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Podcast Transcript

Episode 36, Season 1

How Hugh Robertson won the AFA Adviser of the Year in 2018


Wade Matterson: [00:00] The demographic changes that the market’s going through, there’s just ... There’s going to be more demand for advice than there ever has been, particularly with the baby boomers moving increasingly through retirement. The challenge in terms of [inaudible 00:00:18] future themes-

Fraser Jack: [00:18] Hello, and welcome to the Goals Based Advice Podcast, where I have conversations with pioneers of the new world of financial advice. I’m your host, Fraser Jack. I want to thank you so much for tuning in today. A big shout out to all the feedback and reviews that I have received so far. If you’re enjoying this podcast, please help me spread the word and share with your friends and colleagues, and leave me a review on iTunes or whichever platform you use to access the podcast.

Fraser Jack: [00:50] I’d also like to thank our supporting partner, Advice Intelligence, for powering this podcast. Check out adviceintelligence.com. In this episode, I chat with Wade Matterson, who is heading up the Australian office of a global actuarial firm called Milliman. So what do actuaries have to do with goals based advice, I hear you asking me? Well, Wade’s a little different. He’s interested in understanding human behaviors, so that advisors can help their clients understand how their behaviors make a big difference in achieving their goals. Wade believes that delivering clients a goal likelihood or probability, will give them the certainty that they need to anchor their behaviors. We chatted about advisors having the ability to call on big data, and how advisors can understand advice algorithms and technology to get the best outcome for their clients.

Fraser Jack: [01:44] If you’re ready to deep dive into the advice algorithms for the future advice models, then strap yourself in, because here it comes.

Fraser Jack: [02:00] Welcome to the show, Wade.

Wade Matterson: [02:02] Thanks, Fraser. Pleasure to be here.

Fraser Jack: [02:05] Be welcome. Mate, just a quick one: do you want to give us a bit an overview of yourself and Milliman’s, and what you do?

Wade Matterson: [02:11] Sure. I lead Milliman’s Australian business. Have done since 2007, when I moved back from London. So we’ve been in the market now for over a decade, a long time now. And I suppose from the very early stages when we established the business in the Australian market, we’ve been really heavily focused on the retirement sector. In Australia, that’s represented largely by superannuation. As a global business, Milliman obviously is represented across the globe: 3,500 people in 55 different offices. And each office tends to focus on different things, but really when we got back to the market here, given the size and just the importance that superannuation has for the Australian sector and community in general, we decided to dedicate our time and energy to that.

Wade Matterson: [03:13] In terms of what that’s meant, really from the time we started, we began helping our clients and large-scale institutions focus on retirement products, but really over the last few years, that’s morphed now well beyond the guard rails around what products should look like through to actually how is advice given, and how do we better understand the needs of the consumers that we’re attempting to serve.

Fraser Jack: [03:40] More than a decade in the retirement sector here in Australia, that’s a pretty big call, pretty phenomenal.

Wade Matterson: [03:49] Yeah, that’s right. I used to have a full head of hair and no grays, but it’s amazing what 10 years will do to you.

Fraser Jack: [03:57] There you go now. Try to give us a bit of an overview of your journey, because you’re an actuary, but you always don’t appear to me as an actuary. You’re sort of like a normal person.

Wade Matterson: [04:07] Yeah, well actuaries are normal people. They’re just very focused on certain aspects that the average person maybe doesn’t ... I was always interested in mathematics growing up, and then when I left for university in the mid ‘90s now, a very long time ago, I sort of happened across an actuarial consulting firm. So I started what was to be a long journey studying to become an actuary after leaving university and studying something else there. And fortunately, it took me across the globe to the UK for a number of years, and then originally spent a lot of time working with insurance companies, which is what a lot of actuaries will tend to do.

Wade Matterson: [04:53] I think fortunately for me, when I came back to the Australian market and then we started thinking about what the business would focus on going forward, I was in a fortunate enough position that I got to effectively chart a new course. Something that had always interested me was just trying to understand what motivated people to behave the way they did, and how you can help construct financial services and products and solutions that really benefit the original investor. So for me, I always found that human aspect a little bit more interesting than navigating big corporate balance sheets, so [inaudible 00:05:36], I think that’s probably a big reason why perhaps we might come across a little bit differently, because at the core of what we’re trying to do is really all about the end consumer. I think by definition, that makes us maybe come across as a little bit more human than the average actuary, but that being said, we still are very heavily focused on quantitative techniques and mathematics and that sort of stuff, so I think we’re all nerds at heart.

Fraser Jack: [06:02] Yeah, I think you’ve hit the nail on the head when it comes to the idea of large scale, and I guess when you’re dealing with Super funds and Super products, it is always large-scale, and then to actually be able to consider the end member or the end user is a very different skill I guess than just having large numbers.

Wade Matterson: [06:22] Absolutely. And I think that’s where ... As part of these challenges, I think we see in terms of trying to solve some of these problems, so inevitably we ... And I think this is partly the journey that we’ve been on. When we first began working in the Australian market, we did the same thing that many firms like ours have historically done, where we worked with large-scale institutions to help them build financial products, and what we noticed as we started to see that take shape, was product where ... Where we thought product was important, and it is an important vehicle for helping people achieve outcomes, it’s actually not the starting point. The starting point really is around understanding the needs of the consumer, and then effectively ensuring that they get the right type of advice and the analysis that underpins advice is robust.

