THE disruption of the financial services industry, which began as a trickle, is quickly turning into a flood as start-ups introduce innovative products and services designed for a new generation of consumers, and the established providers are forced to reinvent themselves.
Robo-advice and artificial intelligence (AI) technologies, which use algorithms and machine learning to do the job of financial advisers, analysts and active fund managers, are expected to grow significantly in the coming decade. It is forecast that robo-advisers could manage about 10% of total global assets under management by 2020, according to a study by BI Intelligence.
Gavin Smith, the head of Africa for deVere Acuma, an independent financial advisory firm, says: “Algorithmic trading automatically and immediately adjusts to new developments. Theoretically, robo-advisers should be able to constantly act to perform according to an investment mandate.
“There are many advantages to the introduction of robo-advisers and AI into the financial services sector,” Smith says. “It brings down fees, speeds up administration and saves time.”
However, what automated systems lack, he says, is the ability to liaise with you and understand the nuances of your requirements and changing circumstances. “When it comes to understanding your goals, specific circumstances, and blending these with your retirement, tax and estate planning, robo-advisers are nowhere near to replacing good financial advice,” Smith says.
As a result, some financial services providers are trying to marry the automated and personal approaches in an effort to get the best of both worlds.
Last week, Personal Finance highlighted OUTsurance’s new investment product, OUTvest, which relies on semi-automated investment advice. Below are four more recent innovations that are likely to contribute to the shake-up of the industry.
NMQRL’s machine learning-powered unit trust
NMRQL Research, the fintech company co-founded by Michael Jordaan, the former chief executive of First National Bank, this week launched South Africa’s first unit trust fund powered by machine learning.
The NMRQL SCI Balanced Fund, administered by the Sanlam Collective Investments platform, is a regulation 28-compliant collective investment scheme that invests in a diversified portfolio of domestic and international assets, where the asset allocation and stock selection are systematically managed using machine learning algorithms.
The process looks for hidden patterns in underlying big data. These patterns can be exploited to forecast returns across asset classes and markets.
Jordaan says: “As humans, we suffer from various cognitive biases. These biases negatively impact our objectivity and reasoning skills daily, and are compounded when financial repercussions are involved. Our investment model eliminates emotive decision-making, which allows it to remain rational at all times.”
The fund’s annual investment fee of 0.9% includes the management and administration fees. There is a 10% performance fee if the fund outperforms the average performance of all funds in the South African multi-asset high-equity sub-category.
deVere, in association with Pacific Asset Management, has launched its Model Portfolio Service (MPS), comprising a range of risk-targeted model portfolios to match individual clients’ requirements.
“deVere’s MPS range balances the cost- efficient advantages of robo-advice with the common-sense overlay of an actively-managed solution,” Smith says.
The MPS range will initially consist of four risk-targeted models that combine passive and active portfolios.
“Each model reflects a particular level of risk, they are highly liquid and invest across active, passive and smart-beta stra-tegies,” Smith says.
Chatbots are particularly suitable for financial services. They provide life-like text-based online conversations powered by AI and machine learning.
FinChatBot, which is linked to AlphaCode, the fintech investment arm of Rand Merchant Investment Holdings, provides a robo-advice chat service via the Facebook Messenger app.
FinChatBot chief executive and co-founder Antoine Paillusseau says most South Africans are using their mobile devices to “chat” on messaging platforms, and they prefer to interact via messaging than phoning a traditional call centre.
“Chatbots will increase accessibility to financial services by making the customer experience faster and more convenient using the mediums that consumers prefer any time of night or day.”
While older chatbots were based on a set of rules, the new generation of chatbots use machine learning to adapt to customer behaviour and language, and get smarter as they learn from human conversations. They can handle quotations, sales, customer service and claims.
Dominique Collett, the head of AlphaCode, says: “Chatbots are a real opportunity for the financial services industry. FinChatBot has identified this opportunity to help banks and insurers address customer engagement in a digital, cost-friendly way.”
Indie’s ‘gamified’ life assurance
Indie, a Sanlam-backed financial services business, has announced the launch of its first product: simple-to-use, transparent life assurance designed specifically for young adults that includes a “game” element.
Peter Castleden, the chief executive at Indie, says Indie is a good example of how “a large, established entity like Sanlam can foster entrepreneurship by dedicating resources to innovative businesses, without being weighed down with the slow-turning processes inherent within large corporate culture”.
Castleden says that, unlike many start-ups, whose main objective is often to sell within a few years of inception, Indie’s mandate is to “future-proof” financial services. “It is designed for the long term,” he says.
The Indie life assurance range includes income protection, debt protection, life cover, disability income, funeral cover and dread disease cover, and is bundled with a built-in investment.
“The model demands minimal underwriting requirements and offers a simple product suite to deliver fit-for-purpose life insurance,” Castleden says.
Indie has added elements of “gamification” to the product to increase its appeal to young people. Through “CashDrops”, the cost of life cover is almost cancelled out by cash perks received by members.
After signing up, either through the broker platform, which will be online soon, or directly via the web or mobile interface, Indie clients are rewarded with Bounty – real money that is invested.
Castleden believes this will help the digital generation to understand the impact that compounding interest can have on investments made early in life.
“The younger a client is, the more they can expect to get back. With a potential Bounty in excess of R100 000, depending on various factors, the long-term financial benefit can be enormous.”
ROBO-ADVICE AND REGULATION
By Paul Kruger
During recent regulatory update workshops, Billy Seyffert, the chief operating officer of Moonstone Compliance and Risk Management, alluded to rather stringent requirements for financial services providers (FSPs) who plan to go the robo-advice route.
The Financial Planning Institute (FPI) recently conducted a robo-advice survey. Nearly half the respondents indicated that they believe that regulators should monitor the standards governing robo-advice.
The proposed new fit and proper requirements under the Financial Advisory and Intermediary Services (FAIS) Act include guidelines on what will be required to operate in this space. An FSP who wants to provide automated advice must have at least one key individual who:
• Meets the competence requirements applicable to a key individual of a Category I FSP; and
• Has technological knowledge, skills and experience to:
– Understand the technology and algorithms used to provide the automated advice;
– Understand the methodological approaches and assumptions embedded in the algorithms and the rules underpinning the algorithms;
– Identify the risks to customers arising from the automated advice; and
– Monitor and review the automated advice generated by algorithms to ensure the quality and suitability of the advice and compliance with the FAIS Act.
The topic will be discussed in detail at the FPI Professionals Convention next week.
Paul Kruger is editor and writer-in-chief of the Moonstone Monitor, the Moonstone Investment Indicators and the Moonstone Online website.