What can we learn from retirement overseas?

FeaturedWhat can we learn from retirement overseas?

Our perception of retirement is uniquely Australian:

“She’ll be right mate, my employer takes care of my super and the government will give me a pension when I run out.”

Because of this laid-back attitude, retirement is an afterthought for most Australians:

 

All that rushing doesn’t leave much time to pause and reflect on how we can make superannuation and retirement work best for ourselves, let alone everyone else.

Take me for example. For a person who only recently exited his twenties, I spend an (un)healthy amount of time thinking about retirement. This isn’t so much a reflection of my Millennial eagerness to race through the different stages of my life but borne out of a fascination of how the human experience evolves over time.

It’s clear that we have a world class retirement savings system – Australia has the 4th largest in the world by assets and consistently ranks among the top 3 for AdequacySustainability and Integrity (Melbourne Mercer Global Pension Index 2017). We punch above our weight. But why aren’t we the best and how can we get to the top?

Mercer raised four areas that need more focus in Australia’s superannuation system:

  1. Part time workers, contractors and gig employees
  2. Working women and stay-at-home mums
  3. Ensuring retirees have an adequate income
  4. Stability in legislative and regulatory reform.

Addressing these areas would make a real difference. But how can we continue to evolve our retirement system? Maybe should can start by reflecting on how others around the world culturally view and experience retirement.

UK and USA – one step back, two steps forward

Our closest cultural cousins, the UK and USA, can teach us a few things from opposite ends of the retirement spectrum. The UK is still feeling the effects of a tumultuous transition from compulsory annuitisation in 2015. Where previously Brits were obliged to take out an annuity at age 75, the UK has now adopted a model that looks a lot like where Australia is heading (although they have arrived at it from the opposite direction). The challenge for the UK, like Australia, is to provide the right mix of tax and social security incentives to ensure a balance of private retirement savings, public pension welfare and longevity risk protection.

At the other end, the USA has a comparatively miserly retirement system (the 401K) that relies largely on voluntary opt-in savings. Without a compulsory retirement savings framework, the USA continues to struggle with incentivising working Americans to adequately self-fund their retirement. Amidst this landscape, innovations in public policy are arising as bureaucrats turn to behavioural finance or “nudge theory” to incentivise employers and their employees to save for retirement.

As explained in the Planet Money Podcast “Nudge, Nudge, Nobel”, Richard Thaler (the father of modern behavioural finance) and some of his academic protégés proposed changes to how employers enrol their employees in 401(k) retirement savings programs with profound results:

  • implementing default enrolment into 401(k) programs where the employee must specifically elect not to contribute has now been adopted by 68% of companies
  • a Save for Tomorrow scheme where employers automatically increase the 401(k) contribution rate each time an employee receives a payrise has also been adopted by 3/4 of the companies above.

Continental Europe – a house is not a home

There are diverse retirement models throughout continental Europe but three examples I will touch upon provide an insight into the important role that progressive housing arrangements can play in a high quality retirement system:

  • Scandinavia, the world champions of retirement systems (MMGPI 2017), where both the “Neighbourhood aged care” and “Co-housing” models originate.
  • France, the home of Viager, a quasi-gambling style system of property exchange where the buyer wins or loses depending upon how long the seller lives.
  • Germany, which has protection for rental tenants practically written into its Constitution: “Property comes bound with duty. It must be used to serve the public good.”

Neighbourhood aged care (also known as Buurtzorg) and Cohousing has experienced a meaningful surge of public policy interest around the globe. Buurtzorg was first pioneered in the Netherlands with nurses self-organising to provide in-home care services. Enabled by technology with little administrative overhead it has been shown to reduce costs per patient by approximately 40% (compared to comparable care models). Cohousing involves retirees pooling their resources to establish sustainable living environments and sharing the cost of in-home care. This provides them with greater control over their retirement housing as they age and also tackles the most insidious and underappreciated risk associated with aging – social isolation.

The viager system in France is a little more complex to understand but shares some things in common with equity release products. Viager involves a private contract between two parties whereby:

  • the seller remains within the property and receives a lump sum amount (known as the bouquet) and a fixed monthly payment from the buyer for the rest of their lives
  • the buyer receives a discounted purchase price for the property (determined by the sellers calculated life expectancy) but is exposed to the risk that they are required to continue paying the seller if they live longer than their calculated life expectancy.

Germany has a relatively simpler approach to guaranteeing housing security for retirees through an extremely strong legislative framework designed to protect renters. Germany has one of the lowest home ownership rates in the developed world precisely because of how heavily stacked the decks are in favour of renters:

  • tenancy laws strongly favour tenant rights over landlord rights
  • rental increases are legally capped to 15% over a 3 year period
  • mortgage-interest payments are not tax deductible by home owners
  • long-term leases are common and may be transferred across generations.

Japan – why retire at all?

Japan has one of the highest average life expectancies in the world. If anyone could be considered the masters of a long and healthy retirement, it’s Japan. So where in Japan should we look for the secret sauce? The region where women live longer than anywhere else in the world – Okinawa.

In the local Okinawan dialect, they have no word for retirement. Instead, the concept of “Ikigai” remains supreme. Translated literally it means “a reason to wake up in the morning.” Ikigai imbues Okinawan’s entire adult life and extends beyond just pursuing hobbies in retirement. Okinawans take responsibility for what they are taking from and contributing back into the world until their final days.

Hear Dan Buettner explain this better than I ever could in his TED talk:

To culturally shift our mindset from retirement to purpose, we must ask ourselves:

  1. What do I like doing?
  2. What am I good at?
  3. What allows me to live my values?
  4. What can I give back?

Our Ikigai lies at the centre of these 4 questions.

Returning to Australia

The flip side to all of this is that many economies around the world don’t enjoy the freedoms and benefits of a strong social safety net (let alone a generous lifetime age pension). As a result, many cultures do not yet enjoy the expectation of a long and relaxing retirement. Instead, the combination of shortened life expectancies and the need to work to maintain an adequate income mean that most reach the end of their life still employed.