Wade Matterson: [07:19] If you think about the sorts of problems we’re trying to understand and provide solutions for, particularly, say, around retirement, where you’ve now got people living through retirement, spending almost as much time if not longer, in retirement than they do when they’re working. So it’s fundamentally one of the most complex and challenging problems that as an industry, the financial sector has to try and solve. And consequently, there’s a whole range of things that we need to take into consideration, and the financial outcome and things like markets moving up and down, interest rates changing, those sorts of dynamics, is just one small aspect of the overall retirement picture. And getting to grips with how life changes and what motivates people, and dealing with social aspects in addition to financial ones, makes it a really challenging and interesting problem to try and work through.

Fraser Jack: [08:15] Yeah. I want to drill down a bit more too on this behavioral side of it, because obviously when the advisor’s [inaudible 00:08:23] with the client, a lot of the conversations they’re having and advice [inaudible 00:08:28] markets, but around how the consumers behave around markets, how they behave around their finances, and those behavioral parts. And I know that’s something that is particularly close to what you’re doing as well.

Wade Matterson: [08:40] Yeah, that’s right. I should say, one of the reasons that we started looking at this was again, just from my own personal perspective when we came back from London in 2007. My daughter was six months old, so one of the first things we had to do was go and get our financial affairs sorted out. So at that point in time, I did what most people my age probably did at that point and go and see a financial advisor and try to go through the process to get their assistance in solving those issues. And we were focused obviously ... Because of the nature of my family, we were focused on things like insurance and those types of arrangements at that point in time.

Wade Matterson: [09:26] As we went through that, it struck me that the experience that I went through was really interesting, because you can see as you go through the process, that there becomes so much focus on compliance and all the architecture that sits around the advice framework, that it felt to me ... It almost lacked an aspect of that personal touch that’s really required. And so we started thinking about what would the future look like if advisors tried to navigate this sort of complex world of regulation that they’ve been subjected to, to get back to the core purpose, which was to deliver fundamentally human outcomes.

Wade Matterson: [10:12] As you start to look through that, the investment problem’s a really good example, where if advice has, and it certainly I think has over the last few years been increasingly dominated by the effort that you’re required to go through to maintain a compliant framework, then the amount of true advice that you can deliver around the edges of this becomes quite challenging, because it’s so time-consuming just to keep up with the pure paperwork. And as a result of that, I think what’s happening in some respects is we’ve gravitated towards the things that are easy to communicate, that we can deal with in the short term, so investment returns is a clear example of that.

Wade Matterson: [10:53] And I suspect ... One of the things that we noticed when we set up the business in 2007, if you cast your mind back, the financial crisis wasn’t that far away. After the financial crisis, we certainly encountered the challenges with having that investment story as a real, fundamental core element of the advice proposition, because at the end of the day, advisors are subject, like the rest of us, to the whims of capital markets. And the financial crisis brought that into stark relief, and people obviously were clearly upset with portfolio performance, but if advisors had gravitated to having that investment conversation, then all of a sudden those that did were exposed to the downside of that when returns were very, very poor.

Wade Matterson: [11:41] And so fortunately I think now what we’ve seen is this step away from the investment narrative to something that’s more fundamentally about delivering the end goals and outcomes that clients have. And with that, comes a range of other issues, and in my view, actually [inaudible 00:12:02] creates opportunities for advisors to create a much more valuable proposition for their clients by getting to the heart of the issues that they face, and how they actually achieve lifestyles, rather than focusing on key drivers into that, whether that be investment returns or mortgage rates, or things of that sort of nature.

Fraser Jack: [12:21] Yeah. So that’s obviously [inaudible 00:12:24] think of the idea of that goals based advice piece that I’m so passionate about, and that’s some of the work that we’ve done in the past around goals and how do we link goals and investment philosophies around that ... and draw out those conversations and create a narrative around it.

Wade Matterson: [12:42] Yeah, and I think just on that goals-based advice topic, we’ve seen this now ... I’ve certainly experienced it as we start to talk to advisors on the issues, and I guess we’ve seen as we’ve used this language around goals based or goals focused advice, there’s actually ... Most advisors would say to you, “I’m already a goals based advisor. I already focus on my clients’ goals.” And actually, if you go and research a lot of advice websites, most of them in one way, shape or form will have goals as a central piece of what they’re attempting to do. “We sit down with you, we understand your goals, your hopes and dreams, and then we deliver advice around that.” So I kind of have sympathy that advisors may take umbrage at the use of those types of terms, but what I kind of think, we’re now in this really fascinating aspect of solving, is we’re actually looking now at how we use technology to help advisors better deliver outcomes that are focused on clients’ goals.

Wade Matterson: [13:44] And so that may take shape in a number of different ways, whether that’s using big data to help clients actually articulate the goals that they might have, which was certainly an issue for me when we went to see our advisors. We actually found it very, very challenging and difficult just to even tell them what we thought our financial goals were at that point in time. All the way through to actually helping use smarter algorithms and analysis to understand the implications of different decisions. So if I want to trade off saving for the future versus going on a holiday tomorrow, then it’s hard for me to understand what the implication or the cost benefit trade-off of that might be, but using smarter algorithms and analytics, I can start to contextualize and have a better sense of all these different decisions that I have to ultimately make that will impact my financial journey over a lifetime.

Fraser Jack: [14:36] Yeah, and I we might chat about those algorithms and the idea of using those. It can be a bit of a minefield, actually how you create projections, and how you come with these things. Obviously, I’m a bit ... I’m attacking assumptions to say that ... Just depending on the assumptions, we’ll make a big difference to the outcomes. What are some of the algorithms, and how do we tackle this well, because I know that [inaudible 00:15:03] have said in the past that algorithms and responsible [inaudible 00:15:06] licenses and guys need to understand these algorithms. Do you want to talk a bit more about these algorithms?

