Milliman’s offering to Australian advisers is truly compelling. Milliman is at the forefront of a number of the emerging trends shaping the financial advice industry, including the development and implementation of Goals Based Advice tools and frameworks, investment solutions to help manage sequencing and longevity risk, and detailed research on the behavior of retirees.

“I look forward to working with Wade and the team as Milliman continues its expansion in the Australian market.”

The post Milliman announces appointment of Andrew Whelan as Director, Adviser Services appeared first on AdviserVoice.

Wade Matterson

Global actuarial firm Milliman has entered an agreement with Melbourne-based digital agency Spark Green to create a suite of white label calculators and gadgets for the financial services industry.

The two companies will work together to create end-to-end solutions that combine Milliman’s proprietary actuarial and risk platform and Spark Green’s ability to communicate complex financial information through world-class design.

It will solve a key problem that many super funds, banks and financial advisory firms are grappling with: how to create digital tools that engage and inform members and clients while also meeting compliance obligations.

“People are demanding more from the algorithms that support their engagement and advice tools,” Milliman Practice Leader, Wade Matterson, said.

“Our decades of experience analysing complex information means we have the proven technical expertise to design and deliver these solutions. Milliman’s platform is efficient, timely and accurate.

“As a global actuarial firm, we give our clients confidence that the calculations are robust and Spark Green, as our chosen digital partner, will help us to effectively convey that information in a range of ways. People need to be able to rely on these tools as part of making choices that affect their financial wellbeing.”

Engagement also remains a key industry challenge. Many super funds are currently using external calculators, which clash with the fund’s core identity and brand, while others have complex calculators and found they deliver poor levels of member uptake.

“Digital tools have become a core focus for super funds as members increasingly demand immediate access to information that they can easily understand and use,” said Spark Green partner Sharon Nelson.

“Effective calculators are crucial if funds want to retain existing members and attract new members. These interactive solutions provide personalised information in a way that directly engages with people and addresses exactly what they want to know in simple language.”

Spark Green is an online digital agency that works exclusively with the financial services sector. Over its 18 years in business, it has focused on combining technical expertise with creativity to provide total online solutions to the superannuation, banking, and financial services markets, including strategy, marketing campaigns, websites, and online tools.

Digital innovation has a central role in increasing member engagement. Milliman and Spark Green will now produce a broad range of solutions that are robust, interactive, and appealing, offering a strong value proposition to funds.

These will include a range of key white label calculators and gadgets branded for each fund, which will minimise entry costs for many funds who need engagement tools.

Milliman and Spark Green will also create exclusive customised calculators, gadgets and profiling and risk tools to meet individual funds’ specific needs. All of these online resources will be seamlessly updated with end of financial year legislative changes through Milliman’s powerful analytic platform.

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Wade Matterson

The prudential regulator has warned super fund trustees to provide concrete evidence that they understand what their members want before making decisions on their behalf.

The call was made by Australian Prudential Regulation Authority (APRA) deputy chair Helen Rowell at a Financial Services Council Leaders Summit panel.

While Rowell acknowledged that super fund directors believed their decisions were made in the best interests of members, she said that was not enough.

“The question is, how are they making that judgement, and are they doing enough to actually really understand what their members want?” she asked. “And that’s where we see the gap… but we’re not seeing the concrete evidence of how trustees are turning their minds to that and translating that into an objective assessment.”

It’s a gap that the regulator is currently targeting. New draft legislation aimed at giving Australians more power over their retirement savings will provide it with greater impetus.

The changes include an annual MySuper outcomes assessment, aimed at ensuring funds have the scale and ability to meet members’ needs, as well as more transparent reporting standards and the introduction of annual general meetings.

APRA will also be given stronger powers to take preventive and corrective action, including cancelling a MySuper authorisation, where funds are not acting in the best interests of members.

Meeting members’ needs requires more than strong investment returns

The regulator’s Insight publication accompanying the legislation announcement makes it clear that focusing on investment returns is not enough to deliver quality outcomes for members.

“It is not just investment performance and fees or costs that should be considered, but also the nature and quality of the benefits and services being provided and the adequacy of the RSE licensee’s governance and risk management frameworks and practices,” according to the regulator’s guidance.