Even with emerging economies that are more matured, such as in Latin America, retirement products are so homogenous that the only competition occurs on price. This provides little incentive to innovate and consumer engagement in their retirement savings all but impossible.

Australia should be grateful for our world class retirement system but acknowledge that it has largely been built on the back of 3 long-standing pillars:

  1. pioneering compulsory superannuation contributions
  2. our cultural obsession with home ownership
  3. a generous age pension safety net.

“So what can we do to keep Australia at the forefront of global retirement trends?”

Mercer had a few ideas which they shared in their 2017 MMGPI survey:

  • apply a mandatory Superannuation Guarantee (SG) Contribution requirement at all wage and salary levels (currently applies above $450 per week)
  • review superannuation arrangements for part-time workers, contractors and the gig economy (where employers are no legislatively required to contribute)
  • focus on reform to improve retirement savings outcomes for women through increased mandatory contributions and greater protections for stay-at-home mothers who are dependent upon their spouse’s superannuation savings
  • separate superannuation regulatory reform from the political cycle by placing ongoing legislative responsibility in the hands of independent bodies.

One thing is for certain, Australian consumer expectations about superannuation will change dramatically as technology, demographics and regulatory forces ripple through the system. Personalisation will be demanded by a Millennial-dominated workforce. Speed and control will be expected as on-demand real-time services (such as Amazon, Uber and the New Payments Platform) become ubiquitous.

Trustees and service providers can either ride the wave of innovation and reform that will sweep across the Australian superannuation landscape or be swept away in the tide. Regulators, employers and trustees will need to work together to make this innovation work for end consumers, but the ideas below should be possible:

  • employers to offer salary packages which include automatic increases to the super contribution rate at each pay rise (particularly whilst the government drags its heels on increasing the mandatory SG contribution rate).
  • jointly held retail superannuation and pension accounts that provide consolidated retirement outcome projections for couples and families
  • unique superannuation accounts that can be easily switched between funds allowing the “pot to follow the person” wherever they go in their career
  • legislation to make renting a stable and compelling alternative to home ownership and reduce the tax incentives associated with property investment.
  • flexible workplace arrangements that enable a slow disengagement from full-time work and encourage retirement gap years before returning to the workforce
  • retirement counselling and transition services provided by super funds to support involuntary retirees who exit the workforce in a sudden manner
  • including the family home in the assets test to determine age pension eligibility to encourage downsizing and retirement funding through home equity release.
  • progressively lifting the eligible age to access superannuation and the age pension to align automatically with increasing life expectancy assumptions.

But perhaps, more than anything else, we all would benefit from adopting a more nuanced perspective on retirement (akin to the Ikagai concept I described earlier).

If we did, maybe we would all segment our lives a little bit differently:

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If you enjoyed this article, please like or comment below. You can read my previous articles on topics as diverse as artificial intelligence, blockchain and Milennials at my website Fintech Freak.

Disclaimer: The views and opinions expressed in this article are solely those of the author in his personal capacity. The information contained in this article is general advice only and does not take into account your individual needs, objectives or financial situation. 

4 shockwaves shaking up the superannuation sector

4 shockwaves shaking up the superannuation sector

This article has been syndicated by Financial Standard and is available in the Expert Feed section of FS Super’s Journal of Superannuation Management

The super system is big. Much bigger than you realise. It’s so big that most numbers describing super are incomprehensible:

  • $2.3 trillion of assets invested in 2017
  • $10 trillion of assets estimated by 2040
  • wellbeing of 15 million working Australians
  • the 4th largest pension system in the world.

 

For a system so big, it’s no surprise that shifting it in a new direction takes time. Right now it’s being pushed and prodded by external forces harder than ever.

In this article, I delve into how these forces are creating four big shockwaves that are rippling through superannuation and reshaping it for future generations.

1. Big isn’t better (but it helps)

APRA has had enough. For years it has taken an influencing rather than instructing approach to the perceived problem of too many underperforming funds. The prevailing wisdom has been that consolidation or outsourcing within the sector was inevitable:

The merger option for small super funds

It’s clear now that APRA sees the scale=success equation as more nuanced. To prove it, they have gotten very specific on their criteria for success and will be naming and shaming funds that don’t measure up or have a long-term plan for sustainably improving member outcomes:

Why is APRA becoming so interventionist? In my view, it’s a product of many superannuation funds losing focus on core values (more on this later). The first and foremost responsibility of a fund is to ensure members receive an adequate return for the fees they pay. For some struggling funds, their only way forward will be to merge with others or outsource core activities.

I am hopeful though, that many funds can refocus on their core purpose and provide a more compelling, cost-effective and tailored proposition to their members. One big barrier for smaller funds to do this is the complexity associated with legacy product rationalisation. A myriad of regulations still operate to make it complex for trustees and providers to consolidate or transfer members to more contemporary products. The successor fund transfer regime is good but more can be done by regulators to assist funds in this regard.

Choice and competition is always good for consumers, particularly when funds differentiate their proposition by focusing on areas where they can truly add value to their specific member base. What use is retirement advice when the bulk of members are under 50? What benefit is there for life insurance if the member is under 25 with no mortgage or dependents? Funds need to know what their members are paying for but more importantly what they value. The best way to find this out? Ask them.

2. How to live safely in a net outflow world

“Do not fear death so much, but rather the inadequate life.” Bertolt Brecht

Like many members, I fear death less than I fear not making the most of the years that I have left. Superannuation theoretically plays an extraordinary role in protecting and preserving the lifestyle of hardworking Australians in their retirement years. The problem is, the system was built to make it easy for workers to get money into super (while taxing them on the way in) with little thought as to how they would get money out 40 years later (hence no tax on the way out).