Wade Matterson: [15:13] Yes. I analogy I quite often use is I sort of think about something along the lines of Google Maps, right? Really, the similarity between what we do when we are about to hop in our car and are driving to a friend’s house for a barbecue. We type in the address; Google knows where I am at that point in time. I tell it where I want to go, and then it essentially looks at people that are along that journey, and through a combination of leveraging data and algorithms, it can then make recommendations of the most efficient path to get from A to B. And actually, as I’m in the car driving to the destination, if something happens along the way and there’s a traffic jam or an accident, it gives me an update, and may recommend an alternative path.

Wade Matterson: [16:05] What we’re doing in a financial context, is very much the same. A financial advisor is responsible for helping someone construct a financial journey, rather a physical one in a car. If you think about the way that technology, data and algorithms can have a role to play in that, is number one, how do I understand what point B is in a financial sense? And so it might be easier for someone if you’re trying to anticipate where you want to be one year or two years from now.

Wade Matterson: [16:34] If I’m crafting something like a retirement journey, which can be five, 10 or 15 years, it becomes very, very hard. So the way we think of using data in that context is if I can actually look at other people on similar journeys that may look something like me in terms of affluence or location or family composition, but they’re five years older or 10 years older or 15 years older. So that again might be useful just to put in front of someone and say, “Well, here’s what someone like you is doing at different parts of this journey. Now, what do you think you might do?” It’s much easier for someone to dial themselves up or down than to come up with a complete financial journey just off the back of an envelope or on their own.

Wade Matterson: [17:17] The other thing is, once I can get a better sense of the destination, the financial destination of a client, then I can begin to anticipate and run clever analysis to try and understand and make good recommendations on what an appropriate strategy might be today. And if you think about that, like Google Maps is effectively looking at different cars on similar journeys, and trying to anticipate where the traffic jams are, in our financial context, what we need to anticipate is where may markets go, where may interest rates go, where may you have a health event or a change in your lifestyle along the way. And the only real way to do that, is you effectively have to run thousands and thousands of simulations at all the possible combinations of these things. So in an advice context, people will often talk about Monte Carlo analysis, where we run lots of scenarios. We actually tend to think it’s potentially quite a bit more complex than that, because it’s not just investment variables that are changing like returns and interest rates, but it’s potentially things like health events or having to move into an aged care environment.

Wade Matterson: [18:29] It’s all these things that are running in lots and lots of scenarios that allow you to work out well, what is the most likely thing to happen? And then as you think about it now, once you’re working within an advice process, as we monitor and track those things, then essentially the system can potentially update year to year to year, because whilst today I simulate 1,000 or an infinite number of potential market scenarios, in reality, there’s only one that happens. And so as we move closer and closer or further along that journey, then now I’ve got real experience that I can factor in. And then my algorithms and my data will all be updating to give me the next best efficient sort of analysis of the future in a way, so to speak.

Fraser Jack: [19:16] Yeah, so it really is a live financial plan that is continually updating as times change.

Wade Matterson: [19:24] That’s right. And I think that if you think about of the advice process, then there’s going to be a lot of debate about things like robo advice going to take over the world of financial planning, and financial planners will become redundant. And we don’t believe that’s going to be the case. If you’re thinking about just what I’ve described, it’s a highly complex system. All we can potentially do is simulate all these different possible outcomes, and in reality, you then need someone who is able to sit alongside their client and communicate the implications of these things, and potentially take feedback from the client to ascribe greater weight to one versus the other.

Wade Matterson: [20:11] If client comes in, and they’ve got a history within the family of poor health, then you’re going to put more weight on the sort of scenarios that allow for those poor health events to take place than you will for scenarios where everyone remains healthy forever. There’s a huge amount of data that advisors have to add to this process, and algorithms can only go so far. But by the same token, advisors spending time constructing complex mathematical models on the future of investment returns we think is an inefficient use of time, and it’s something that probably ... that an algorithm or an analytical firm like ours can do much better and much more efficiently, which then frees up the advisor to have a more meaningful conversation with their client.

Fraser Jack: [20:58] Yeah, the ... I absolutely agree on the idea that all this is around making the advisor smarter. The advisor tech scenario where you’re actually taking this information, and you’re able give the advisor the tools that they can then translate to their client and actually have that human conversation, and I’m not sure that robos are going to revolutionize like everyone thought it might. I think this is really about making advisors smarter.

Wade Matterson: [21:25] That’s right. And I think it’s one of those areas where for the last few years, we’ve probably focused on the wrong part of the daisy chain, and a lot of the conversation around advice and superannuation has gravitated towards fees and returns: find me the product that is cheaper or has a higher return associated with it. And we’re missing the really crucial dimensions of this, which is we’ve got to talk a lot more about value, and I think we’ve lost the perspective that there’s huge value in advice for people.

Wade Matterson: [21:58] Superannuation and retirement and financial advice is not a commodity service; it’s not like a petrol station where I can just turn up to any petrol station, put fuel in the car and then get an extra 100 kilometers out of this thing. It’s something that has a real fundamental value to your quality of life. And there’s been many, many studies that demonstrate that the people that feel happiest about their lifestyle are generally those that have planned for it, that have had some involvement from an expert to help navigate and prepare for what the future might hold. We need to get back to focusing on the value that advice can create, and how we can enhance that value through the use of smart technology.

Fraser Jack: [22:40] Yeah, and I was saying before about this value conversation, and I remember one of the things that you brought up with me then was around the idea of clarifying uncertainty, is one of the major values that an advisor can bring. About identifying, clarifying, and then being able to model that uncertainty.

