Uber Moment

Kiwi Investor Blog achieves 100 not out

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Kiwi Investor Blog achieves 100 Posts.

Thank you to those who have provided support, encouragement and feedback. It has been greatly appreciated.

 

Before I briefly outline some of the key topics covered to date by Kiwiinvestorblog.com, the “intellectual framework” for the Blog has largely come from EDHEC Risk Institute in relation to Goals-Based investing and how to improve the outcomes of Target Date Funds in providing a more robust investment solution.

Likewise, Noble Laureate Professor Robert Merton’s perspective on designing an appropriate retirement system has been influential. Regulators and retirement solution providers should take note of his and EDHEC’s work.

Combined, EDHEC and Professor Merton, are helping to make finance useful again.

Their analysis into more robust retirement solutions have the potential to deliver real welfare benefits for the many people that face a challenging retirement environment.

A Goals-Based approach also helps the super wealthy and the High Net worth in achieving their investment and hopefully philanthropic goals, resulting in the efficient allocation of capital.

The investment knowledge is available now to achieve this.

 

To summaries, the key topics of Kiwi investor blog:

 

  • Likewise, much ink has been spilt over Target Date Funds. I believe these are the vehicle to achieving the mass production of the customised investment solution. Furthermore, they are likely to be the solution to the KiwiSaver Default option. The current generation have many shortcomings and would benefit by the implementation of more advanced investment approaches such as Liability Driven Investing. This analysis highlights that Target Date Funds that are 100% invested in cash at time of retirement are scandalous.

 

 

  • The first kiwiinvestorblog Post was an article by EDHEC Risk Institute outlining the paradigm shift developing within the wealth management industry, including the death of the Policy Portfolio, the move toward Goals-Based Investing and the mass production of customised investment solutions. These themes have been developed upon within the Blog over the last 22 months.

I covered the EDHEC article in more depth recently.

 

 

  • The mass production of customised investment solutions has been a recurrent topic. Mass customisation enabled by technology will be the Uber Moment for the wealth management industry. Therefore, the development of BlackRock and Microsoft collaborating will be worth following.

 

 

 

  • Several Posts have been on Responsible Investing. I am in the process of writing a series of articles on Responsible Investing. The next will be on Impact Investing. The key concern, as a researcher, is identifying those managers that don’t Greenwash their investment approach and as a practitioner seeing consistency in terminology.  The evidence for Responsible Investing is compelling and there is a wide spectrum of approaches.

 

 

  • There has been a focus on the issues faced by those near or in Retirement, such as the Retirement Planning Death Zone. These discussions have led to conclusion that Warren Buffet could be wrong in recommending high allocations to a low cost index funds. Investment returns are greatly impacted by cashflows into and out of the retirement fund.

 

  • I don’t tend to Post around current market conditions; market views and analysis are readily available. I will cover a major market development, more to provide some historical context, for example the anatomy of sharemarket corrections, the interplay between economic recession and sharemarket returns, and lastly, I first covered the topic of inverted yield curves in 2018.  I provided an update more recently, Recessions, inverted yield curves, and Sharemarket returns.

 

My word for 2019 is Flexicure, as outlined in my last Post of 2018, Flexicurity in Retirement Income Solutions – making finance great again – which brings together many of the key topics outlined above.

 

Happy investing.

Please see my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

 

 

Fintech’s Colossal Solution – Uber Moment? Microsoft and BlackRock team up

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BlackRock and Microsoft are building a platform that will help people develop better saving and investment habits through more regular engagement with their retirement assets.

This initiative was announced in December 2018 and the Wall Street Journal (WSJ) noted at the time:

“The firms plan to develop a technology platform that will provide digital financial-planning tools and new BlackRock funds offering guaranteed retirement income to employees through their workplace saving plans.”

 

This is close to the Uber moment for the Wealth Management industry: technology platform providing retirement planning tools and direct access to new generation Investment Solutions.

 

BlackRock, the world’s largest money manager, according to WSJ “wants to shape the technology plumbing that connects it to different parts of the financial ecosystem handling workers’ retirement money.”  And for Microsoft, who needs no introduction, “an investment platform built with its technology could bring in new revenue as it looks to become a bigger cloud-computing player.”

 

BlackRock and Microsoft have made progress since December and FinancialPlanning.com provided further details in July 2019:

“The technology giant and the asset manager overseeing 15 million Americans’ 401(k) portfolios are developing an app and desktop tool aimed at narrowing the widening gap between what workers will need in retirement and how much they’re saving.”  (401 (k) is like KiwiSaver)

BlackRock and Microsoft are looking to reimage America’s path toward achieving greater financial security in retirement by bringing together BlackRock’s investment capabilities and Microsoft’s technology strength.

Together, they are exploring the next generation of investment solutions to help more people make better decisions as they work toward their financial goals in retirement.

