Australian Stock Exchange All Ordinaries Index 10 Years

Why paranoia is the best strategy for the Australian Financial Services Industry

Andy Grove, a tech industry visionary who bet the company (Intel) several times, passed away this week — on March 21, 2016. He’s most commonly remembered for his “only the paranoid survive” quote.

The phrase is actually a part of a longer statement:

Success breeds complacency. Complacency breeds failure. Only the paranoid survive.

Grove also said:

Not all problems have a technological answer, but when they do, that is the more lasting solution.

Those two statements should be resonating loudly in the minds of the financial services industry in Australia. I’m sure that they already go to bed with the sound of #fintech ringing in their ears, and pray that it will be gone tomorrow. But unfortunately they awake the next morning to yet another scandal to add to their reputation headache.

Groves is right now more than ever — only the paranoid of the Australian financial services industry will survive. Here are two reasons why — lack of value, and the rise of the robos.

Brokers and superannuation funds rent extraction

The plot above of the ASX All Ordinaries Index shows that it is at the same level today as 10 years ago. Let’s consider Baby Boomers who were accumulating the final tranche of their retirement fund over that time:

  • They have all had large amounts invested via share brokers and financial advisors and superannuation funds in the Index or strongly correlated to the index. These intermediaries have directly extracted tens of billions of dollars in fees which means that on average the Boomers have lost money. They would have been far better off to have invested in fixed interest deposits.
  • The Australian Stock Exchange itself has indirectly extracted billions of dollars in profit paid to shareholders from these same investments as yet another rent-seeker in the chain of people with their hands in the savings of the Boomers. When asked recently about why the backend processes were so slow and complicated the CEO of the ASX said that “There has been very little innovation in the post-trade services that operate around the world for the better part of 20 years”. In other words we willingly operate a 2nd rate service but gladly charge you top rate fees — thank you Boomers for your generosity!
  • The Boomers have also been discovering in droves that the life insurance which they had been paying for, recommended through a cosy relationship with their financial advisor or superannuation fund in return for a kick-back, has been a pure scam and rip-off. The annual cost has risen to a point where they cannot afford it, yet they have a 20+ year life expectancy. So they are letting their Life Insurance lapse in record numbers, and the life companies are feeling the pain. The companies have lived on the Boomer’s money for so long, providing nothing in return, that their complacency reached all time highs. Now they’ve taken a bit of a tumble, but the Boomers have lost their all of their 20 or 30 years of premiums for a big fat ZERO in return. The poor reputation of the industry and the calls for enquiries and investigations into unethical practices in life and health insurance add to the general public perception of being ripped-off.
  • Finally — fees. When a group of UK pension fund managers visited Australia to seek insights into how the massive Australian Superannuation Industry was run they were quoted as being shocked by the complacency, the lack of innovation and the high fees. Point blank they said that they learnt nothing. The Australian superannuation industry is a $2 Trillion business with revenue of $280 Billion — one of the largest in the world — yet fees have been double what smaller funds e.g. in the UK, say are reasonable.

The whole financial services industry does not smell of roses, and is particularly on the nose with the Boomers. Boomers have not only felt but now seen too many others living off their retirement savings and giving nothing in return.

It would be foolish for any financial institution to not take this perception into account in any and all of their brand promotion and marketing. And it would be foolish to not be paranoid. The Boomers will be around for another 20 years, and the Boomers children can see how their parents have been ripped off.

How does the #fintech win? By offering simpler, faster, more transparent, more agile, more personalised services which are integrated into your lifestyle and have far fewer people between you and the end product and have (secure) open interfaces to your other prefered financial and lifestyle providers and apps.

People are looking for alternatives and even though history has shown that Australian customers are particularly apathetic it may be foolish to bet the company on this continuing into the future.

The Robos are coming

The second quote from Groves says that when technology takes over a task then it stays entrenched. One of the most vulnerably industries for “robot” automation is the Australian Financial Services Industry.

The industry has been living on high margins, has been slow to invest in innovation, and has a relative lack of competition — mostly oligopolies — which has inevitably led to complacency.

Robos will attack on two levels in Australia:

  1. The “low end” jobs which comprise tens of thousands of financial services workers. These will be eaten by the rising “API Economy”. They will be automated out by flexible agile combinations of cloud-based processes one of which will be AI (or cognitive processing and analytics). Because of the particular state of the Australian industry, as noted above, the impact will be greater than in more innovative, efficient and competitive markets. Count at least 50% of current jobs gone by 2020.
  2. “High end” jobs such as top traders and analysts will also be attacked by the robos and a large percentage eliminated. There is a good incentive here because these people earn too much. These robos are not the “API robos” but the Deep Learning robos. People developing these, and deploying them today, see a significantly smaller workforce.

In addition there is a middle level of robo-advisors who will displace thousands of zero-value-add “financial advisors” who have had their hands in the Boomer’s retirement funds for the last 20 years.

Personally, I seriously believe it more than possible that by 2022 80% of Australian Financial Industry jobs will be fully automated — jobs gone.

As Groves warned, these technologies will become entrenched, and only the paranoid of the Australian Financial Services Industry will survive.

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