There are several ways that funds incorporate these quantitative and qualitative criteria into their business plan to demonstrate they understand—and can then meet—the needs of members.

Funds already have the core building blocks: name, age, address, super balance, insurance coverage and an income estimate (based on employer contributions). This core information is bolstered by other data sets, such as industry analysis by APRA, population analysis by the Australian Bureau of Statistics and other industry surveys.

This leaves a huge gap for big data to help reveal the actual retirement needs and desires of members.

While many funds have valid concerns about collecting more personal data due to privacy concerns, engagement issues and cost, there are ways to fill in the gaps about how members are behaving and what they need.

It is becoming an expectation rather than an option. The Productivity Commission’s How to Assess the Competitiveness and Efficiency of the Superannuation System report has already noted “there is likely to be significant scope for improvement in the system” regarding the way funds are collecting member data.

“The Commission will examine ‘best practice’ behaviours employed by funds to gain more relevant information about their members and how they are using it in product design,” its draft report said.

Milliman Retirement ESP: A more accurate portrait of members and how their needs are changing

While the super system now holds more than $2.3 trillion in assets, it is not yet the central hub for most retirees. Funds are rarely privy to the substantial assets that many members hold outside of super— whether they own their own home (and may still be paying it off in retirement) or rent—and what their qualitative lifestyle expectations are.

These are just some of the major factors that should have a substantial impact on funds’ member communications, advice and product development.

Milliman’s quarterly Retirement Expectations and Spending Profiles (ESP) service is a classic example of big data—it is based on 300,000-plus retirees’ spending data—combined with actuarial analysis that finally turns a spotlight on to these areas.

The Milliman ESP reveals what retirees really spend from all income sources, segmented by wealth bands, age, singles versus couples and location as well as shows their essential versus discretionary spending and how it changes through retirement.

Funds can use this information in many ways to bridge the divide highlighted by APRA: taking action in members’ best interests without demonstrably understanding what they want.

For example, overlaying the Milliman ESP real world data about customer behaviour can radically change “optimal” portfolios based on limited surveys about retiree preferences. In some cases, the level of portfolio risk needed may be overstated if retirement goals are well out of reach and based on limited surveys about needs rather than real world behaviour. Location provides another crucial element—knowing just how much the actual cost of living is in different cities and regional areas can radically alter default investment portfolios.

Greater insight leads to better products and member engagement

Funds with more accurate information about the behaviour of retirees can also create better products. The industry is littered with retirement income products that have never attracted significant inflows because they were based on incorrect assumptions about member behaviour.

There is often a huge divide between what members say they want (such as retirees who say they want guaranteed income) and what their actual behaviour shows they want (such as more flexible retirement products). Accurate big data combined with analysis can help discern the differences between members’ stated preferences and revealed preferences.

Funds can interpret this in a variety of ways. For example, some funds may use the Retirement ESP data (which also breaks down expenditure across several categories and tracks how it changes over time) to create retirement income streams based on discretionary versus essential spend.

Member engagement through general advice, communications and marketing is one of the most crucial areas that can be bolstered with more accurate data about members.

The early success of tech-focused super fund Spaceship, which has targeted younger investors, shows the power of understanding and engaging with members. Pointing out the shortcomings of the product, no matter how warranted, is unlikely to have any impact when its customers feel understood.

This should serve as a wakeup call to all super funds. Now is the time to use big data such as the Milliman Retirement ESP to understand how members are behaving in the real world if communications are going to resonate with them.

We are now in an era where it is commonplace for organisations to deeply understand customer behaviour—companies such as Facebook, Google and Amazon have been built on this ethos. APRA is demanding that super funds also understand their member behaviour at a more fundamental level and funds which ignore that advice will do so at their own peril.

By Wade Matterson, Australian practice leader and Jeff Gebler, senior consultant.

The post Super funds: Learn more about members or risk regulatory intervention appeared first on AdviserVoice.

Wade Matterson

The prudential regulator has warned super fund trustees to provide concrete evidence that they understand what their members want before making decisions on their behalf.

