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Super robots marching on member funds

Glenn Freeman  |  05 Apr 2017Text size  Decrease  Increase  |  

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In recent years, Australian superannuation funds have been increasing the amount of control they offer members, and robo-advice is also on the table in furthering this objective.


The noise around automated financial advice--known colloquially as robo-advice--has been building for years. Various elements of the investment and broader consumer landscape have been falling into place for the better part of a decade, maybe longer. A concept that once seemed an outlandish notion perhaps dreamed up by the likes of Isaac Asimov or HR Giger is now becoming reality.

Supermarket shoppers self-scan their goods and pay, without human interaction; banking customers regularly transfer funds and organise loans during daily bus commutes using mobile phones; and investors manage portfolios remotely using algorithm-driven automation and artificially intelligent "advice".

When BlackRock, the world's largest investment manager swaps living, breathing people for stock-picking models, you know the rise of the machines is real.

Australian super funds are also jumping on the bandwagon, using the stochastic modelling forecasting engine of SuperEd to drive automated, scaled advice--addressing specific areas rather than holistic advice--to more members.

Only 2 per cent of super fund members get advice from their super fund on an annual basis, according to a study from financial industry benchmarking firm, Comparator.

Heading up SuperEd's efforts to correct this advice shortfall is Jeremy Duffield, who is also founder and former CEO of the Australian arm of index fund behemoth Vanguard.

He launched SuperEd around three-and-a-half years ago. With no physical adviser inside the process, "the adviser is the algorithm". As an industry, Duffield believes the financial system and government expect too much of individuals.

"We're putting the responsibility for saving for retirement on an individual's shoulders. They should have access to advice. I believe there's more value to be had in advice than investment management," he says.

"I'm still a strong advocate of indexing, and it's easier to earn alpha through good advice than it is through investment management. In my opinion, funds ought to be investing more in advice, and relatively less in active investment management."

Duffield describes SuperEd as "a coaching, guidance, and advice platform that takes someone on a journey from where they are today to where they want to be at and through retirement".

"It's taking information about them and helping guide them along the way to a better retirement, helping them make better decisions about what they can do in getting ready for retirement."

Stochastic modelling

This is a central part of the platform, as distinct from deterministic approaches. In a nutshell, stochastic models analyse information about the individual to create a range of potential outcomes.

Deterministic models, which are often used within traditional financial advice, are more simplistic and prescriptive in setting a single pathway.

"We believe most plans using deterministic forecasting, a mean forecast, really misstate the problem because they don't explain the uncertainty," Duffield says.

"The uncertainty is that you're going to get something in a range of outcomes. The idea that you get a point forecast is just naïve, and the industry seems to be okay with making that type of naïve assumption.

"Even ASIC and their MoneySmart calculators use a single point forecast, but the implications of that are 'take more risk, get more return'. You don't necessarily get more return just by taking more risk."

As he explains it, "you have the chance of getting more return, but there's no guarantee. That's the reason to show a range of outcomes".

SuperEd also uses a goals-based approach rather than one that is simply based on risk-tolerance.

"Most funds have low-cost options and we'll make those available in a way that meets the individual's intentions. What's your income goal? What are you trying to achieve, and how long do you think you have to achieve that? What's the difference between what you have as a minimum requirement and your desired level? Some people will want to protect against getting very old whereas others will say 'I don't expect to live to a very old age,'" Duffield says.

He has also considered the federal government's MyRetirement framework, which is looking to develop a comprehensive income product for retirement (CIPR), with submissions due at the end of April 2017.

SuperEd entered a partnership with retirement product specialist Challenger around six months ago, as part of "helping members think through how an annuity might play a role in their portfolio".

Duffield's submission to the government review argues there should be a personalised solution for each individual's retirement, that a one-size-fits-all solution is unlikely to work, because in retirement--as in everything--we're all so different.

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Glenn Freeman is Morningstar's senior editor.

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