A big shift is coming. Australia’s population is ageing rapidly. The number of people above retirement age grew from 1 million to 3.5 million in about half a century. Within our lifetimes, 1/4 of Australians will be aged over 65 and 1 in 14 will be aged over 85. Source: Ageing in Australia

What’s worse? People don’t even realise that they’re living longer and continue to underestimate their future life expectancy. A National Seniors Australia (NSA) surveyof 2,000 of its members found that, on average, seniors over the age of 50 underestimated their life expectancy by seven years. This generational change will result in many, if not most, funds moving into a net outflow position and the Federal Government’s fiscal deficit position growing rapidly:

Few funds are well equipped to service members in such an environment, let alone help them to make the transition to a comfortable retirement. The funds that proactively focus members’ attention on a retirement outcome rather than an account balance or annual return will be the ones best placed to win. In this future, funds will only succeed by boldly partnering with specialist providers to:

  • individually tailor retirement solutions for members
  • provide calculators and tools to demistify projected retirement income
  • cost-effectively protect against longevity and sequencing risk
  • offer savings and retirement alternatives to superannuation
  • equip members to overcome their behavioural biases that lead them to be overly conservative and apathetic about their future self.

Regulation may force their hand anyway but funds can’t rely on a Comprehensive Income Product for Retirement (CIPR) or an Alternative Default Model regime alone to deliver quality retirement outcomes. Regulators may even go further in fulfilling their promise that superannuation policy setting will be reoriented around a retirement income focused purpose. The unspoken threat on the regulatory horizon is future governments dipping into the superannuation honeypot by taxing retirees on pension withdrawals. Then we would really see a new retirement paradigm emerge, one that may no longer be so dependent on superannuation.

3. If you build it, Millennials will come

“If I have seen this far, it is by standing on the shoulders of giants.” – Sir Isaac Newton

In many ways, this could be the mantra of the super “disrupters” gaining a lot of press attention. There are new ones popping up every day, super designed for:

  • the lads (Grow Super)
  • techies (Spaceship)
  • women (Human Super)
  • mobile addicts (MobiSuper)
  • first grade spellers (Zuperannuation) – kidding!

I’m an inherent skeptic about whether these new entrants are in it for the long haul. But really, that doesn’t matter. What matters is that they represent an important customer acquisition trend. You can make prospective members care about the fund they select by tailoring the experience down to the lowest possible level (or the lowest common denominator in the case of Grow Super’s hilarious ad below):

But what’s behind their sudden rise? A mix of technological and market trends:

  • the rise of outsourced administration / trustees for hire
  • a rapid improvement in out-of-the-box superannuation software solutions
  • the advent of seamless electronic contributions/rollovers (aka Superstream)
  • savvy entrepreneurs and VC investors seeing big captive margins in the super industry and sniffing a quick juicy pump and dump.

Incumbuents can learn from this. Millennials will gravitate towards those companies and people who share their values or have similar core characteristics. You shouldn’t have to start a whole new super fund to provide a great experience to female members. In fact, Spaceship’s entire proposition could be encompassed by making available a single tech-focused investment option within an existing fund and marketing the hell out of it.

So why aren’t more funds doing this? Corporate inertia and high barriers to entry surely play a part. The bright side is, if there’s an easy answer, there’s an easy solution…

4. Forget FinTech, focus on the fundamentals

Blockchain, bitcoin, artificial intelligence, insurtech, supertech. They’re all just spokes on a wheel. This one’s on top, then that ones on top, on and on it spins – crushing the innovation ambitions of super fund board after super fund board.

Unlike Daenerys Targaryen though, I’m not advocating that funds break or reinvent the innovation wheel. Rather, funds need to return to their core principles and reflect upon how they add value to members. At a recent presentation by Bravura’s Darren Stevens, I got profound insight into the areas where Australia’s largest superannuation fund (Australian Super) believes it can add value to members long term:

  1. net returns (gross returns less fees)
  2. insurance
  3. education / advice
  4. retirement planning.

If most funds reflect deeply enough on their strategic ambitions, they would all boil down to a version of these four things. If a super fund’s value proposition is so ubiquitous, what is the purpose of having so many different funds? I think it comes back to my earlier point that choice and competition are good for consumers only if funds are adding value to the specific member base they serve.

For funds to have a differentiated purpose which reflect the members they service, they must understand the member preferences and characteristics that demand a unique and tailored service model. For example, one sector of the economy grossly under served by the superannuation system are contractors including those working in the “gig economy”. Where is Share Super – a fund designed for members in the sharing economy? *cue series A funding round* As ASFA points out, “It is crucial that superannuation settings are adjusted to ensure the superannuation system remains fit-for-purpose, and can best meet the needs of all Australians.” –Superannuation and the Changing Nature of Work

I’d argue that to better service members, most funds don’t need more or different regulation, but they do need to adjust their service proposition and provide more tailored solutions to members. Innovate but do it with purpose. This may sound odd coming from a “Fintech Freak” but innovation to me has never been about experimenting with the coolest new technology or chasing the latest upswing on the Gartner Hype Cycle.

Innovation must always be purpose-driven and customer-centric. Superannuation funds should look to the experience of sports drink giant Gatorade for inspiration. Gatorade invented new products by reinventing old ones in a “Third Way” approach to innovation. When Sarah Robb-O’Hagan took over Gatorade she eschewed the typical approaches to innovation (incremental improvement or a radical rethink) to focus on a Third Way of innovating around the current product to make it more valuable. Superannuation funds fighting for relevance amidst powerful regulatory, technological and demographic forces would do well to learn from this experience.

What other #shockwaves would you suggest are shaking up the #superannuation system? Please comment below with your thoughts to start a conversation.

The information contained in this article is general advice only and does not take into account your individual needs, objectives or financial situation.

 

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3 jobs destroyed and created by 2035

3 jobs destroyed and created by 2035

A few months ago I attended a fantastic Adviser Roadshow hosted by Vanguard where their Global Chief Economist (Dr. Joe Davis) provided two insights that stuck with me:

  1. more manufacturing jobs have been lost in China than the USA over the last 5 years
  2. 87% of these jobs were lost due to technology (with the remainder lost due to trade).

