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New Zealand:Talking Robo-advice with Binu Paul

Tuesday 14 March 2017

Binu Paul, founder Fintech start up in News Zealand, SavvyKiwi,  talks to the GRC Professional about about the robo-advice and the impact 

What is robo-advice? What is commonly misunderstood about robo-advice?
Any service that utilises technology to deliver some form of financial advice may be termed ‘robo-advice’.
Unfortunately, it's a terrible choice for a name and is vague enough to be interpreted in different ways, at times with some trepidation. Thankfully, there are enough people talking about it that the general meaning isn't lost. Just as there are different streams in fintech (such as reg-tech for regulation, insure-tech for insurance etc.) robo-advice would perhaps be better termed 'advice-tech' or something along those lines. Essentially, a bunch of algorithms sift through data supplied by the user, and based on a pre-determined criteria provides advice to users. 
We could consider robo-advice from three different perspectives.
With reference to an incumbent financial advisory practice, the use of technology to automate parts of the financial advice process should, in practice, free up the advisor to provide higher value add services to clients. The degree to which benefits accrue largely comes down to the makeup of an advisor's client base. For an advisor with a long tail of lower-value clients, adopting new technology tools to automate services to that segment of the client base makes a lot of sense.
As opposed to an incumbent, a start-up has the luxury of starting from scratch when it comes to being able to provide a lower-cost delivery platform for its users; however, it is also burdened with the challenge of creating a brand and a client base, both of which can be expensive and time-consuming.
For a product provider, on the other hand, a robo-advice platform could just act as an additional 'shelf space', albeit a digital one. Essentially, it becomes a new distribution platform to sell their own products, with some form of 'advice' wrapped around it.

What is the general sense about robo-advice? Is there a sense the public is more comfortable with robo-adviser than dealing with a person, or is it the other way around?
Given how it’s still early days, it is hard to get a sense of what it means or will mean. But there are a few truths I believe in: the public are becoming increasingly reliant on their mobile devices; they have a growing level of trust when it comes to conducting financial transactions online, and increasingly, they expect information to be democratised with the ultimate objective of owning their decisions. These are all the right ingredients for the adoption of robo-advisory platforms.
But, I also believe while current robo-advisors do a good job with the transactional aspects of the process they have much further to go in terms of the coaching and behavioural aspects of financial advice.

Are deficiencies expected in some areas where traditional advice can do better than digital advice?
 I believe there are two aspects to this. Firstly, the quality of the advice being provided in any automated fashion will depend on the quality of the algorithms being used, as well as the quality of the information being supplied by the user. The obvious challenges then are to assess how effective the algorithms are, while determining whether 'all' the client information has been captured satisfactorily. 
But there are arguments both for and against the merits of traditional advice (versus robo-advice).
On one hand it could be argued that a human sitting across from the client is better able to pick up subtle nuances and 'read between the lines'. This is something that technology is still some time away from being able to replicate. On the flip side, it could be argued that, given the process is algorithm-based and automated, the ability to be disciplined (without the distraction of human emotions) is far greater with robo-advice.
Currently, based on what I have gathered, I do believe advisors who depend largely on 'transactional' revenues will grow increasingly redundant, while the advisors who depend on earning revenues from 'relationship'-based advice will continue to retain their relevance.
Globally, most robo-advisory platforms have not been tested through a market correction or a scenario similar to the global financial crisis of 2007. In fact, many of these platforms were set up post-GFC, in response to subsequent failures in the financial manufacturing and intermediation business models that resulted in new lows in investor confidence. 
Potentially, there could be two points of failure in such instances. One goes back to the point on the robustness of the algorithms that drive these platforms (which can be mitigated through stress-testing techniques). The other, more subtle 'unknown' is how investors might behave in times of similar crisis. With a majority of robo-advisors offering passive investments, the challenge would be to ensure that, when markets turn negative, they have enough emotional / intellectual support to stay disciplined, rather than exit and crystallise any short-term losses. The risk is that droves of exiting investors can exacerbate the issue, instances of which are peppered throughout history. At such times, having a traditional advisory model has its benefits.


You said it was still draft and consultation mode. What industry consultation paper, and were there key or potentially-controversial points in that draft consultation?
 A draft consultation paper with reference to robo-advice was released in mid-Feb this year. 
The consultation paper is a wider review of the provision of financial advice in New Zealand, and touches on various aspects of the advice regime as it stands today. The robo-advisory element is only a sub-set of the wider changes being proposed. At the core of it, the requirement for advice tailored for a consumer to be provided by a natural person is proposed to be removed. The deadline for stakeholder feedback is 31 March. 


What was industry’s reaction to the draft consultation paper?
 Given it is still in feedback mode, it is hard to speculate on what the industry's reaction will be. With the review being this wide-ranging, much of it is still being digested. 


What is the position on cyber risk and robo-advice?
Cyber risks are omni-present across most technology developments and is not a specific and/or special issue for robo-advisory platforms. As such, they need to be considered at a firm level, rather than at a functional level. Much of the focus will be on the governance framework around such risks.


Binu Paul is founder of FinTech start up SavvyKiwi, a pioneering initiative and a New Zealand first, that helps users maximize their retirement savings. The SavvyKiwi app is a fully automated investment-decision support system that empowers users to make unbiased financial decisions.
Binu has spent the last 19 years in funds management and investment research, with the recent 4 years in technology development and commercialisation. Binu is also a part-time consultant to the Financial Markets Authority. Trained at the Wharton business school on corporate strategy execution, Binu has also gained MBA and Bachelor of Technology degrees. Binu organises Finnotec, New Zealand’s only dedicated FinTech conference series, and is passionate about establishing a FinTech community in New Zealand. All views expressed here are personal in nature.