Wade Matterson: [22:58] Yeah, that’s right. And I think that’s one of the interesting elements of advice in any context. It was only just the other day I was at a conference, and there was an advisor on stage talking about how they have these conversations with their clients, and the way they described it is effectively, they tell stories to their clients using other clients that they have as a good example, so if I’m trying to talk to someone who’s about to retire, then I might talk to you about a story relevant, that plays to a kind of got [inaudible 00:23:33], been retired for 10 years or 15 ... The challenge with ... That approach is really, really powerful, I guess is the first comment. The challenge with that, is that advisors are human as well, and so if I have a personal view because my parents for instance traveled the world when they retired, then I’ll inject my own personal bias, and I’ll pick the story that potentially resonates with my world view.

Wade Matterson: [24:01] I guess what we think is that how do I actually arm advisors with a much broader set of data, so they can actually sit back and say whilst they may believe X, Y, Z, they can begin to look at information and use evidence in an intelligent way to communicate it to people and actually remove their own bias out of the conversations they have and the guidance they provide. And I think that’s the real exciting thing to me, because if you look across the advice industry, the data in the past just simply hasn’t been available, and now we’re moving into this environment where I can actually get really large data sets that talk to me about the experience that people have in terms of the life they live and how they spend money and what they do with it, and I can begin to think about how I might leverage that to create a bigger base of evidence to justify the advice that I give to clients.

Wade Matterson: [24:54] And the same thing applies to the algorithms, where I have to now talk to people, or they are concerned about what happens when markets correct, or if we were to go through a financial crisis. Inevitably, people want to see what is supporting the advice recommendation that we make, and what is the evidence that we use, and we think things like algorithms and data are just going to give advisors a much richer base of evidence that will help them build trust much more quickly than would otherwise happen as they seek to engage a wide base of clients.

Fraser Jack: [25:29] The idea is that one, a great story, is one person. And you’ve got 1,000 great stories, and you end up with some data analytics across that, and using evidence-based but not just one person, but thousands.

Wade Matterson: [25:44] That’s it. Yeah, exactly. Essentially information has a huge currency attached to it, and we’ve seen this in lots of different sectors, is how can I assimilate information quickly, and that’s really where technology has to step in.

Fraser Jack: [25:59] Yeah. I couldn’t agree more. Now, I just wanted to go back if I can on the uncertainty conversation. Let’s just quickly unpack some of it. I don’t know if we’ve had some conversations in the past, around different types of uncertainty, and then looking at modeling it and those sorts of things. Do you want to just do a bit of an overview of your ideas on uncertainty?

Wade Matterson: [26:21] Yeah. Effectively, what we’re trying to do, the way I kind of describe it now is advice ... Just like life, it’s about managing expectation. So if you think about the way we operate day to day, even in a work environment or in your own personal life, we set expectations with our significant others or with the people we work with or for, around what we’re going to do, how we’re going to do it, when we will deliver things, what time we’ll be home. And then we spend the rest of our time attempting to live up to those expectations and managing and communicating perhaps when we fail to achieve that [inaudible 00:27:05] or when we overachieve.

Wade Matterson: [27:09] And advice is the same. Financial planning is the same concept, it’s essentially we’re trying to establish expectations with people, and then we want to manage and communicate against them. And the challenge that we have when we’re building these sort of financial plans, is that nothing is certain, nothing is guaranteed in the future. So the question then becomes how do we identify the aspects that contribute to uncertainty? What are the things that are going to deviate or create a detour for us away from the plan that we’ve set for ourselves? And as a result of that, typically what you find is we’ll tend to gravitate and focus on the things that are detrimental to the plan, rather than things where we overachieve, because delivering above expectations is always a good thing, but failing to meet them is not so good.

Wade Matterson: [28:00] In that context, there’s a whole bunch of different ways we tend to often think about it; by taking investment returns as an example, one example could be let’s run thousands and thousands of simulations of future market returns, and then look at all the scenarios where we fail to achieve them, and people will talk about probabilities and those sorts of measures. The other thing to contemplate there is probability of achieving something isn’t on its own a great metric, because if I fail to achieve it, then the next question I’m going to ask you is by how much. So if I miss a target by a dollar, it’s very different to missing it by $1,000. So we want to allow for some element of magnitude, as well as the frequency of achieving a particular goal or target.

Wade Matterson: [28:49] The other way that often gets factored in, is people will often turn up in an advice context, and because they’ve observed the way their parents went through a scenario or their own experience, they’ll effectively say, “I want to know what would happen if a financial crisis, for example, happened again.” So we talk about that as stress tests, where you pick a particular event that someone’s concerned about, and you look at what would happen if that event was to take place again. It could be a market crash like I described, or it could be, “My father died when he was in his mid-fifties. What would happen then?” And you run them as discrete events. And then really what you need to do in those environments, is you then need to contextualize it, because in some cases, people will assign more weight to that because they’ve seen it or they’ve seen someone else experience it. And you’ve got to be able to put it in kind of contrast to how likely it might be to happen again.

Wade Matterson: [29:51] There’s a whole bunch of challenges with communicating uncertainty, and then obviously as you start to watch markets unfold, it’s important to continue tracking as well, because situations will improve; we’ll get closer to goals, closer to targets. So the impact that a market correct for instance might have to someone who’s two years away from their retirement date, versus someone who’s in their twenties who’s got 40 years of earning an income and saving and all the rest of it, can be very, very different depending on your personal circumstances.