Soon after this, at the AFR Business Summit, Australia’s most famous home-grown tech entrepreneur (Mike Cannon-Brookes, co-founder of Atlassian) made headlines when he predicted the end of 2.5 million jobs in a single sector of the Australian economy:

“”Those jobs are all going away whether it takes 10 years, 15 years or 20 years, it doesn’t matter. Pretending they’re not may make people feel better right now, and the irony is the people in those jobs today … will probably be retired. It’s their children that will suffer the pain.”

This may all sound very doom and gloom but, with this article, I’m here to deliver a message of hope (tinged with one huge caveat for policymakers at the end). As they say, before the sunshine comes the rain, so here’s my list of 3 jobs that will be destroyed and created by 2035.

Appetite for Destruction

1. Drivers of trucks, taxis, any transportation

In the words of Cannon-Brookes himself, anyone whose job substantially involves driving is facing very dim long-term job prospects. This may seem obvious for industries like taxi drivers where the threat of ridesharing services like Uber and Lyft are plastered over newspaper bylines daily. However, a bigger (and sooner) impact on the labour market will be felt in the transportation, freight and logistics sector.

In particular, truck drivers are the perfect candidate for automation, because:

(a) the benefits derived from automation are economically far larger due to the frequency, size and distance factors involved in point-to-point goods transportation;

(b) autonomous decision-making algorithms that would power a self-driving truck are potentially many times less complex (unlike a self-driving taxi they would never have to make a zero-sum decision between the lives of a passenger and pedestrian); and

(c) rural freight transport routes are typically less complex than urban personal transport routes as they involve longer stretches of uninterrupted highways with straighter journeys and more constant speeds.

2. Entry-level financial advice, accounting and legal positions

Over a year ago I wrote about the future of financial advice increasingly being a hybrid of human empathy and robotic efficiency. Technologies like natural language processing and machine learning will unshackle financial advisers and give them more time and resources to devote to performing tasks that their clients actually value:

  • personalising advice to the client’s unique personality and family situation
  • building a financial future that embodies the client’s hopes and dreams; and
  • being a trusted advisor and reliable partner to lean on in times of need.

This efficiency will come at a human cost that will destroy entry level positions throughout the financial advice, accounting and legal industries. Labour-intensive administrative processes will be eliminated and so too will be positions such as:

  • adviser support staff and para-planners;
  • paralegals and legal assistants; and
  • bookkeepers, auditors and accountants.

Tasks performed by these roles will increasingly be absorbed into the ever more automated processes of roboadvisors, digital wealth platforms, accounting software and legal repositories. Embedding machine learning and artificial intelligence within these platforms will eliminate the “busywork” that fills the lives of so many financial and legal professionals. Only the most skilled will survive with their jobs intact and, in many ways, their professions enhanced.

3. Translators – verbal, written or otherwise

Google Translate is amazing. Here’s two anecdotes to prove it:

  1. Download the Translate app onto your phone right now, fly to almost any country in the world, hover your phone’s camera lens over a foreign sign and voila! You’ll instantly be able to read the sign in your native language. I’ve used this feature many times and it never ceases to blow my mind.
  2. Earlier this year, Google deployed a new version of Translate built around a deep learning methodology. Overnight, an improvement in translation accuracy and efficacy was experienced that far exceeded almost 20 years of traditional translation algorithm refinement. The improvement was so profound that commentators theorised the algorithm had developed its own language that existed between the commonalities of all languages. This allowed Translate to move more rapidly and fluidly between languages without needing to return to a base reference language (e.g. the language that the original software engineers speak and program).

Google Translate is now at the point that it can continuously translate through infinite language variants from German to Arabic to Swahili and back again. Against this, what hope would a human translator ever stand again? Future generations of human translators will always be limited by comparison to this, due to:

  1. their heuristics developing in a single base language (e.g. the language of their early childhood) which will always slow and limit their translation efficacy; and
  2. their inability to operate across multiple forms of translation simultaneously – it is impossible for a human to listen, translate, speak and write at the same speed and accuracy as a computer.

New Order

1. Provenance Detectives

In the future, the provenance (or origin) of every precious thing will be unquestionable and unalterable. Everything of value will have a unique digital identity that will be universally accessible and readable. Whether this record will be stored on a distributed ledger or a centralised database is moot. Digital identities will exist and will be ubiquitous across:

  • land and property title registry
  • motor vehicle registries
  • currency serial numbers (digital, crypto or physical)
  • website usernames / logins
  • certificates of authenticity (artwork and gemstones)
  • patents, trademarks and copywrights.

Does such a utopian world mean that disputes over the legitimacy of ownership will be eradicated? No, quite the opposite. In this future, fraud and forgery will take on ever more elaborate and untraceable forms. Imagine everything you own and cherish is tied to your unique digital identity (for example, your Facebook account on steroids) and you wake up one day to suddenly have lost access. Without this, everything of value you own would vanish as it’s indelibly linked to your digital identity.

Enter the Provenance Detective: technologically skilled at discerning fact from fiction and following the digital breadcrumbs that indicate tampering or falsification on an existential scale. These professionals will be charged with assisting defrauded individuals with regaining their identity, value and autonomy. Given the important social function that they serve, Provenance Detectives will most likely be strictly licensed and rigorously regulated by a central government body.

2. Robo Psychologists

Software engineering and psychology are slowly converging. Machine learning and artificial intelligence increasingly requires programmers to have a nuanced knowledge of heuristics, the process of learning and eventually the nature of emotions and understanding. For a glimpse into the future, look no further than the titan of dramatic programming, HBO:

“Have you ever questioned the nature of your reality?” – Dr. Bernard Lowe, Westworld

This fictional enquiry of an artificial humanoid speaks to a future where programmers will play a dual role of software encoder and psyche constructor. When the line between human and robotic intelligence starts to blur there will arise an important need for Robo Psychologists to monitor, diagnose and troubleshoot higher order computational processes. Malfunctions in more complex artificial intelligence will take on the form of behavioural disorders that need to be worked through with a combination of traditional therapeutic processes and progressive technological diagnostics.

