Behavioural finance could give human advisers the edge in the age of automation, according to a NZ robo-advice provider.
Clive Fernandes, founder of robo KiwiSaver-advice firm National Capital, said advisers can use behavioural finance principles – first articulated by Nobel laureate Daniel Kahneman in the 1970s – to build ‘financial coaching’ businesses that should be immune to digital disruption for the time being.
Fernandes said automation was rapidly encroaching into many areas of financial advice such as portfolio design and construction, which could threaten the value proposition of some firms.
“Very few advisers will be able to design a portfolio better than a robo-adviser with AI [artificial intelligence] and machine-learning capabilities,” he says in a recent paper. “However, every good adviser has an opportunity to give service their clients in a way that robo-advisers cannot (yet).”
According to Fernandes, advisers who formally adopt a behavioural finance approach – that quantifies concepts such as herding and loss-aversion preferences – stand a better chance of differentiating their services from computer-generated investment advice.
“Advisers can use empirically proven behavioural finance principles to build their understanding of clients and design interventions to help them achieve their goals,” he says in the paper.
Ultimately, though, machines could also integrate the Kahneman et al concepts into robo-advice, Fernandes said.
In fact, he said National Capital was exploring how to automate behavioural finance insights into its system using technology developed by US firm, Financial DNA.
The questionnaire-based technology helps advisers optimise how and what they communicate to clients, producing tailored “financial behavior insights addressing risk, spending and goal drive behaviors”, the US firm’s website says.
“In a way I’m already providing behavioural finance advice to my clients through questionnaires – but I am still doing that manually,” Fernandes says. “It will be much more efficient when we automate the process.”
While that may be some time away, National Capital is slowly building a client base for its robo-advice service via the modern marketing duopoly of Google and Facebook. Since launching earlier this year, National Capital has robotically shifted almost $2 million of client funds (Fernandes won’t say how many individuals) into risk-appropriate KiwiSaver products.
Currently, the business operates on commissions paid from the five KiwiSaver schemes it deals with – Aon, ANZ, Fisher Funds, Generate and Booster. But Fernandes hoped to add more schemes and move to a fee model (albeit still intermediated by the KiwiSaver provider) over time.
He said the KiwiSaver transfer market should be an ideal one for robo-advice as clients are already invested.
“Most robo-advisers offshore are built by fund managers looking to put clients into a portfolio of investments – such as exchange-traded funds,” Fernandes said. “Advice is just a small component of that.”
Outside the high net worth market, there was a large cohort of ordinary income New Zealanders who could benefit from robo-advice, he said.
Despite its promise, robo-advice globally remains a niche service. Even in the US, robo-advice is mostly a cut-price fund distribution game, headed by Vanguard, which has accumulated about US$115 billion through its robot, according to a new survey.
The Robo-Advisor Pros report shows the next-four biggest US auto-advice firms – Schwab, Betterment, Wealthfront and Personal Capital – had a respective US$37 billion, US$16 billion, US$11 billion and US$8.5 billion under management. Personal Capital, the fifth-largest robo, reported only 19,000 paying customers (although 2 million used its free investment tools).
Back in NZ, six firms have been granted a robo-advice exemption from the Financial Markets Authority (FMA) with direct life insurer, Pinnacle Life, and online fund distributor, Sharesies, the latest digital arrivals. Pinnacle was handed robo regulatory relief last week while Sharesies earned its exemption mid-May.
The pair join National Capital, Nikko Asset Management, Kiwi Wealth and Cigna Life as exempt suppliers of digital personal financial advice.
Robo-advice will become legal under the Financial Services Legislation Amendment Act, due to go live next June.
“The exemption will be revoked when the new financial advice regime under the Financial Markets Conduct Act comes into effect, replacing the existing Financial Advisers Act regime,” the FMA says.