Robo-advice vision: overlooking the insurance dimension

An article from NZ Herald explains that the concept of robo-advice is on the books for 2018. The FMA made an announcement after receiving 49 submissions with the majority of these in favour of robo-advice. Interesting to read the list of companies that the NZHerald note submitted on the law. This isn't the full list, just the ones the Herald picks out to mention, probably based on their familiarity with the brand names:

'The consultation period, which ran from June 21 to July 19, included submissions from: Cigna Life Insurance, Delta Insurance NZ, Fidelity Life Assurance, the Institute of Financial Advisers, the Insurance Council of NZ (ICNZ), Medical Assurance Society of NZ, Partners Life, Southern Cross Medical Society, as well as major retail banks ANZ, ASB, Westpac NZ, fintech start-ups and law firms.'

Look at that list again - seven of the organisations mentioned are insurers or insurance-focused. Yet this article exclusively covers the funds management sector, excluding insurance, probably because it is written by an investment-focused adviser. Readers should not make the same mistake - insurers in New Zealand are very interested in robo-advice. But moving past that, a number of useful points are made. One is about fee transparency - and the connection to improved requirements for the advice process under the draft new Financial Services Legislation Amendment Bill are important. Robo advice services should be subject to the same rules as human advice services, although specific regulatory requirements will differ, because the nature of engagement with the services, and how they are run differs.

Click here to read more.

Digitization and the effect on jobs and wages

There is a fascinating chart (you can find here) which shows the effect of digitization on occupational categories, by the number of jobs and the wages changed. It is clear that digitization is having an effect - but now you can see how much, and in what way, the effects are felt. For now, at least, personal financial advisers - like most medical staff - appear to be thriving as digitization gathers pace. Others have not fared so well. The image below is just a picture, but if you click the link above you get an interactive chart, which is much more interesting. 

Submissions Report on the Draft Exemption to Facilitate Personalised Robo-Advice

The submissions report on the draft exemption to facilitate robo-advice is well worth a read, especially the introduction, which shows that the FMA have taken the submissions into account and makes commitments to address the main issues. Assuming that those commitments are well-reflected in the actual regulations, this is a good example of the consultation process working well. Link

PolicyGenius Founder Interview

An interview with Jennifer Fitzgerald, founder and CEO of PolicyGenius, can be found at this link. Thanks to Tony Vidler for pointing this one out. It is well worth a read. I've separately blogged on the issue of content creation, and how the insurance industry is hiding its light in this regard. But note also that focus on income protection - this is absolutely the next big territory for sales operations. It is just that the current product-based message is not connected well with the market. 

Robo isn't binary, it's both human and robo

Robo tools aren't either/or. The picture is sufficiently complex that in this article by Donna Fuscaldo at Investorpedia it is possible to argue that Millenials want robots, but also want humans. When you think about it, that's logical. No one seriously argues that a bank should be robo-only, or human only, banks are a complex stack of technology and humans. Investment is the same - and insurancee will be too. New Zealand's only experiment with a bank with no branches was closed a couple of years back. 

Goodreturns: Robo-Advice Exemption a Win for Big Providers - is it?

Goodreturns highlights the article by Simon Papa, formerly of the FMA, now of Cygnus Law, pointing out that the current draft of the robo-advice exemption favours larger businesses. That was the angle reflected in the headline on Goodreturns. But later in the article there was a view which I would prefer to highlight. That robo-advice may end up being provided almost exclusively by large, overseas, companies, not the current market participants. Robo-advice probably rarely cannibalises full-personalised advice provided by a human professional. Robo-advice struggles to beat humans head-to-head. The natural target of robo-advice is the no-advice price comparison website for insurance, which it can beat easily in terms of confidence and outcomes, when well-designed. Yet the draft exemption, effectively prevents that kind of service. That's not to say that it couldn't be licensed: conceivably it could seek an individual exemption. But the worry is that the exemption represents the wider approach the FMA might take. 

Proposed Exemption to Facilitate Personalised Robo-advice - Code Committee Submission

The Code Committee Submission on the proposed exemption to facilitate personalised robo-advice is a very good document, well worth reading in full, with a highlighter in hand. Nevertheless, I shall quote some significant sections and add comments here, because the many good points deserve to be publicised and discussed. The Code Committee wisely avoids discussion of the merits of the FMA's proposed exemption, or power to grant an exemption, instead they stick to their role, which is to promote standards: 

"... the Code Committee’s position is that if an exemption is to be granted to facilitate personalised robo-advice then the terms on which any such exemption is granted must be consistent with the terms on which AFAs must operate and the purposes of the FAA consistent with the objectives of the exemption stated at page 13 of the Consultation Paper. This means exemption conditions must ensure that:

  • any personalised service provided through a robo-advice platform is subject to no less a set of minimum standards than would apply to an AFA providing a similar service;
  • permitting robo-advice is consistent with promoting the sound and efficient delivery of financial adviser services; and
  • public confidence in the professionalism and integrity of personalised robo-advice services and their providers is encouraged.