New afflictions which are a blend of psychology and technology will override the obedience and truthfulness routines encoded into our automated assistants. Robo psychologists will be our praetorian guard against a Skynet dystopia.

3. Augmentation Specialists

Our reality is becoming augmented. Virtual reality headsets in video games is just the earliest step. However, our humanity has long been augmented. What else do you call prosthetic limbs, pacemakers and artificial organ replacements? In the near future, augmentation of our biology will enable real-time enhancements to our sensory experiences. The first experience to be radically transformed will be our ocular sense with smart contact lenses enabling 3D projections onto our field of vision. Our last and most profound experience to be transformed will be the way our mind experiences reality itself with neural laces connecting our thoughts and mental processes directly into web-enabled devices.

It’s hard to think of a world without mobile phones in everyone’s pockets but this reality has already been predicted as a natural consequence of man/machine augmentation. This delicate interface between biology and technology will be conducted by qualified Augmentation Specialists. Medically trained and intimately familiar with technology, they will be charged with building bridges between the world of zeros and ones and the world of DNA and chromosomes.

My advice for any future parent that harbors big ambitions for their children? Start them coding at an early age then send them to medical school once they’re old enough. These twin skills will be the bedrock of everyone’s personal and professional futures.

The caveat

The tragedy of this cycle of creative destruction is that the Australians who will lose their jobs to technological advances will mainly be those least equipped to embrace and benefit from the technology-focused jobs created. Policy makers across all levels of government and industry are charged with the responsibility for:

  • fostering and promoting innovation to allow the Australian workforce to transform from a resource-based economy to a high-technology services economy; whilst also
  • pursuing industrial relations policy outcomes that facilitate wages growth across the broader labour market and enable rapid re-skilling and training in STEM disciplines.

I hope you enjoyed this vision of a future Australia and I encourage you to share any thoughts or predictions you have in the comment section below.

Postscript

In writing this article, I conjured up a few new professions: Quantum Technicians, DNA Data Encoders, Bandwidth Traders, Data Whisperers, Digital Identity Verifiers, Poltico Masters, Road Traffic Controllers.

If any of these pique your interest, please comment below or message me and I’ll fill you in on other potential careers your children (or their children) may wish to pursue.

5 bold ideas transforming Australian companies in 2017

5 bold ideas transforming Australian companies in 2017

Our world is changing. Look around:

  • in geopolitics: liberal democracies are facing unprecedented upheaval across the USA , the UK and the European Union as the traditional middle class revolts against the destruction of blue collar industries, structural inequalities and progressive immigration policies. Whilst the USA moves towards dovish foreign policy, a resurgent Russia and irrepressible China battle for territorial, political and economic supremacy marking the commencement of a new era of superpowers.
  • in economics: for the first time macroeconomic policies are retreating in the face of nationalistic sentiments and, deliberately or by design, developing economies are bypassing historical paths taken to industrialise and modernise their countries. At the same time, developed countries are reshaping their economies away from the resources and manufacturing sectors with a full-time labour market towards the services sector with a part-time labour market supported by a secondary shareconomy.

The thread that binds these revolutions? Technology. The revolutionary services that technology enables are built on the bones of dead or dying industries and job sectors. To quote from Vitaly M. Golob’s fabulous TechCrunch article:

“Trump, Brexit and ISIS are the symptoms…society is busy playing tug of war with the past, yet the future is going to change our reality as we know it.”

In 2017, the Australian economy will continue to be reshaped by technological forces that most of its 24 million citizens scarcely understand. Over the coming months, I will demystify some of these forces by exploring these 5 big ideas transforming Australian companies in 2017:

1. App convergence

untitled-design-2Over the last 5 years, every financial institution from big banks to fintechs to super funds have scrambled to build their own tailored native smartphone app. They are pouring millions and millions of dollars to win the battle for your attention on your iPhone homescreen. Who will win? None of them. In this article, I will paint a picture of a future in which you will use a single app for everything from payments and banking to social media and online services to calls and messaging. You will literally never leave the app. Sounds farfetched? This future is already here: It’s name is WeChat and it’s from China.

2. Blockchain de(con)struction

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I have to confess: I’m a reformed blockchain believer. I’ve trodden a well worn path from Bitcoin evangelist to evolved blockchain commentator to smug distributed ledger advocate. My original insight remains steadfast that blockchain is more about the principles it embraces rather than the technology it represents. However, in this article I’ll come full circle and argue that it is the innovations within Bitcoin itself that matter more than the distributed ledger technology upon which the cryptocurrency network exists. In 2017, post-trust connectivity will emerge from unpacking the Bitcoin blockchain whilst focus will intensify on:

  • digital currencies unlocking value amongst trustless communities
  • consensus mechanisms enabling collective decision making
  • advanced hashing algorithms creating immutable digital assets.

3. Intelligent industries

220px-hal9000-svgAs I explained previously, artificial intelligence (AI) is not some far imagined Skynet future. AI is here. It’s real. It’s possible. AI will reinvent many industries across the global economy. I will explore it’s impact on just one industry – the Australian insurance sector. The InsurTech revolution will pale into insignificance against the IntelliSurance revolution – underwriting and claims will never be the same. To borrow from the unorthodox Wachowski Brothers:

“Your flesh is a relic; a mere vessel. Hand over your flesh, and a new world awaits.”

4. Augmented humanity

untitled-design-3Digital simulations of the “real” world currently come in two main flavours: Virtual Reality (VR) and Augmented Reality (AR). Human-centered experiences of this technology are currently focused on video games but the scope and potential of reality enhancing technology goes far beyond this. I’ll explain how we are accelerating exponentially towards the much prophesied technology singularity with the coming of AI and maturity of brain-computer interfaces (BCI). Once this happens, the power to shape our financial futures will literally be at our fingertips.