Fraser Jack: [30:25] Yeah, it’s a pretty complex world that you live in. I just wouldn’t mind getting an overview of the words “deterministic” and “stochastic”. Many advisors out there have heard the terminology, but do you want to give a bit of an overview of those two?

Wade Matterson: [30:40] Yeah. As actuaries, we love to use these sort of complex-sounding terms. But effectively, in a deterministic world, we essentially make assumptions around [inaudible 00:30:54] what investment returns or income, and once we make that assumption, it sticks. The example there is quite often we might assume let’s say, that equity markets will provide eight percent per annum, every year. And in reality we know that markets don’t do that. Markets in some cases will provide a lot more than that, and in some cases provide a lot less. But on average, over a long period of time perhaps, historically it’s been eight percent, so we assume eight percent.

Wade Matterson: [31:24] Generally that’s helpful for very high level things when you’ve got plenty of time and you don’t need to focus on the aspects of uncertainty and variability. And unfortunately we don’t live in that world. We live in a world where what actually happens can be a million miles away from the averages that have occurred over the last 10, 15 or 20 years. When we want to try and capture the variability that happens in some of these assumptions from year to year, then we have to run lots of different simulations.

Wade Matterson: [31:59] And that’s effectively what we refer to as stochastic analysis. In stochastic analysis, we introduce ... We may still have an average return for instance, but we also introduce the concept of volatility. Whilst we might have investment markets averaging out at eight percent a year in terms of return, they might have a volatility estimate attached to that, which means when we put it into the model, in one year we might a 20% return, in one year we might get a -15. And that gives you this real concept of path dependency, where some scenarios look really, really good, and some look really, really bad and on average, whilst it might be eight percent, I can now hone in on the bad ones, and say what would happen to my financial circumstances should a bad scenario take place? Because as most advisors have seen, when things are going well, clients are generally happy, but it’s all of a sudden where we got those downside scenarios where clients are a little bit upset because they didn’t quite understand what might happen in the event that that takes place.

Fraser Jack: [33:03] Yeah, so the stochastic modeling is essentially closer to the real world than the deterministic model.

Wade Matterson: [33:09] That’s right, and look, it’s still an assumption. I think this is the interesting thing, where the definition or the way a stochastic model is set up from one person to another can be very, very different. And so as we begin to think about the level of sophistication that these algorithms need to have, and the sorts of organization that really need to be behind them, it’s one of the reason why we began focusing our time and energy on that, because you want your model to be representative of what happens in the real world. It’s not going to be a perfect predictor of that, but it does mean that the nature of the componentry that sits underneath this thing can be very, very complex in terms of the shape of return distributions or health events or a whole variety of things.

Wade Matterson: [34:02] It’s always going to be an approximation to the real world, but I guess what we’re attempting to do is come with an approximation that has sound science that underpins it.

Fraser Jack: [34:12] Yeah, I’m glad you brought that up, because the assumptions to me have always been a really strange example of why one piece of advice can be completely different to another piece of advice, and that in many cases, it’s just depending on the assumptions, and we’ve seen that with a number of ... some of the big ones that shape their assumptions on greed and predicted great returns, and when that didn’t happen, went under. But these assumptions are massive, and an advisor sitting in an office in a small country town, or even anywhere around Australia, bigging themselves up: “I’m going to be the one that those assumptions are hanging on!”, and which essentially they are ... It’s a huge issue to me that we don’t have a set of assumptions that are going to be consistent across the market or done by somebody that actually knows what they’re doing.

Wade Matterson: [35:00] Yeah, that’s right. Look, and I ... And [inaudible 00:35:01], and the first comment on that is this shouldn’t be the job of the advisor to be even communicating the nature of these sorts of assumptions. Why should a client have to have it explained to them that the assumptions underpinning the investment returns are in this [inaudible 00:35:19] reverting [inaudible 00:35:22] shifting economic model. The term itself is hard enough to say, let alone trying to explain it to a layman.

Wade Matterson: [35:32] I think ultimately, when you’re using these sorts of tools, one of the reason I guess we try to do what we do is so the advisor just has an innate comfort that the numbers that are being used and produced in their analysis are robust.

Wade Matterson: [35:51] The interesting element in all this, is if we do the job of running sophisticated algorithms and leveraging the power of data, if we do that really, really well, the advisor and client never actually knows it, because what you’re doing is you’re giving across ... or you’re creating a huge trust in the analysis that comes through, and then the advisor can focus on the job that matters, which is actually discussing the implications of decisions with the client, and putting strategies in place to help ensure that they achieve the objectives that they set, and that they can go home having received the advice, and they can sleep well at night. And that’s really fundamentally what we’re trying to focus on, and I think that’s the sort of artful balance that we’ve got to meet here, where if we get too bogged down and too fixated on the nature of the algorithms and the assumptions and all this sort of stuff, then we actually over-complicate what should be fundamentally a human process.

Fraser Jack: [36:56] You know, I love the term “artful balance” there. I think it pretty much sums it up. And just the idea of the robustness around these future projections, bearing in mind that they’re never going to be 100% accurate no matter what we do. Hindsight’s always going to tell us what we should have said or we could have predicted, but yeah, just that robustness I think is pretty important. Do you want to give us an overview of what some of the stuff that you’re working on at the moment with regards to ... around the goal achievability type stuff?