The call was made by Australian Prudential Regulation Authority (APRA) deputy chair Helen Rowell at a Financial Services Council Leaders Summit panel.

While Rowell acknowledged that super fund directors believed their decisions were made in the best interests of members, she said that was not enough.

“The question is, how are they making that judgement, and are they doing enough to actually really understand what their members want?” she asked. “And that’s where we see the gap… but we’re not seeing the concrete evidence of how trustees are turning their minds to that and translating that into an objective assessment.”

It’s a gap that the regulator is currently targeting. New draft legislation aimed at giving Australians more power over their retirement savings will provide it with greater impetus.
The changes include an annual MySuper outcomes assessment, aimed at ensuring funds have the scale and ability to meet members’ needs, as well as more transparent reporting standards and the introduction of annual general meetings.

APRA will also be given stronger powers to take preventive and corrective action, including cancelling a MySuper authorisation, where funds are not acting in the best interests of members.

Meeting members’ needs requires more than strong investment returns

The regulator’s Insight publication accompanying the legislation announcement makes it clear that focusing on investment returns is not enough to deliver quality outcomes for members.

“It is not just investment performance and fees or costs that should be considered, but also the nature and quality of the benefits and services being provided and the adequacy of the RSE licensee’s governance and risk management frameworks and practices,” according to the regulator’s guidance.

There are several ways that funds incorporate these quantitative and qualitative criteria into their business plan to demonstrate they understand – and can then meet – the needs of members.

Funds already have the core building blocks: name, age, address, super balance, insurance coverage, and an income estimate (based on employer contributions). This core information is bolstered by other data sets, such as industry analysis by APRA, population analysis by the Australian Bureau of Statistics, and other industry surveys.

This leaves a huge gap for big data to help reveal the actual retirement needs and desires of members.

While many funds have valid concerns about collecting more personal data due to privacy concerns, engagement issues, and cost, there are ways to fill in the gaps about how members are behaving and what they need.

It is becoming an expectation rather than an option. The Productivity Commission’s ‘How to Assess the Competitiveness and Efficiency of the Superannuation System’ report has already noted “there is likely to be significant scope for improvement in the system” regarding the way funds are collecting member data.

“The Commission will examine ‘best practice’ behaviours employed by funds to gain more relevant information about their members and how they are using it in product design,” its draft report said.

Milliman Retirement ESP: A more accurate portrait of members and their changing needs

While the super system now holds more than $2.3 trillion in assets, it is not yet the central hub for most retirees. Funds are rarely privy to the substantial assets that many members hold outside of super; whether they own their own home (and may still be paying it off in retirement) or rent; and what their qualitative lifestyle expectations are.
These are just some of the major factors that should have a substantial impact on funds’ member communications, advice and product development.

Milliman’s quarterly Retirement Expectations and Spending Profiles (ESP) service is a classic example of big data – it is based on 300,000-plus retirees’ spending data – combined with actuarial analysis that finally turns a spotlight on to these areas.

The Milliman ESP reveals what retirees really spend from all income sources, segmented by wealth bands, age, singles versus couples, location, as well as showing their essential versus discretionary spending and how it changes through retirement.

Funds can use this information in many ways to bridge the divide highlighted by APRA: taking action in members’ best interests without demonstrably understanding what they want.

For example, overlaying the Milliman ESP real world data about customer behaviour can radically change ‘optimal’ portfolios based on limited surveys about retiree preferences. In some cases, the level of portfolio risk needed may be overstated if retirement goals are well out of reach and based on limited surveys about needs rather than real world behaviour.

Location provides another crucial element: knowing just how much the actual cost of living is in different cities and regional areas can radically alter default investment portfolios.
Greater insights leads to better products and member engagement

Funds with more accurate information about the behaviour of retirees can also create better products. The industry is littered with retirement income products that have never attracted significant inflows because they were based on incorrect assumptions about member behaviour.

There is often a huge divide between what members say they want (such as retirees who say they want guaranteed income) and what their actual behaviour shows they want (such as more flexible retirement products). Accurate big data combined with analysis can help discern the differences between members’ stated preferences and revealed preferences.
Funds can interpret this in a variety of ways. For example, some funds may use the Retirement ESP data (which also breaks down expenditure across several categories and tracks how it changes over time) to create retirement income streams based on discretionary versus essential spend.