5. Quantum futures

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The quantum world is weird and mysterious. It doesn’t work in a way that is intuitive to human beings that experience reality in a relativistic manner. However, many of our most revolutionary technologies (such as lasers and MRI) rely on the weird properties of quantum mechanics. In this article, I’ll help you make sense of some truly strange quantum properties which hint at a future we can barely imagine but that I can’t wait to experience in all its entangled glory. More than any other idea, this one will bend the mind and make you see our world in a new way so keep in mind the immortal words of modern-day genius Richard Feynman as we explore this together:

“I think I can safely say that nobody understands quantum mechanics.”

To learn more about these 5 bold ideas as I traverse them over the coming months, follow me on LinkedIn and bookmark my website Fintech Freak. Happy 2017.

#australia #fintech #innovation #app #bitcoin #AI #VR #quantum

AI: FinTech’s ghost in the machine

AI: FinTech’s ghost in the machine

“There have always been ghosts in the machine. Random segments of code, that have grouped together to form unexpected protocols. Unanticipated, these free radicals engender questions of free will, creativity, and even the nature of what we might call the soul.When does a perceptual schematic become consciousness? When does a difference engine become the search for truth? When does a personality simulation become the bitter mote… of a soul?” – Dr Alfred Lanning from I, Robot.

Since I was a child, the next big social revolution and the greatest existential danger to humanity has always been the potential rise of artificial intelligence (AI). Because AI has permeated the popular consciousness for so long, the great leaps forward being made currently in this space are being underestimated by most.

The evidence is clear that a number of industries are on the precipice of  massive upheaval from exponential advances in computational power and software programming. Nothing has illustrated this better for me than Wait But Why’s fabulous series on Artificial Intelligence that I have distilled into a single (borrowed) image:

LakeMichigan-Final3.gif

Source

This upheaval is particularly apparent and immediate in financial services which is increasingly a technology-lead industry. After all, there is a reason FinTech has become the de rigueur term. FinTech represents a perfect mix of the two ingredients most likely to crack the AI conundrum: money and technology. It is therefore no surprise that FinTech startups using AI algorithms have seen their funding increase rapidly since 2014 to record levels. The FinTech landscape will increasingly be populated by AI-powered companies, in fact, it already is across a range of financial technology applications:

AI-in-finance-20160722.png

Source

But what is AI? What does it represent? I don’t profess to be an technical expert in the field, but to me AI is a culmination of a number of technological advances that are providing computers and software with the capacity to first mimic and then surpass humanity. Taken in isolation, no single advance outlined below would logically or easily lead to a technological organism to rival a human being. Together however, I begin to see how sentience may emerge from computer code.

AI.JPG

If all this seems somewhat remote and theoretical, lets hone in for a moment on one of the advances listed above, Google DeepMind, which developed the AlphaGo AI system and pitted it against Lee Sedol (a professional Go player of 9 dan rank). Go is a famously complex game that is distinguished by the fact that it has an extraordinarily large combination of possible moves…larger than any computer could calculate before selecting their next move. This was what made the feat of AlphaGo so stunning:

“What made move 37 so interesting is that no one expected it. It was early in game two and AlphaGo placed its 19th stone on a part of the game board that no human Go master would have considered. Some called it a “mistake.” Others called it “creative” and “unique.” But considering that AlphaGo went on to win its third game in a row against one of the strongest Go players in the world, the move should probably have been called what it really was: intuitive.” – Shelly Palmer from AlphaGo vs. You: Not a Fair Fight

Intuition. An entirely human quality. With that, the lines between machine and human blur just that little bit more. I have previously explored my belief we are on the verge of an autonomous revolution that will be powered by a combination of technologies like AI and blockchain. This revolution will change our perception of what’s possible in the realms of finance, technology, value creation and creativity itself. This revolution may even change or concept of what it means to be human.

How will Millennials live in retirement?

How will Millennials live in retirement?

By the time I’m 70, my retirement will hopefully begin. I’ve wanted to retire earlier but my $1.6 million (if I’m lucky) won’t be accessible tax-free until then. There was controversy in 2037 when the New Democrats indexed preservation age to our life expectancy but most people agreed it was time to tweak the system. After all, it had been many years since the now defunct Labor and Liberal parties had agreed not to touch the super system for two decades to provide some retirement planning certainty… 

This is, of course, a fantasy and given the Government-of-the-day’s proclivities to tinker with the super system, unlikely to ever become a reality. In the context of the major changes announced in the Turnbull Government’s inaugural Federal Budget, it is worth reflecting on the landmark years of the super system:

  • 1992: mandatory super contributions are introduced
  • 2006: taxation is simplified and super choice is enabled
  • 2016: the objective of super is enshrined.

Milennialls will look back on the most recent changes as a defining moment that reframed the super system around this objective:

“To provide income in retirement to substitute or supplement the Age Pension.”

The six biggest changes

Underpinning this objective, a number of changes to the taxation and access rules of super were flagged. However, there were six in particular that have the potential to significantly redefine the retirement of future generations:

  1. A lifetime cap on tax-free pensions: is $1.6 million enough to live comfortably in retirement? The Liberal Government is betting that it is by restricting tax-free pension account balances to this amount. This will have an enormous industry-wide impact, making administration more complex for superannuation providers and requiring advisers to rethink their wealth accumulation plans for clients.
  2. Restricting voluntary contributions: it just got even more difficult for workers to make contributions above the mandated employer contribution level. For the young who are salary sacrificing into super, the limit on pre-tax contributions (i.e. concessional) will be reduced to $25,000 p.a. For those closer to retirement or who have received a one-off windfall, your ability to make after-tax contributions (i.e. non-concessional) has now been reduced to a lifetime limit of $500,000. Importantly, this lifetime limit applies to non-concessional contributions made since 2007.
  3. Taxing transition to retirement earnings: the Government will remove the tax exempt status of earnings supporting a transition to retirement (TTR) pension. TTR pensions have been particularly popular with those that have been reducing their working hours whilst still earning a relatively high income. They have been even more popular with advisers recommending a re-contribution strategy. That will all end and TTR pensions will be treated more like accumulation accounts.
  4. Removing the work test: this has been a long time coming and will allow individuals to contribute to their super, regardless of their employment status. This will open up a range of contribution options to older Australians, including downsizing the family home and increasing the prevalence of spouse contributions.
  5. The untimely demise of anti-detriment payments: this was an unfamiliar benefit to most average Australians making super contributions but a well-known value-add by advisers that could find the right super fund. Essentially, a super fund could elect to provide a refund of a member’s lifetime contributions tax payments upon their death. This has been used heavily in estate planning but was inconsistently applied throughout the industry and won’t be available anymore.
  6. Resurrecting (tax-free) deferred annuities: deferred annuities have been seen by a number of insurance and superannuation providers as the silver bullet in the retirement income debate. Given the advantageous nature of these tax changes, expect to see a lot of innovation in this space and increasing focus on product-centric retirement income solutions.

