By Lloyd Kavanagh and Tina Xu
First published by LawTalk on 3 June 2016
When MBIE announced it was reviewing the Financial Advisers Act 2008 (FA Act) MinterEllisonRuddWatts decided to take a radically different approach with our submission.
We were concerned that the interests of young working professionals, or “Millennial Professionals”, may be forgotten. So, we formed a focus group of 6 young lawyers to discuss their investment and financial knowledge, financial decision-making processes and views about personalised financial advice.
We discovered three things about this group:
- That their largest asset (and perhaps only asset) is time.This time should allow them to build assets and watch their investments (hopefully) grow.
- They are concerned that they may not be able to rely on the current level of government superannuation support when they retire.
- That the currently available sources of personalised financial advice do not meet their needs.
This third point is interesting. Our Millennial Professionals told us that even though professional financial advice would be helpful, with only modest savings,they believe they are perceived as unattractive clients to financial advisers. Furthermore, these advisors may be unwilling to provide them with personalised financial advice unless they also used other services.
Millennial Professionals embrace disruption
As the rise of personalised financial advice provided by technological means, also known as “robo-advice”, continues to gather pace internationally, it’s not a matter of if, but when, they hit New Zealand shores.
Technology has revolutionised the dating, travel and insurance industries. Undoubtedly automated advice platforms will revolutionise the financial advice industry. In the future, these platforms will access big data or artificial intelligence, providing advice that far surpasses the capabilities of a natural person, for speed, accuracy and cost.
Our Millennial Professionals say they would embrace personalised automated financial advice platforms,if available,because:
- They are early adopters of new technology. They rely on technology for everyday decision making (search engines, navigation), to make their lives easier (uber,air bnb,tinder), to save money by comparing prices (farefinders, online shopping) and to communicate to a wide audience (snapchat, instagram, twitter).
- They trust and understand automated platforms. They believe that automated platforms remove human error, unconscious bias and emotion.
- They like the idea that automated platforms are instantly accessible online and they can adjust variables and easily see different outcomes.
- They are interested in technology that uses big data and artificial intelligence.
- They consider themselves knowledgeable enough to operate, and interpret the advice provided by,an automated platform.
- They consider automated platforms will be less costly. With only modest savings, Millennial Professionals do not want to pay hundreds of dollars for an individual’s knowledge.
Despite these observations, we do not think that Authorised Financial Advisers (AFAs) will become a thing of the past. They will continue to be the preferred option for those with more assets to invest and who want to build relationships with an adviser.
But for Millennial Professionals, seeking the services of a human adviser is not their natural approach and the lack of an online option means that many do not know where to find reliable financial information. Consequently, some instead obtain financial reassurance from friends.
Innovation will require a law change
Currently under the FA Act, personalised financial advice to retail clients in relation to third party category 1 products can only be provided by natural persons who are AFAs. Automated financial advice platforms are limited to providing “class advice”, which by definition does not take into account the client’s particular financial situations or goals.
New Zealand’s financial advisers regulatory regime should support and encourage innovation and most importantly, address the needs and wants of a segment of the market who are not currently being catered for.
Accordingly, we proposed that a new category of “licensed financial advice platform” should be added to the regime to regulate automated online platforms that provide personalised financial advice.
We envision this will be similar to the discretionary investment management service (DIMS) licensing regime where the entity providing the platform will be the responsible body. Platform providers must demonstrate that they have the resources and capabilities to meet their legal, professional and ethical obligations when providing personalised financial advice.
Such a licensing regime should not capture any automated platforms that perform sales or advertising functions or those that only provide “class advice”, as they are already permitted under the current regime.
Where to from here?
Automated advice platforms are an inevitable future and one that resonates positively with Millennial Professionals. However a law change would be needed for these platforms to provide personalised advice.
MBIE’s review provides a catalyst for New Zealand to decide whether it should be at the forefront of this movement and guide the global development of automated advice platforms. Otherwise New Zealand risks losing touch with our increasingly technologically reliant Millennial Professional generation.
Our focus group consisted of 6 lawyers from MinterEllisonRuddWatts, between the ages of 23 and 25 years old with 1 to 2 years of work experience. There were 2 males and 4 females in the group. All of the lawyers currently work in Auckland. 5 of the lawyers were born overseas but grew up in New Zealand and 1 was born in New Zealand. From our experience, our focus group represents the typical demographic of law graduates in New Zealand law firms.
MinterEllisonRuddWatt’s submission on the FA Act is available at: http://www.minterellison.co.nz/files/uploads/Documents/News%20Alerts/Financial%20Services/15952438-1_Financial%20Advisers%20Act%20submission.PDF
Lloyd Kavanagh is a partner at MinterEllisonRuddWatts and leads the financial services practice. Tina Xu is a solicitor in the banking and financial services team at MinterEllisonRuddWatts.