Member engagement through general advice, communications and marketing is one of the most crucial areas that can be bolstered with more accurate data about members.
The early success of tech-focused super fund Spaceship, which has targeted younger investors, shows the power of understanding and engaging with members. Pointing out the shortcomings of the product – no matter how warranted – is unlikely to have any impact when its customers feel understood.

This should serve as a wakeup call to all super funds. Now is the time to use big data such as the Milliman Retirement ESP to understand how members are behaving in the real world if communications are going to resonate with them.

We are now in an era where it is commonplace for organisations to deeply understand customer behaviour – companies such as Facebook, Google, and Amazon have been built on this ethos. APRA is demanding that super funds also understand their member behaviour at a more fundamental level and funds that ignore that advice will do so at their own peril.

By Wade Matterson and Jeff Gebler

The post Super funds: learn more about members or risk regulatory intervention appeared first on AdviserVoice.

What we do know is largely composed of averages and assumptions which are ranked against the ASFA Retirement Standard’s portrait of the average Australian.

The standard represented an important step forward when it was launched in 2004, but expectations have since risen dramatically along with the industry’s assets, which now surpass Australia’s annual gross domestic product and the size of the share market.

The personalised nature of each superannuation member’s retirement journey means a one-size-fits-all approach simply cannot deliver the necessary information, products and risk management strategies required to achieve everyone’s desired outcomes.

Or, as the Productivity Commission’s recent report into the industry’s competitiveness and efficiency put it, “Indicators which focus on the ‘median’ or the ‘average’ user will not necessarily reflect what is optimal for all or even most members”.

Funds need to take a more nuanced approach or a lack of member engagement will be the end result.

Starting points: Different funds, different members

An average couple requires about $640,000 at retirement (or $545,000 for a single person) to support a comfortable retirement, according to the ASFA Retirement Standard.

The average Australian household at retirement has slightly more than half this level of super—around $355,000 in 2013-14, according to ASFA. However, this hides a wide disparity in actual retirement experiences. The median household super balance was just $110,000.

At the least, this suggests that the ASFA Retirement Standard is of little practical relevance to a significant number of older Australians and those super funds attempting to improve their retirement experience.

A basic analysis of super fund data, segmented by age, underlines the problem faced by funds.

For example, APRA data reveals that Hostplus members aged 45-64 years had an average balance of approximately $40,000 (the bulk of its approximate 1 million are much younger) at June 30, 2015. No amount of investment outperformance is going to lift these members into the comfortable category defined by the ASFA Retirement Standard.

APRA data also reveals that a number of funds had relatively well-off members (although the data can be partially skewed with defined benefit categories) aged 45-64 years such as equip ($247,000), Commonwealth Bank Group Super ($215,000) and Energy Super ($200,000). Many of their members will have higher expectations about retirement than the standard assumes.

These differences between funds require different strategies to support a comfortable retirement, which should be defined by members rather than be dictated to them.

Assuming less and learning more

The only way to deliver products and services which will deliver better retirement outcomes is to learn more about members.

This is no easy task given there are more than 13 million Australians with (often multiple) super accounts and each has their own individual preferences and circumstances. But it is a crucial first step.

Too many funds assume super is the central hub of retirement–as expressed through the ASFA Retirement Standard–when they have little or no information about members’ wealth outside of super or their personal expectations.

Too many members who can’t meet this standard then receive a devastating message: they’ve paid for a product for decades over a working lifetime only to be told they haven’t earned a comfortable retirement (as defined by the fund rather than the member).

This is a cue for disengagement. Funds with a large proportion of members who can’t meet the current standard should instead take this as a prompt to learn more about them.

It requires better communication with members about their actual needs and better segmentation based on a far wider range of real-world data.
This combination can produce far more accurate estimates of what a comfortable retirement means for individuals and then suggest a pathway to support it.

For example, an analysis that includes just one new real-world data set (the ABS Household Expenditure Survey) can radically reshape the type of fixed income goals expressed in the current retirement standards. This is illustrated below where the income goal is defined at a member level incorporating a more realistic expectation of spending requirements using ABS HES data.