Taking advantage of Microsoft’s technologies and BlackRock’s investment products, the companies are aiming to make it easier for people to both save for retirement and achieve the lifetime income they need through their employers’ workplace savings plan.

The firms will begin rolling out their tool later this year.

By all accounts, this is going to be a powerful platform.  I’d imagine some of the tools will be like the BlackRock CoRI Index, which estimates the level of lifetime retirement from current savings.

 

Lifetime Income Focus – Next Generation of Investment Products

From an investment perspective the retirement tool will include guaranteed retirement income planning.

As part of the rollout Microsoft and BlackRock are designing methods of showing workers how much extra contributions today could end up netting them in retirement.  The intended result is that employees “have a clearer picture of how their contributions today will translate to long-term retirement income”.

BlackRock intends to offer the platform in connection with next generation investment products that it will design and manage. The new products from BlackRock will seek to provide a lifetime of income in retirement.

 

Therefore, BlackRock will be offering more sophisticated products than widely available now.  These Funds will seek to provide guaranteed income streams to participants as they get older, an element not common in 401(k) (like KiwiSaver) and other retirement plans.

The funds will be like Target Date Funds, a blend of investments that get more conservative as investors head into retirement. However, the funds BlackRock wants to roll out will also increase their concentration in financial instruments that provide regular payouts as participants reach retirement.  This is a massive enhancement.

As an aside, Target Date Funds would be a good option as the Default Fund for KiwiSaver.

 

Importantly, the focus is on providing an income stream in retirement.  There is a strong argument this should be the primary investment goal and not the targeting of a lump sum at time of retirement. What matters in retirement is income.

The OECD encourages the retirement objective to be the generation of income in retirement and for there to be coherency between the accumulation and pay-out phase of retirement.

Currently most investment products are poorly positioned to meet these objectives.

The central point is, without a greater focus on generating Income in retirement during the accumulation phase the variation of income in retirement will likely be higher.

Therefore, volatility of income in retirement is a good risk measure.

It is encouraging that KiwiSaver providers are required to include retirement savings and income projections in annual statements sent to KiwiSaver members from 2020 onwards.

 

More specifically, the focus on retirement income and use of more advanced portfolio construction techniques as liability-driven investing overcomes one of the main criticisms of Target Date Funds.  Particularly, Target Date Funds should have a greater focus on generating income in retirement.  This means the fixed income allocation should act more like an annuity so that is pays a steady stream of income to the investor once they reach retirement.

The investment knowledge is available to achieve this.

 

Accordingly, BlackRock’s solutions appear to be more aligned with Goals-Based Investing and will be a more robust Retirement Income Solution than those available now.

There is a real need for these new generation investment solutions as many of the current financial products have shortcomings in meeting future customer needs, particularly the delivery of a stable and secure level of retirement income.

It is also important to note that there is a paradigm shift underway within the wealth management industry in relation to the development of new and improved investment solutions.

The industry is evolving, new and improved products are being introduced to the markets in other jurisdictions to meet a growing savings crisis.

 

Defining Social Challenge – Addressing the Savings Crisis with Technology

As BlackRock outlined when making the initial announcement in December 2018:

“Retirement systems worldwide are under stress and providing financial security to retirees has become one of the most defining societal challenges of our time,” said Laurence Fink, chairman and chief executive of BlackRock.

“BlackRock has a tremendous responsibility to help solve this challenge, and we recognise the need to act now. Working with Microsoft will enable us to build a powerful solution for millions of hardworking Americans.”

There has been a major shift globally away from Defined Benefit (DB) schemes to Defined Contribution (DC).

As a result, the individual has become increasingly responsible for investment decisions, for which they are generally not well equipped to make.   This has been likened “financial climate change” by the World Economic Forum

In America, millions are struggling to achieve their financial goals in retirement.  BlackRock and Microsoft are aiming to narrow the “gap” between what workers will need in retirement and how much they are saving.  This gap is estimated to be expanding by $3 trillion each year!

Therefore, there is a very real need to help people who are struggling with the difficult task of saving, investing, and turning this into a retirement income.

In BlackRock and Microsoft’s view the “shift in responsibility, from corporations to individuals, combined with ever increasing life-spans, has created a need to reimagine a new approach to securing a sound financial future in retirement – one that is powered by innovative investment solutions and the most advanced, trusted and cutting-edge technologies.”

“Technology is already revolutionizing entire industries and the way people interact with everything from health care to education and transportation. And yet, retirement solutions of today have been slow to keep pace. Taking advantage of Microsoft’s cutting-edge technologies and innovative investment products from BlackRock, the companies aim to make it easier for people to both save for retirement and achieve the lifetime income they need through their employers’ workplace savings plan.”

 

Thus, the need for new innovative investment solutions and technology platforms.

