Roboadvice green light 'better late than never'
Work is progressing on the exemption that will allow personalised roboadvice, or digital advice, in New Zealand. But one law firm says it's a case of "better late than never".
Friday, November 17th 2017, 6:00AM 
7 Comments
Joanna Khoo
The Financial Markets Authority is consulting on the draft exemption notice and wants information on aspects of it, including the draft information sheet, application documents, good character declaration and application guide.
But law firm Russell McVeagh said New Zealand was playing catch-up to the rest of the world.
As at October 2017, digital advisers had $224 billion in assets under management, and this is estimated to grow to over $2 trillion by 2020.
Senior Associate Joanna Khoo said: "The two main barriers for customers currently obtaining financial advice under the traditional human adviser model are the cost of financial advice and the minimum amount of investable assets typically required. Globally, the rise of digital advice has been a significant step toward reducing this advice gap by generating a low-cost solution suitable to a broad range of customers.
"While digital advice is already well developed in the US, UK, Australia, Singapore and Europe, New Zealand has been slow off the blocks. At about the time the Financial Advisers' Act 2008 (FAA) came into force here, firms in the US were already launching their first digital advice platforms."
Recent reports on digital advice platforms show the average financial planner has a minimum investment between the range of $10,000 and $50,000, while minimum investment amounts for digital advisers start as low as $500.
Most digital advisers charge fees ranging from 0.02% to 1% of assets under management.
Providers planning to develop robo platforms would need to consider the commercial viability of the prospect, Russell McVeagh said.
"Given that digital advisers, on average, charge a much lower fee to investors, providers looking to invest in developing or acquiring a platform will need sufficient scale of service uptake to make such investment worthwhile.
"As such, the exemption seems to favour providers with a large-scale client base (such as providers of KiwiSaver, or large retail funds). Despite these barriers to entry, overseas jurisdictions have shown that there is a role in the market for smaller players to innovate and develop new platforms that may be used by larger financial service providers."
Providers will now need to apply to the FMA to rely on the exemption and provide good character declarations, among other information.
That will involve ongoing disclosure obligations, conduct obligations and record-keeping requirements in line with those required of authorised financial advisers.
Russell McVeagh said the effect of the application requirement is to create a quasi-licencing process similar to the licensing regime under the FMCA. "Providers should therefore factor in sufficient time for the application process in their launch strategy."
Head of Russell McVeagh's corporate advisory group Dan Jones said the exemption was a necessary first step in putting the New Zealand financial advice regime on equal footing with overseas regimes, and may provide particular assistance to New Zealanders in KiwiSaver.
"A small number of providers have indicated readiness to launch digital advice solutions under the exemption, yet the timing and infrastructure costs could mean that enthusiasm is limited," he said.
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Comments from our readers
My prediction is that – after much fanfare – the first iterations of roboadvice will be improvements in onboarding and maintaining of consumers, with simple calculators and lots of marketing whizz. Having researched the various robo solutions globally, there is low appeal for an offshore provider to seriously consider a NZ solution / gateway, as the numbers simply don’t stack up.
Put another way: a full robo solution will need to cost the consumer less that the average balanced fund (…or perhaps the average Kiwisaver fund with a balanced option) to be appealing
Cool. A chance to learn from everyone else's mistakes.
This extract from Insurance Business website today explains -
"Cognitive bias occurs when we draw conclusions and make assumptions based on cognitive factors rather than the evidence before us. We like to think that we are rational creatures who weigh up all the evidence before pronouncing our verdict, but this is not the case. As Dan Ariely author of Predictably Irrational describes, “We think of ourselves as in the driver’s seat, with ultimate control of the decisions we make – but, alas this perception has more to do with our desires – than with reality.”
This is confirmed in the works of Daniel Kahneman, Amos Tversky, and Richard Thaler.
So question for the FMA - do you think Robo-advice will increase or decrease consumers' tendency toward cognitive bias?
Personally, I have no issue with the concept of Robo-advice as many investors will, at some stage, require the intervention of qualified, personal (i.e. human) advice. But I would be interested in the FMA view of cognitive bias and Robo-advice platforms.
I'm more interested in how the biases, cognitive or otherwise, of the people who build the robots will be managed.
Cognitive bias is a concept familiar to many Funds Managers, so while some Robo-advice designers may be subject to cognitive bias, others will be developing algorithms to exploit consumers' cognitive biases.
As stated, I have no problem with the concept of Robo-advice, but the question of behavioural and cognitive bias is surely an issue requiring some open consideration.
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