Wade Matterson: [37:29] Yeah, so like I said, when it comes to things like goal achievability and smarter algorithms and data, there are a couple of core areas that we’ve been focusing our time and energy on. The first one ... I guess where we’ve actually began our work in this space was building out a sophisticated mathematical modeling to try and effectively run those simulations into the future, and understand the implications of different financial decisions. If you think about what a business like ours has done for many years, we’ve worked with insurance companies and other organizations to help them analyze their ability to match their assets with their liabilities. And financial planning for a household is actually the same type of [inaudible 00:38:18]. We’ve got assets, which we have accumulated over time, and we’re going to accumulate into the future, and we’ve got liabilities, except when we put proper language on them, a liability is just a goal, so a hope and a dream that the people have.

Wade Matterson: [38:31] Really, what we’ve spent a lot of time on is focusing on leveraging the same techniques on institutional users to manage those, to actually analyze the household financial planning challenge. Now, it becomes very, very complex, because you’ve got to take into account multiple goals and objectives, the contribution of things like tax and regulation and social security, and the fact that all these things potentially change over time. We began by building that out, and we start talking about goal achievability. Really, the way we tend to think about it is looking at the robustness or your ability to achieve goals consistently over lots of different scenarios. When we model those sorts of things, we’re allowing for all sorts of changes, whether that’s changes in investment markets, changes in spending behavior, changes in health status, and then we’re looking across lots of different scenarios to then see what happens, what are the key kind of that take place that stop me from achieving goals.

Wade Matterson: [39:34] That’s one element to where we’ve been focusing our time and energy. And then the second part of that that we’ve spent is actually trying to figure out how you help people articulate their goals in the first place. If you think about retirement as a good example, some of the classical approaches to establishing a retirement income target might be we use something like an [inaudible 00:39:58] standard, or we assume that you’ll spend 70% of what you spent while you were working in retirement. Now, as you start to actually look at what actually happens to people and what their spending pattern is by looking at large data sets and banking data and grocery basket information, what you actually find is that as we age, when we’re actually about the mid-fifties, our spending starts to decline. It declines across in aggregate, but in certain areas like health, it actually starts to ramp up.

Wade Matterson: [40:30] We’ve been spending quite a bit of time trying to understand what’s the financial behavior that people have, what drives that, and then combining that with the nature of this high-powered analytical framework, to come up with smarter ways of understanding what are the key drivers that people have and that they’re exposed to that prevent them from achieving goals, or how can they improve their lifestyle by participating in certain types of action.

Fraser Jack: [40:59] Yeah, I think you’re right. There’s a massive part in that of actually setting the goals, isn’t it, with regard to ... And having the ... I guess the calculations or algorithms there and available when they’re setting to goal to understand how much money will I need in retirement, and not just assuming as you said before, the deterministic model, where we just assume that they spend what they spend now, or a percentage of it, and then that CPIs into the future. But actually using, like you said, big data sets to be able to accurately predict what people are going to spend in retirement, and therefore not have to be exposed to [inaudible 00:41:33] over-aggressive investing, just to get them there.

Wade Matterson: [41:36] Yeah, and I think that’s one of the things we ... that’s one of the reasons we start looking at that is, is it doesn’t matter how smart your analysis is, if we make the wrong assumptions, and we set the wrong target up front, then all the analysis that underpins that by definition’s going to be wrong, because we’ve set the wrong goal. So fundamentally, it’s about how do we get better information, and I think this is where if you think about how advisor technology is evolving, it goes well beyond the sorts of things we’re doing for applications that help advisors pull through backing data to create budgeting tools on the up front engagement process. So just getting a better handle on what are their clients spending now, let alone what they’re going to spend in future.

Wade Matterson: [42:18] Essentially, all this technology is, is trying to make the process more efficient and get a clearer picture of what people do with their money, now and later, and then use [inaudible 00:42:28] analysis to come up with better recommendations.

Fraser Jack: [42:30] Yeah, couldn’t agree more. Now, we’ve had a chat in the past regarding risk profiling and the idea of risk profiling being a little bit out of date these days, and really just trying to narrow that down into a goal profiling type of conversation. Do you want to pick up on that conversation we had?

Wade Matterson: [42:47] Yeah. And [inaudible 00:42:47]. It’s funny, I was presenting on this the other week. To me, this is one of the big gaps, the expectation gap that gets created. I think about my own advice experience, the challenge I had with the ... was that we go through this detailed process, and we get asked what our goals are, which is quite a challenging conversation on its own, but we go through that. We provide [inaudible 00:43:14] this rich set of information about our finances, and then we have this perspective that the advisor is going to take all that information, that personal conversation, and turn it into a financial plan to help me achieve those things.

Wade Matterson: [43:30] But actually, what drives the strategy or the investment outcome, is the 15 or 21 questions that I fill in, that ask me how much I know about stocks, that determine what my risk profile is. And to me it kind of creates this disconnect. And I understand why it needs to be done, because it’s fundamentally trying to understand what someone’s tolerance is around investment market volatility.

Wade Matterson: [43:59] But the example I often use, because you think about how that risk profile works ... I might have five different goals, but I get invested in one way, into one investment option. But if you were to start the conversation around my goals, then very, very quickly, you’ll get the sense that some goals are more important than others, and some goals will have much more flexibility than others. If one of my goals for instance was, I want to maintain a roof over the head of my family, and I want to make sure that we’re well fed. And someone asks me how much tolerance do I have on variability on that particular goal, my response would be, “None. I have no variability [inaudible 00:44:37] except on my ability to feed, clothe and house my family.”

Wade Matterson: [44:44] But then if my next goal was, “You know what? I want to go on an overseas ski trip once a year,” and I was then asked, “Well, what flexibility do have on that?”, you know what? If something happens, and I wasn’t able to do that, I would quite happily go to the local camp ground an hour away than go on this overseas trip. Instantly now I have a different goal tolerance on one goal than I do another. But then lumping them all together ... I can’t possibly lump those things together and put them into one investment option. I have to treat each of them independently, and respect the sensitivity that I have to fluctuations in [inaudible 00:45:23].