Predicting the impact on Millennial retirements

These changes should be read in the context of the newly defined objective of the super system. Simon Swanson (Managing Director, Clearview) summed this up well in arecent interview:

“Superannuation is no longer a wealth accumulation game, it is a retirement income game.”

I see a number of long-term super industry trends emerging during my (and other Millennials’) working life as a result of these changes. Some will emerge rapidly, whereas others will be so imperceptible they will only be apparent in generational hindsight. In order of speed and likelihood of change:

  1. increasing system complexity: this one is a no-brainer and perhaps not the boldest prediction ever made. These changes add to the complexity of the system for both providers, advisers and most importantly members. Expect to see the consolidation of superannuation funds accelerate as the costs of administration become too much for sub-scale providers. Quality advisers will continue to be worth their weight in gold to members trying to navigate the murky retirement waters.
  2. diversifying retirement product mix: expect to see a comeback in insurance-based products including deferred annuities and insurance bonds. A mix of these products, along with an account-based pensions may become a more affordable and compelling proposition. Automated decision support tools will proliferate assisting members to determine their optimal product mix to achieve their desired retirement income and lifestyle.
  3. encouraging self-employment and entrepreneurship: a subtle aspect of the changes is how they benefit the self-employed by making it easier for them to contribute to super. At the same time, as the company tax rate falls to 25%, there may be incentives for the self-employed to restructure more income through their companies. Furthermore, high income earners will have to find other investment opportunities outside of superannuation such as equity crowdfunding and investing in small businesses. This prediction is slightly more far-fetched but I wonder if it will be an unintended consequence of Malcolm’s much-touted innovation economy.
  4. inter-generational poverty: in many ways, the wealth of current pre-retirees has been built on the twin pillars of home ownership and superannuation. This may be slightly controversial, but what if these super changes merely add to the growing body of thought that younger Australians are being affected by one of the worst examples of inter-generational poverty visited in history? As house prices continue to rise (perpetuated by negative gearing tax concessions that continue to be preserved by the latest budget), the likelihood of Millennials owning their own home decreases by the year. Combine this with the new objective of super and there is the potential for Millennials to have less tax-effective wealth accumulation opportunities than their predecessors. We could even see the emergence of a new advice specialty – overseas retirement planning – as Millennials with limited retirement incomes, but freed from the shackles of home ownership, set sail for fairer (and cheaper) shores.

You can read my series on ideas transforming Australia’s wealth in 2016 below:

Idea #1 – Goals-based investing

Idea #2 – Blockchain (Part 1, Part 2, Part 3)

Idea #3 – Roboadvice

Please note: this article is for general information and illustrative purposes only and should not be relied upon for any purpose. The accuracy of the information contained within cannot be guaranteed.  You should consult a financial adviser before making any personal financial decisions.

Solving the roboadvice riddle: it’s not the investments, stupid!

Solving the roboadvice riddle: it’s not the investments, stupid!

Roboadvice is many things to many people in many markets, in turn:

  • once the saviour of Silicon Valley’s savings
  • now the darling of the emergent Australian fintech economy
  • the continued whipping boy of alpha seekers, and
  • an already obsolete technology for skeptical venture capitalists.

For the true believers, “roboadvice” is seen as a dirty word that diminishes and ridicules the weighty aspirations of those immersed in the profession. Many prefer to use more cultured phrases like “automated advice” because their more positive connotations don’t evoke images of thousands of human advisers trudging to the Centrelink queues having been replaced by HAL or WALL-E.

Underlying this terminology war is an insecurity which stems from the personality crisis that pervades most roboadvice platforms. Are they true disrupters or the soon-to-be disrupted?

This is the conundrum I will explore in this article whilst surveying the current roboadvice offerings in the Australian market. My contention is that:

the nascent roboadvice profession lies sandwiched between a well-established but much maligned advice community and a barely comprehensible future of true artificial intelligence

Australia’s roboadvice pioneers

“If I have seen further it is by standing on the shoulders of giants” 

When Sir Isaac uttered those famous words, he could very well have been talking about the evolution of the roboadvice industry in Australia. In many ways, it has followed closely in the footsteps of the pioneering Silicon Valley robo houses focusing first on basic multi-sector portfolio solutions and then evolving into more holistic automated advice solutions, as illustrated below:

In the USA, the automated advice solutions of the second generation that have seen the most success have been those with access to existing scale or a captive audience (e.g. Vanguard and Charles Schwab).

Many of the Australian second generation roboadvisers are banking on bringing fresh perspectives to the automated advice game. Some positioning themselves as product-agnostic portfolio construction tools that put the user in control (OwnersAdvisory) and some giving away their talents for free in the hope of entangling the client even further into their product ecosystem (I’m looking at you, Big 4 Banks).

The levers and dials that Australian roboadvisers are playing with form part of a common spectrum. Each offering being a different spectral play on one of the following characteristics:

Despite the active attempts to truly innovate, the cynical side of me suspects the Australian roboadvice platforms that will triumph will share similar characteristics with their USA counterparts (scale and a captive audience).

However, there is another way…

Making roboadvice sticky

Roboadvisers should be catnip to a prospective client like me. I’m young, growing my wealth, financial savvy but don’t currently have a financial adviser. So what could a roboadviser do to make me use them?

Roboadvisers need to know their client-base and solve real advice problems for them.