This is close to the Uber moment for the Wealth Management industry.

 

Happy investing.

Please see my Disclosure Statement

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

 

Technology focus that will transform the Wealth Management Industry – Robo Advice alone won’t be enough

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The Professional Wealth Magazine (PWM) argues that Private Banks must take “goaled-based tech to heart”.

In their recent article they see technology assisting Wealth Managers in the following areas:

  1. Customer facing;
  2. Client relationship management; and
  3. Goals-Based wealth management Investment Solutions.

The first two are well known, the third, as PWM note, is flying under the radar. Combined they are the future of a successful wealth management business.

Quite obviously Robo Advice models use technology. Nevertheless, Goals-Based wealth management provides the opportunity for greater customisation and a more robust investment solution that better meets the needs of the customer.

Therefore, technology will play a major role in delivering more customised Investment Solutions to a wider range of people.

 

Technology is going to play a major role in the industry’s transformation.

As has been argued: “In order to be part of the fourth industrial revolution, the people-centric industry of wealth management must transform the production, customisation and distribution of retirement solutions, …..”

(See my first Kiwi Investor Blog Post, Advancements in Portfolio Management, for an article written by Lionel Martellini, of EDHEC Risk Institute, that appeared in the Journal of Investment Management in 2016: Mass Customization versus Mass Production – How an Industrial Revolution is about to take place in money management and why it involves a shift from investment products to investment solutions.)

 

The PWM article covered a recent symposium held in Paris focusing on fintech, quantitative management and big data, the technologically-led trends transforming the global industry.

The participants at the symposium gathered to consider: what should be the role of technology in client acquisition and servicing, data analysis, and portfolio management?

With regards to technology in general PWM note, “Private banks need to put technological solutions at the heart of their operations if they are to meet the demands raised by clients and relationship managers, though there will always be a need for human interaction”

However, having acknowledged that technology is critical for a successful Wealth Management business of the future, it appears to be a difficult issue to address. PWM “calculate that of the 150 global private banks we monitor closely for technological, business, customer-facing and portfolio management trends, less than one third have implemented a serious technological solution to the challenges encountered by their clients and relationship managers.”

“Many have only devised client-interfaces such as online forms, apps and screens allowing choices of services. But a handful have gone much further…….”

 

Under the radar

PWM noted that “…there is probably one technology-led sphere which is totally under-appreciated by the industry, which was highlighted at the summit. This is that of goals-driven wealth management (GDWM), ….”

 

Goals-Based investing is an improvement on the generic industry approach. Rather than viewing your investments as one single diversified portfolio, where the allocations are primarily based on your risk tolerance and the concept of risk is measured by volatility or standard deviation of returns, Goals-Based investing creates distinct milestones (goals) that are closely aligned with the priorities in your life.

Goals-Based investing closely matches your investment assets with your unique goals and objectives (customisation). It is the Wealth Management counterpart to Liability Driven Investing (LDI), which is implemented by pensions and insurance companies where their investment problems are reflected in the terms of their future liabilities (expected future insurance claims), much like a Wealth Management client’s future priorities (goals). LDI is also implemented by Pension Funds, particularly those with Defined Benefits, which are known future liabilities/cashflows.

Goals-Based Investing offers a more robust investment solution, provides a closer alignment of retirement goals and investment assets. It will also help investors avoid some common behavioural biases, such as regret and hindsight bias.

The benefits of Goals-Based Investing are a:

  1. More stable level of income in retirement;
  2. More efficient use of capital – potentially need less retirement savings;
  3. Better framework to make trade-off between allocations to equities and fixed income; and
  4. Improved likelihood of reaching desired standard of living in retirement.

In summary, a Goals-Based investment strategy increases the likelihood of reaching a customer’s retirement income objectives. It can also achieve this with a more efficient allocation of capital. This additional capital could be used for current consumption or invested in growth assets to potentially fund a higher standard of living in retirement, or used for other investment goals e.g. endowments and legacies.

 

As the PWM article points out, technology is allowing “wealth managers to use institutional tools, helping clients to prepare for key life events….. Length of investment terms, risk tolerances, prices, taxes, depreciation levels can all be plugged into a model by relationship managers. Optimal asset allocations can then be arrived at and modified to plan for specific goals.“

“While few private banks currently approach this topic seriously, it surely must become the wealth management paradigm for the future. It will still require human wealth managers to advise clients and shepherd them through the process, but it will put an algorithmic system at the centre of the asset allocation decision. There is no substitute for this and it will most likely steal the very soul of wealth management.”

The Bold is mine, LDI is an institutional tool implemented to meet specific goals.

 

This is beyond a straight forward Robo Advice model and the filling out of a generic risk profile questionnaire. Technology is being applied to determine more customised investment solutions, taking into consideration a greater array of personal information and then implementing an investment solution using more advanced portfolio techniques, such as LDI.