Wade Matterson: [45:23] I kind of think that the way of the future is we start to think about how we construct strategies and investment options. We’re now focused a lot more down to that goal level, and try and understand what really motivates someone, what drives them to achieve particular goals, and how sensitive they are to changing the nature of those goals. And that should inevitably then be translated into the sorts of advice strategies, products, investment solutions that we offer [inaudible 00:45:53].

Fraser Jack: [45:53] Yeah, I’m a big believer in goal tolerance, and having different goal profiles and being able to do that. What you said there, it sort of reminded me of Maslow’s hierarchy of needs, or [inaudible 00:46:05] Maslow’s hierarchy of goals, isn’t it?

Wade Matterson: [46:07] Yeah. It’s no surprise I think that when I think about that, you’re generally going to find ... It’s kind of an interesting thing, because the challenge within an advice business in the past ... One of the reasons why they probably haven’t pursued this sort of path is they [inaudible 00:46:24] and go. But the challenge with that is that everyone can be different, that all of a sudden, I’ve tried to deliver a model that has the ability to be economical of scale. I can’t simply have different solutions for every single person, because it’s hard to manage that at scale in a cost-effective way. Again, now we’re in this world where technology is going to help us do that, so technology is going to give us the ability to streamline this, to pull out individual goals and actually deliver more tailored solutions.

Wade Matterson: [46:56] To get back to your example there, Fraser, where if you pick up Maslow’s hierarchy of needs, my argument would actually be, you know what? When you get to the heart of it, most people are going to look relatively similar anyway when it comes down to this stuff. They’re going to have a fundamental core set of goals that you know what? They’re non-negotiable. And they’re going to move up a pyramid where different goals are going to fall into different buckets. Some are going to be a little bit more negotiable, and some are going to be even completely negotiable. So it’s just a case of then building an approach that can appreciate I still need to deliver advice at scale, but it’s the way we group goals and the way we then produce solutions to meet those different goal tolerances that’ll be important.

Wade Matterson: [47:38] Inevitably I think, it’s going to actually help advisors justify their value proposition again, because now I’m showing you how the advice I’m giving is linked back to that conversation we’ve had at the outset around what you want to get out of life.

Fraser Jack: [47:51] Yeah, you’re absolutely right. It’s definitely part of the value proposition that advisors are bringing. It’s definitely not just lowest cost versus returns, as you mentioned. Now, tell me about the future; how do you see the future panning out? There’s obviously a lot of changes going on, and you’re talking to a lot of groups around, and there’s a lot of groups moving and changing. How do you see, say, licensing and Super funds and all those things that you see changing over time? And I know you were on stage the other week talking about the idea around specializing, and advisors specializing.

Wade Matterson: [48:27] Yeah, I think it will be interesting. I think certainly we’re in a point of significant change in the industry. I kind of hate using phrases like inflection point or tipping point, but I actually think perhaps more than ever, we’re at that point now. And I guess I’m a bit of an eternal optimist, so I actually think that the opportunity for advice going forwards is immense. If you start to think about the demographic changes that the market’s going through, it’s just ... There’s going to be more demand for advice than there ever has been, particularly with the baby boomers moving increasingly through retirement.

Wade Matterson: [49:16] The challenge in terms [inaudible 00:49:19] future themes, I kind of think of it as obviously we are going to have increasing pressure and focus on fees and efficiencies, so how do I manage to maintain and run my business in a cost-effective way. So people will be looking to technology to streamline their processes, make it more efficient, try and take out some of the manual processing and [inaudible 00:49:44]. There’s a lot that’s going to go on there, and it’s going to continue to go on there.

Wade Matterson: [49:48] I think at the same time, you’re also going to see this increasing focus on value, so how do we justify the value. Part of that will be driven through regulation, so the idea that people will have to opt in on annual basis to advice. Clearly, the incentive there for an advisor is to be very, very clear in demonstrating the value of continually opting into that. A huge amount of technology facilitating that conversation, and I think in that context, advice technology will increasingly move from the back office to the front office. It’ll be something that advisors use in front of their clients in a much more interactive way, effectively to create some sense of co-design of the strategy as well as the ability to sit down and monitor progress, and track your ability to achieve goals.

Wade Matterson: [50:40] In terms of the advice structure and licensing and education, I think the trends we’re going to see, we’re going to see a lot of change in terms of the ownership. I’m not too sure how that plays out. I think there’s a lot of value in the ownership models that we have, but it’s hard to say at this stage what large-scale institutions will decide going forwards. Well, we’re seeing some of that already. I think the demand for advice will mean that ... Advice as a proposition is still relatively powerful [inaudible 00:51:14]. It’s just how do we use the technology that we’ve got. We’ll see new entrants come to the market that can help us do it better.

Fraser Jack: [51:20] Yeah, you shared your story about when you got advice as a consumer, and when you’re chatting to other consumers. What tips would you give consumers around them going to get advice?

Wade Matterson: [51:32] Yeah, like I said, I’m a big advocate for the value of advice. It’s the sort of thing I think does have a substantial place to play, obviously depending on your particular circumstances. Interestingly, my father has been retired for a while now, and he’s in his seventies. But when I first got back 10 years ago, he was in his early sixties, and [inaudible 00:51:57] was getting asked by his mates and friends about people that he’d go and see to help them with their affairs. So it really just demonstrated to me that there are huge gaps out there that people need assistance and access to advice.

