Data, technology and algorithms: Make the right choices or risk being stuck in transit

29 August 2018

Wade Matterson

Wade Matterson is a principal and leads Milliman’s Australian practice. He is responsible for Milliman’s Australian operations, and also supports Milliman’s retirement and risk management initiatives across the Asia-Pacific region.

Technology allowed Uber to redefine the nature of personal transport and sweep aside the incumbent taxi industry. Ever since, people have been expecting financial planning to have its ‘Uber’ moment. It hasn’t happened.

There is no Uber equivalent in the world of financial advice, particularly when it comes to retirement. Ridesharing apps offer a simple, immediate transaction – an effortless way to get from point A to B. But the financial journey we’re on is different. It’s far more emotional and complex, with an aspirational destination that regularly changes.

This trip doesn’t need an Uber, it needs a navigation app like Google Maps. It takes big data, such as road maps and speed limits, combined with sophisticated algorithms to help guide people on their journey. It uses location data to crowdsource real-time traffic conditions and quickly offers better directions to avoid traffic jams.

Why hasn’t this happened in financial planning yet? The fintech bringing together these disparate elements and transforming the world of advice has been held back by several factors.

For one, it’s been easier to use limited surveys asking people about their preferences than to collate and analyse big data showing their real-world behaviour.

But big data is now a reality. It’s not perfect – as anyone who’s been occasionally misled by Google Maps knows – but it’s being constantly refined and getting us closer to our ultimate destination.

Milliman has partnered with a number of industry bodies, including the FPA, to create the Retirement Expectations and Spending Profiles (ESP) service. It incorporates the bank transaction data of more than 300,000 Australian retirees, as well as grocery transaction and property valuation data sets, to reveal the reality of retirement.

It paints a vivid and accurate portrait of retirement and challenges several common assumptions based on limited industry surveys.

For example, many financial products aimed at retirees assume that expenditure rises with inflation over time. The Milliman Retirement ESP shows that the median retired couple’s expenditure falls by more than one-third (36.7 per cent) as they move from their peak spending years in early retirement (65 to 69 years of age) and into older age (85 years and beyond).

This has clear advice implications, given many people fear running out of money and so underspend in their early years of retirement. Many of them are likely to be saving for future expenses that never occur.

The location where retirees choose to live also has a major impact on their quality of life and the savings they need to fund it. The Retirement ESP reveals exactly by how much, by analysing real bank transaction data. For the median 65-69-year-old retiree, their location can affect their annual spend by more than $10,000 a year.

For example, Canberra residents have the highest annual spend of any region in Australia at $38,923, while Tasmanian metro residents spend the least at $28,816. The median spend across Australia was $31,068.

Home ownership

Home ownership has become a hot topic in recent years, as property prices have soared across Melbourne and Sydney before the more recent slowdown.

The Retirement ESP analysis reveals that Sydney-based retirees who rent privately may have to save more than four times the amount of superannuation if they expect to live the same lifestyle as homeowners who own their homes outright. High-quality advice can help Australians prioritise these goals, with a deeper understanding of their impact in the years ahead.

Big data

Big data also provides valuable insights into what retirees are spending their money on.

The data reveals that retirees living in regional areas spend significantly less on health than the national average. It also shows that Canberra retirees spend the most on leisure and travel, while Sydney retirees spend more on insurance than retirees who live elsewhere.

This data can help planners create profiles based on real data, which can be a powerful influence on client behaviour and lead to more tailored retirement lifestyles.

For example, we can assume a relatively healthy, retired client who enjoys travel – a ‘Grey Nomad’ – spends in the 95th percentile of nationwide travel spend, the 50th percentile of nationwide health spend, and the 75th percentile of spend across all other categories.

But if accurate data alone was enough, we’d all still be reading street directories to map our journey. It takes more than information, it takes analysis to make it useful.

Technology and the needs of planners

Technology now allows us to perform thousands of simulations and complex modelling that was, just a few years ago, only available to large institutions. Now this power is becoming available to financial planners and clients – and not before time.

Investment Trends 2018 Planner Technology Report found 94 per cent of 804 surveyed financial planners would switch their current systems to access improved digital tools. The answer, according to the report, is that platforms and planning software providers need to collaborate to meet planners’ rising advice and technology needs.

Advisers and their clients also need to know who stands behind any algorithmic analysis. Trust is in short supply, given ongoing revelations at the Financial Services Royal Commission. Sophisticated financial modelling takes significant resources to perform accurately, which requires a best-of-breed approach, rather than an ad-hoc approach.

Milliman, which has spent decades working with many of the world’s biggest pension funds and insurers to manage their balance sheet risk, is working with a number of local organisations to provide institutional-grade algorithms to power financial advice.

While Google Maps may measure journeys in kilometres, financial planning clients measure it in time. The longer the journey, the more uncertain the outcome, underscoring the need for high-quality financial advice. Technology is the key to make each client’s financial journey smoother, safer and faster.

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