 

The article covers other technology related issues in relation to wealth management, such as increasing competition from the likes of Google, Facebook, Alibabas and Tencents.

Importantly, PWM see room for a human element in all of this.

 

PWM conclude we are at the beginning of the industry’s “revolution”, technology will play a part in the success of the modern wealth manager and in capturing the next generation of investors:

“The battle for the hearts and minds of the next generation and for the soul of wealth management has yet to be fought and won. But the opening salvos have been fired.”

“Private banks have interesting weapons in their armouries. Some still need to be modernised for effectiveness. But at the moment, those that appear to be vital for future success appear to be GDWM (goals-driven wealth management) tools, networking apps and screens for impact and ethics.“

“The private bank of the future will manage, introduce and evaluate, as well as working closely with the next generation. These disciplines require a raft of technological systems and an army of relationship managers, not just to operate them, but to take the output which they deliver and use this to help build a long-term relationship with families of the future.”

Again bold is mine.

 

The future, according to PWM, is a raft of technology solutions with Goals-Based investing as the underlying investment solution.

The appropriate use of technology and the mass production of customised investment solutions will be the Uber moment for the Wealth Management industry. The technology and investment knowledge is available now.

The customisation of investment solutions involves a Goals-Based investment approach, based on the principles of LDI.

A winning outcome will be the combination of smart technology and the mass production of customised investment solutions that more directly meet the needs of the customer in achieving their retirement goals.

 

Happy investing.

Please see my Disclosure Statement

 

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

 

 

One Year Anniversary

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Kiwi Investor Blog is one year old.

My top three articles for the year would be:

Investment Fees and Investing like an Endowment – Part 2

Endowments and Sovereign wealth Funds lead the way in building robust investment portfolios in meeting a wide range of challenging investment objectives.   This Post covers this and amongst other things, what true diversification is, it is not having more and more asset classes, a robust portfolio is broadly diversified across different risks and returns. A lot can be learnt from how Endowments construct portfolios, take a long term view, and seek to match their client’s liability profile. Although fees are important, an overriding focus on fees may be detrimental to building a robust portfolio and in meeting client investment objectives.

 

A Robust Framework for generating Retirement Income

This Post builds on the Post above and looks at an investment framework for individuals, developed by EDHEC-Risk Institute and their Partners. It is a Goal Based Investment framework with a focus on capital value but also delivering a secure and stable level of replacement income in retirement.

 

The monkey paw of Target Date Funds (be careful what you wish for)

This Post emphasises the need to focus on generating a stable and secure level of replacement income in retirement as an investment goal and highlights the approach that is required to achieve this. Such an approach would greatly enhance the outcomes of Target Date Funds. This Post also references the thoughts of Professor Robert Merton around having a greater focus on generating replacement income in retirement as an investment objective and that volatility of replacement income is a better measure of investment risk, as it is more aligned with investment objectives, unlike the volatility of capital or standard deviation of returns.

 

Kiwi Investor blog has covered many topics over the year, including the value of active management, the shocking state of the investment management industry globally, Responsible Investing, the high cost of index funds and being out of the market.

Of these, recent research into the failure of the 4% rule in almost all markets worldwide is well worth highlighting.

 

Kiwi Investor Blog has a primary focus on topics associated with building more robust portfolios and investment solutions.

The Blog has highlighted the research of EDHEC-Risk Institute throughout the year. EDHEC draw on the concept of Flexicurity. This is the concept that individuals need both security and flexibility when approaching investment decisions. This is surely a desirable goal and the hallmark of a robust investment portfolio. The knowledge is available to achieve this and the framework and rationale is covered in the Posts above.

Flexicure is my word of 2018.

 

I don’t think the Uber moment has been reached in the investment management industry yet. Technology will be very important, but so too will be the underlying investment solution. The investment solution needs to be more tailored to an individual’s investment objectives.

As outlined in the Posts highlighted above, the framework for the investment solution has emerging and is developing.

It is a goal based investment solution, more closely tailored to an individual’s investment aspirations, so as to provide a more secure and stable level of replacement income in retirement.

 

Happy investing.

 

Please see my Disclosure Statement

Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.

 

Value of Investment Advice and Technology

/ Kiwi Investor / 1 Comment

I thought this was a well written and balanced article about the role of technology within the Financial Advice Industry.

The Uber moment has not really arrived in the financial services industry, particularly not in New Zealand (we have had a few cheap cabs join the ranks!).

The appropriate use of technology and mass customisation of investment solutions is the Uber moment in financial services industry.

The customisation of investment solutions involves a Goal Based investment approach, based on the principles of Liability Driven Investing.

A winning outcome will be the combination of smart technology and smart customised investment solutions.

 

Please see my Disclosure Statement