Wade Matterson: [52:16] I think from my perspective, advice is a very personal thing, so my recommendation to people whoever you’re seeing, wherever you’re getting your advice, it has to be someone that you innately trust, that you the ability to create a strong relationship with. And it has to be a two-way street, so you can’t really be guarded about it. It’s one of those intimate relationships where a good advisor will know a lot about you, and you have to be prepared to give them access to that, and to ... It’s beyond just the numbers. It’s really down to what it is that you hope to achieve out of life, and unsurprisingly for those good advisors out there, those relationships become very personal. I think if I was to look back on my personal journey, it’s one I think probably regret to some extent, being in the industry. I have never found that advisor, so to speak, and it’s one of the things I do need to spend a bit of time thinking about the ... You tend to let life get in the way, and maybe [inaudible 00:53:31] start to think about it some more.

Fraser Jack: [53:33] Yeah, it’s an interesting one, isn’t it? Because I’ve asked that question a lot, and it generally always comes back to a relationship-based conversation around choosing the right person, the right values, the right ... all those things versus the person who’s maybe the best technical advisor. If you were chatting to young advisors looking at coming through, or maybe into the industry, what sort of tips would you give to those people?

Wade Matterson: [54:05] I actually have spent a reasonable amount of time chatting to younger advisors, and in some respects ... Again, I’m particularly optimistic about the hands that the industry is in in some respects, because generally, they’re obviously hugely enthusiastic, but they’re also very adept at the use of technology. From that perspective, I kind of ... There’s almost ... not a huge amount of advice that I have for them.

Wade Matterson: [54:40] The advice outside of that is almost spend more time engaging with some of the older guys that have been there, done that, and [inaudible 00:54:48] these older advisors with a good history, because I think there’s a huge amount of value in just lived experience, so people that have gone through the war stories and challenging times, and how you deal with clients, because it is a very much a personal relationship-driven business. The technology will be useful, but it’s never going to replace those softer skills. I think that’s the challenge for the younger advisors as they come through, and it’s probably the challenge for the industry. If we do see a lot of the older heads in advice exit because of the burden that things like education standards and just the general evolution of their business takes, then we’re potentially going to lose a huge amount of value just from that social aspect of lived experiences and at the coal face advice that’s immensely valuable to the younger generation coming through.

Fraser Jack: [55:47] Yeah, and what would you say to those advisors now, the ones that are being pressured in a way where they’ve got a lot of great experience, but they may not have the qualifications or whatever it might be, and having to make a few changes. What do you say to those guys?

Wade Matterson: [56:04] Look, I think ... I guess in some respects, it’s hard for me to give them advice. They’ve clearly been around a substantial period of time, and they’re very good at what they do, and you get to a point where there is an additional burden that you do feel as though it’s not particularly justified that you have to go through it when you’ve built up a huge wealth of experience. I guess my suggestion or my request would be to not see them fade out, because I think they have plenty to offer. And whether that’s finding some way to remain involved through giving advice, or actually just to stay plugged into the industry in some way, shape or form so they can transfer some of that shared experience across the advice community.

Wade Matterson: [56:56] I think there’s huge amounts of opportunity. Whether that’s through some of the technology firms that will spring up, or some of these educational groups that will start to focus on how they can help advisors bridge the qualification gap and things like that, I think there’s just this huge [inaudible 00:57:14] amount of experience across the market, that it’s going to be a real shame if it just disappears over the space of one of two years.

Fraser Jack: [57:21] Yeah. I echo that request, as you put it. It would be a real shame. Whatever we can do as an industry to maintain in some way some people that even if they’re not going to be an advisor any more, just maintain their relevance, and keep them relevant to our industry.

Fraser Jack: [57:40] Now mate, last question. We’d better go. What tips would you give yourself if you could go back in time?

Wade Matterson: [57:45] Oh ... Mate, good question. I guess ... Look, I ... [inaudible 00:57:50] I’m the eternal optimist, so I do wonder whether I’d actually give myself any good advice back in the day. I think one of the ... You mentioned that I’m a bit of a different actuary. I am a different actuary; it took me a lot longer than the average actuary to qualify, so it’s one of those things where periodically, I do sit back and go, “Was it worth it? Was it worth it spending over a decade studying after university to get where I am now?” I think years and years before I got to the Australian market, that would have been a question, but since I’ve been here, I find the sort of work we do now particularly rewarding.

Wade Matterson: [58:30] I guess the one piece of advice I would probably give myself that’s relevant to this conversation is actually get my finances sorted out much sooner, and have a plan in place. I think I’m now mid-forties, got a young family, and I still do sit back from time to time and think I could have done better if I had a financial plan much earlier. Fortunately I’m not in a terrible situation, but it is one of those things where the value of getting started early and having good advice and then actually following it through isn’t lost on me, even at this stage of life.

Fraser Jack: [59:06] Yeah, fantastic. Thank you so much, Wade, for coming on the Goals Based Advice Podcast today. Really appreciate your time and all of your experience and wisdom. Thank you very much.

Wade Matterson: [59:16] Right. Thanks, Fraser and I’ll speak to you again soon.

Fraser Jack: [59:20] If you haven’t already, I’d love you to subscribe to the podcast on your podcast platform of choice. And to continue the conversation, head over to our social media channels. We’ll catch you next time.


Disclaimer: This document is a transcription obtained through a third party. There is no claim to accuracy on the content provided in this document, and divergence from the audio file are to be expected. As a transcription, this is not a legal document in itself, and should not be considered binding to advice intelligence, but merely a convenience for reference.