The opportunity to create better benchmarks is now there for funds thanks to more open data and the rise of low-cost cloud computing that has enabled analysis on a deeper level than ever before.

The super industry exists because Australians are forced to support its products for decades. Finding out what they really need for a comfortable retirement, and helping them achieve it, is the least they deserve in return.

By Jeff Gebler, Wade Matterson

The post Why the industry’s “comfortable retirement” measures are wrong appeared first on AdviserVoice.

Wade Matterson

The rise of automated advice and new technology is changing the face of financial planning. It is offering low-cost advice to investors who previously couldn’t afford it and bolstering the advice of traditional planners with powerful new analytical tools.

However, there’s a problem.

Many automated advice providers are simply replicating the increasingly outdated traditional advice process, which places an investor’s risk tolerance at its apex and delivers product-led solutions.

This approach, which came from reams of legislation aimed at protecting consumers over the past 15 years, delivered advice which was superficially compliant. But it was advice which all too often led to a product which had little bearing on an investor’s actual goals.

Many automated advice providers are now falling into the same trap. They may offer lower-cost advice but their fees are still tied to an investment (often an exchange-traded fund portfolio) rather than the advice they are delivering.

New digital risks

The quality of digital advice needs to match that provided by traditional financial planning dealer groups to “ensure consumer and stakeholder trust and confidence,” according to the Financial Ombudsman Service’s (FOS) annual report.

FOS reviewed 1,141 investment and advice disputes in 2015-16–inappropriate advice was the largest category, accounting for 28% of cases.

Financial planners accounted for the largest source of complaints (55%) and managed investment disputes were the largest category (37%), with many investors complaining that the advice they received wasn’t suitable for their goals, objectives or risk tolerance, or that risks were not adequately disclosed or explained.

These risks are arguably exacerbated when using automated advice tools which rely on digital communication channels to explain complex financial topics. In fact, FOS rates those risks so highly that it believes the government should introduce a new compensation scheme to protect consumers.
“We consider that the growth of digital advice in Australia increases the need to establish a compensation scheme of last resort,” according to FOS.

Algorithms and technology represent the key risks with a recent survey of CFA Institute global members rating flaws in algorithms as the biggest risk faced by robo-advisors.

Building better digital advice tools

The Australian Securities and Investments Commission (ASIC) has recognised the importance of technology and is placing stringent requirements on robo-advisors to monitor and test advice-based algorithms.

This includes: maintaining documentation setting out the purpose, scope and design of algorithms; regular testing of algorithms which is documented; timely algorithm updates to reflect new market or legal requirements; ongoing reviews of advice quality; controls and processes to suspend advice if an algorithm error is detected; and processes and security arrangements for managing any algorithm changes (and keeping those records for seven years).

These obligations will only become more burdensome as the fledgling robo-advice industry begins to incorporate a more complex, goals-based advice process into their businesses. This approach is necessarily more complicated but has the potential to actually deliver the outcome that investors want.
The shift to goals-based advice by robo-advisors is likely to follow a similar path as traditional advice (it will use much of the same underlying technology).

Risk profiling still plays a key role but investor goals are placed at the apex of the process as AMP recently did by overhauling its traditional advice with the launch of AMP Advice.

A more nuanced approach to risk profiling will move well beyond simple questionnaires which assess risk tolerance (an investor’s willingness to take on risk) to include different components such as risk aversion (the flip side of risk tolerance), risk capacity (the financial ability to endure losses) and risk need (the amount of risk needed to likely achieve goals).

Behavioural finance concepts will also become more deeply ingrained into the advice process and more accurately reveal the future behaviour (or risk-return trade-offs) that investors are most likely to make under different circumstances.

Goals-based advice remains complex territory and taking a best-of-breed approach to its many facets can help firms implement successful solutions faster while lowering their risks.

So far, many robo-advisors have competed on a lower cost of advice when they instead should be focused on raising the quality of their advice. Automated advice–and similar technology used by face-to-face advisers–has the potential to deliver better results for investors, but only if we learn from the mistakes of the past.

By Wade Matterson

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