In our view, the above requirements are an absolute minimum. In granting an exemption to facilitate personalised robo-advice, the FMA must be confident that the level of consumer protection involved is no less than that which would be involved had the personalised service been provided by AFA"

You could argue one small piece of this, as a specialist in the field of insurance, for example, I have to speak up for the oft-neglected insurance sector. The current legislated standard for insurance is only that applicable to the Registered (but not Authorised) Financial Adviser, who is not actually required to meet Code standards - but rather the less well-defined section 33 of the FAA (and other law too, of course). But this would be a silly argument, we have a draft Bill which will bring insurance under a common set of Code standards shared by all financial advisers, so in practice I agree with the Code Committee on all the points above. In any case, the exemption draft is plainly aimed at investment business, and in such cases no quibbles should be possible. Robo-advice should meet current Code standards. If not, why not? The Code Committee proceeds to offer suggestions of the draft exemption paper: 

"The Consultation Paper does not provide any evidence that the FMA has taken any learnings from the experiences of those overseas jurisdictions into account in formulating its thinking. Given the likelihood that many of the personalised robo-advice platforms that will be made available to the New Zealand public are likely to comprise New Zealand applications of overseas platforms, we believe it would be helpful for the FMA to document its observations of those overseas experiences."

I expect that the FMA has considered other jurisdictions. I share the Code Committee's view that sharing what they have learned would be helpful. Perhaps we shall see that in some expanded commentary on the next version of the paper, or it could be released between now and then as a separate document to give context. The central part of the Code Committee's argument, however, is this:

The consultation discusses possible limits that might be imposed on the provision of personalised robo-advice if an exemption is to be granted. The limits discussed include limits
on the possible scope of any personalised robo-advice service that might be permitted, and financial limits. The Code Committee believes this is an inappropriate approach to take in the granting of any exemption. Either the provision of personalised robo-advice is consistent with the purposes of the FAA and is able to be delivered subject to the same minimum standards as apply under the Code, or it is not.

The emphasis is added by me. For the Code Committee, you should meet AFA standards, and if you do, there is no need for limits. This is the reverse of the FMA's apparent position, which we might infer as something like 'you cannot meet all the standards, so we will limit the risk'. But the Code Committee has firm feedback on the proposed limits on robo-advice on page 7 and 8 of the document: 

a) Limiting the scope of a robo-advice service in the manner proposed at pages 7 and 8 of the Consultation Paper is an approach we have not observed in any overseas jurisdiction
that currently provides for the regulation of robo-advice.

So it seems that the Code Committee has done some research of its own and finds no international validation of limits

b) The only limits placed on AFAs in providing personalised services are those driven by the AFA’s competency and abilities, as provided by the Code. A similar approach should apply to personalised robo-advice. 

There is a strong consumer protection argument here. Also, consistency with the law : competency is the standard used now, why not keep using it? Indeed, it isn't very confidence building for consumers to see a regime which could be interpreted as saying in effect, that small financial services contracts should not be subject to as high standards as large ones. Consumers with smaller investment funds, or smaller insurance needs, often depend on them far more than consumers with greater resources. 

c) The proposal that the exemption ‘would be limited to personalised robo-advice on products which are easy to exit’ is hard to reconcile with a product list that includes KiwiSaver and credit contracts. Even if limits on the possible scope of a robo-advice service were to be imposed, we believe that basing the filter mechanism on such a concept is ill-conceived.

Indeed, many of us in the insurance industry think we know what the writer of the report means when they put this awkward description of 'easy to exit' into the document. We suspect that what is intended is more like 'has less risks on exit', for example: I have asthma and dodgy knees. It is very easy for me to cancel my insurance, and very hard to get those conditions covered on the same terms. That, we think, is a problem the writer of the draft is not yet confident a robo-advice service could tackle. When we make our submission on the draft we will ask for clarification. 

d) Imposing limits on the scope of permitted robo-advice services is likely to undermine the efficacy of those services. In particular, by limiting the products on which personalised robo-advice services might be provided, it seems unlikely that robo-advice could ever be seen as a suitable option for the provision of investment planning services. Imposing any of the limits discussed would result in consumers accessing a more limited range of outcomes through robo-advice than would be the access if receiving services from an AFA, which would be a negative regulatory outcome.

Indeed, again. 

e) Placing any financial limit on either the value of a product or on the aggregate investments that might be advised on through a robo-advice service, would discourage investment in
the system necessary to deliver robo-advice services. Imposing such limits is likely to compromise the ability of a robo-advice service to reliably deliver suitable outcomes on a standalone basis, requiring human advisers (or self-help solutions) to plug the gaps, undermining the objectives of the exemption.

Although investments is not my main focus, I suspect that no robo-advice provider will be excited about the idea of their service being limited to just $5 million per year. That tiny limit provides almost no incentive for innovation outside the existing providers of funds. The only service that can be encourage is one offered by an incumbent fund manager. I am glad they will be able to do so, but I should like others to be able to do so as well. 

Separately I shall write on the issue of the proposed limits as they apply to life insurance, leaving them out of this post because the focus here should be on the Code Committee's work. Also, it is worth continuing to emphasise - creation is hard, criticism is easier. I am grateful for the work of the people that wrote this paper and recognise that the debate could not get to this point without it.

If You Don't Like Detail, Bad News...

If you don't much like technical detail in the insurance advice process, bad news: because managing detail is fundamental to the process. It's the client that gets the satisfaction of knowing you are handling it, the adviser, on the other hand, has to handle it. It doesn't mean that you need to share all the detail with your client, you have to manage it all. If you're smart, you'll get help. There will be lots of nice robots to make life easier for you. Not to work around you - to help you. This article describes the process in funds management. Thanks to Tony Vidler for pointing it out.