moneyblog

Does robo-advice worsen bias and can AI fix that?

There is a concern among regulators that robo advisers do not make their selection process clear to customers - so algorithmic advice may be biased, especially in those cases where there is a choice of product providers. There are several ways such sites can lead clients to believe that their choice is perhaps wider and the process fairer than it might be. One is simply the way the starting set of companies is selected - if you have a mid-market product and you want to favour that one then it is easy to only select products that are in some obvious way 'worse' - say more expensive or offering less cover. The manner in which you apply selection criteria can affect outcomes too. If you apply selection criteria in a series of 'rounds' where you eliminate products you can imagine that if you knock out, say, all the products that are more expensive first, then in the second round you may find it easy to win on a coverage criteria. Even considering criteria in a balanced scorecard can be  gamed in some ways - such as the weighting applied to each factor. That is why the Financial Conduct Authority in the UK is interested in how robo-advice works, and in particular how they meet requirements to check suitability, but also other advice safety issues.

It is not just bias in sales that concerns us - it also happens in underwriting and probably in claims. Humans are prone to bias in favour of groups to which they belong, and by implication against the others. That can reinforce existing societal prejudices and make life harder - more expensive policies and more declined claims - for minorities. Is there hope? This article from Daniel Schreiber, CEO & Co-founder at Lemonade explains how he thinks an AI we may never understand can eliminate discrimination and bias in insurance. Of course, I note that he isn't talking about bias in insurer selection - Lemonade is a single insurer offer, not a marketplace. 

Kōura looking to improve its digital advice platform - the struggle is conversion

Rupert Carlyon, Kōura founder has said since going live, they have given advice to 3,000 people through the company’s digital advice platform. They are looking to roll out new messaging to improve user experience and understanding of their products. Click here to read more

The internet is a great platform for data-rich financial services. Since its earliest days financial services (led by sharetrading) have been a leader in e-commerce. But there is a catch. It has always been difficult to convert a lot of interest into action. We can easily deliver data, calculators, and content - and still struggle to achieve connection, engagement, and action. This is the overarching problem with digital. It is worth working on, but it is hard. 

Australia: Westpac penalised $9.15m for poor advice

Westpac in Australia has been fined $9.15 million after Sudhir Sinha, a former Westpac financial planner provided poor financial advice on multiple occasions. 

ASIC noted that the Court found Mr Sinha failed to act in the best interests of his clients, provided inappropriate financial advice, and failed to prioritise the interests of his clients, in four sample client files identified by the regulator.

Click here to read more. 

 

Australia: ASIC set to ban cold calling

The Australian Securities and Investments Commission (ASIC) is set to ban cold calling for life and consumer credit insurance sales from January 2020. This has change has been justified as addressing poor sales practices that ASIC believes has led to unfair consumer outcomes. This ban will not apply if the marketer provides the person they are calling with personal advice. It is another sign of the shift in conduct expectations that creates an incentive for a financial provider to choose to step into advice provision and the supervisory regime that surrounds it. We may experience similar incentives in this market. Click here to read more

 

Australia: compliance is 15% of the cost of advice

Angela Martyn, a financial planner in Melbourne has revealed that her practice spends $4.50 for every $100 of revenue on compliance – including personal indemnity insurance, industry memberships, audits and training. Martyn has said that personal indemnity insurance makes up much of the cost. The labour required for these things is $9 of every $100 of revenue. Additionally, she spends $1.50 per $100 revenue on marketing. Martyn has said that she expects that compliance spending will increase to 15% – 17% of their revenue. Or put it another way, 15% of the cost of advice will be compliance. 

Advisers minimise chances of poor claim outcomes

Tower CEO Richard Harding detailed that research showed confidence in the industry is at an all-time low. Harding revealed that although general insurers often claim 99.9 per cent of claims are paid, instead approximately one in five claims were withdrawn by policyholders. Although there are many reasons a policyholder could withdraw a claim, including pressure from the insurer, fear, dishonesty and non-disclosure, having an adviser reduces chances of withdrawals. Clients with advisers are better informed and make fewer pointless claims. In effect, his comments were a big endorsement of having an adviser involved. By implication, however, they raise questions about direct insurance. Click here to read more

Australia: use of APLs

It has been claimed that institutionally aligned Australian Financial Services Licensees are funneling new clients into in-house products. Whistleblower Jeff Morris has said the industry lacks the ability to properly manage conflicts of interest, and insisted that the Government should ban the use of APLs (approved product list) by vertically-integrated advice licensees. In response, David Wappett, head of research and relationship manager at MLC Advice said that they provide a range of additional resources to ensure advisers understand the way APLs are constructed. Click here to read more

What makes a viable APL? It's all in what's on it and whether you use it. In essence, if a vertically integrated business treats its in-house products the same as any other... then there shouldn't be any problem. But how to do that? 

Challenge questions for advice suitability

Tony Vidler has a series of challenge questions for advice suitability in this piece. His list is focused on an investment advice situation, below is my version, focused on an insurance advice situation. 

1. Does the advice address the scope agreed between you and the client? 
2. Did you gather sufficient information to ensure suitability?
3. Is the advice consistent with evidence-based approaches or academic consensus about this problem?
4. Is the advice, or recommendations, based upon research and analysis?
5. Is the balance between risk retention and transfer consistent with client tolerance for risk?
6. Does this take into account existing resources and/or insurance? If not, why not?
7. Has client desire to either consume or maintain capital been considered? 
8. What assumptions or calculations underpin it?
9. is the ownership structure appropriate, and have all existing ownership entities been captured and considered?
10. are their specific tax liabilities or advantages which are material to the recommendation? If so, what impact would a change in the taxation position have upon the recommendation?

 

 

Need to find a FAP?

From an adviser:

I was at a meeting with a group of advisers last week, when an adviser who has been in the industry for many years asked:

"How do I find a FAP?  Do I just google FAP?"

Everyone else in the room was like "Nooooo - whatever you do, don't google that!"

Might get an education if they did...

 

Australia: another study shows people are better off with advice

According to anew report issued by Russell Investments in Australia states that financial advisers add at least 4.4% or more every year to clients - and a total of about $560,000 better off overall. Rather than see this as another shot-fired in the 'active' versus 'passive' debate, I prefer to focus on the behavioural aspects that financial advisers bring to the relationship - that applies to risk management, to insurance, to home loans advice, and debt repayment, and holistic financial advice. Readers will know that I am made keen on technical aspects of our industry: policy comparison especially, but also financial performance, price, underwriting, and digital advice. All these matter, but the central territory for advice is helping clients change. 

The study worked with a number of advisers from US, Canada and Australia for the past 20 years and identified five key areas of financial advice in the report: annual rebalancing, preventing behavioural mistakes, planning and additional wealth management services and tax-smart investing. Click here to read more.