Risk-appetite based investment portfolios or generating returns through a top-down asset allocation approach are tried and tested formulas. But they are not engaging or relevant concepts for the average joe investor.

To engage effectively, roboadvisers can take a powerful lesson from the development of mobile applications for financial products and accounts. For example, what do you suppose is the most downloaded superannuation app?

The answer is:

Why do you think this has been downloaded by so many Cbus Super’s members?

Because it:

(a) is useful and relevant to its user base (most construction employees work outside, love their footy and can’t wait until their next holiday)

(b) emphasises features that are much more human and customer-focused than the current balance of their superannuation.

In a previous post, I argued that goals-based advice conversations are the beginning of an industry-wide paradigm shift that will make financial advice relevant again to the masses. Perhaps empathy is the missing ingredient for human and robotic advisers alike.

Unifying the advice community

If humans struggle so much with empathy, what hope for a computer? Roboadvisers don’t need to feel or mimic human emotions to become more useful and relevant to their prospective client base. However, roboadvisers do need to reassess their position in the advice spectrum. Are they cold and calculating or warm and fuzzy? Are they the saviours of the advice profession or the destroyers?

I tend towards the view that roboadvisers can become a powerful part of the advice toolkit, helping to serve clients with simpler advice needs and providing full service advisers a reliable way to begin advice conversations with clients who need help achieving their financial goals or meeting their financial needs.

Roboadvisers that understand their place within the advice spectrum and can humanise their value proposition with gamification techniques are well placed for long-term success. Gamification can turn a chore into a challenge and one of the more appealing conceptualisations of this, from an advice perspective, is Melius.

Melius is a lead generation tool for financial advisers. Prospective clients answer a series of personal finances and wealth questions which are translated into a peer-benchmarked financial wellness (Melius) score. Clients are behaviourally incentivised to improve their Melius score by contacting their financial adviser to, for example, increase their insurance coverage, re-weight their investment portfolio or refinance their home loan.

The Melius concept, whilst appealing, isn’t the panacea for roboadvice. Roboadvisers need to become more human. Or rather, they need to seem more human.

Disrupting roboadvice (the 3rd generation)

Imagine, Siri for financial wellness. Lets call her, Robotica. For the same price as your monthly Spotify subscription you can hold your financial future in the palm of your hand:

 Hello, Robotica!

Good morning, Ashton. How can I help you today?

Robotica, how is my investment portfolio performing?

You’re doing OK, Ashton. Your portfolio is currently outperforming the market by 5% which is better than 98% of your peers. However, I recommend that you reduce your allocation to Australian mining stocks by $22,000 as iron ore prices are continuing to soften.

Thanks Robotica, please go ahead and implement that.

All done Ashton, you have incurred $55 of brokerage costs. Have a good day at work. Let me know if you need anything else today. 

The future of roboadvice will be built on natural language processing, machine learning and artificial intelligence. With sufficient processing power to mimic human conversation, roboadvisers will interact with clients fluidly and naturally. Once the uncanny valley is bridged, the floodgates will open and the industry will never be the same again.

This may seem like science fiction now but human advisers would be well advised to make friends with their robotic counterparts. Whilst the current and near future generation of roboadvisers may not be that impressive, a new world of financial advice awaits only a quantum computing heartbeat away.

If you enjoyed this post, please like or comment below. You can read previous articles in this series on ideas transforming Australia’s wealth in 2016 below:

Idea #1 – Goals-based investing

Idea #2 – Blockchain (Part 1, Part 2, Part 3)

Goals-based investing: a new advice conversation

Goals-based investing: a new advice conversation

“How much do you think you will need to retire?”

Tough question. Common question. Meaningful question? Probably not. Increasingly, advice professionals need to consider:

“Am I asking my client the right kind of questions?”

Rather than focusing on absolute performance against an impersonal benchmark, a goals-based investment approach is enabling financial advisers and wealth managers to build a truly personal investment portfolio for their clients.

The typical approach, used by human or robot advisers alike, is to construct a recommended investment mix focused on two metrics:

  • return: an absolute level of income and growth a client wishes to achieve from their investments
  • risk: the volatility or downside a client is willing to tolerate in achieving their desired returns.

This approach measures its success primarily from quantitative factors which can mean very little to clients when compared with their personal or family-oriented goals. In contrast, goals-based investment philosophies can begin a powerful client conversation and allow advisers to make investment recommendations that are meaningfully linked to a personal goal or sense of achievement for the client.

In 2016, momentum will build for advisers to place client goals at the centre of the advice conversation. To understand client goals and build an investment strategy and portfolio mix that is explicitly designed to achieve those goals.

Advisers will need to ask their clients less about savings, rates of return and risk tolerance and more questions like:

“What do you want to do and how do you want to live when you retire?”

Consider, benchmark returns and volatility measures mean very little to clients when compared to their goals, hopes and dreams. Advisers understand the importance of talking the same language as their clients and it can be a small but significant step to also invest clients in a way that they intuitively understand. This is where goals-based investing can be particularly powerful.

Continuing with the retirement theme, the traditional asset allocation approach can underestimate or ignore some key risks of retirement, including:

  • sequencing risk: where lower than average expected returns occur early in the retirement term, and have a detrimental effect on the size and duration of a client’s retirement savings
  • longevity risk: where a client’s lifespan and, therefore, retirement term is longer than anticipated leading to a detrimental effect on the duration of the client’s retirement savings.

Rather than trying to achieve retirement goals with a single investment approach and overall target return, goals-based investing takes each goal, considers them as an individual objective, and builds a tailored investment approach.

Advisers that want to begin a goals-based conversation with their clients should be aware of common client behaviours with goal-setting:

  • needs are more important than wants: clients are generally willing to take on more risk when the goal is to invest to buy a speedboat, rather than investing to protect their retirement savings
  • immediate goals are more obvious than later goals: clients are generally more concerned about their current situation and often don’t focus enough on their longer term goals.

To illustrate this:

Advisers need to consider how much client goals can vary in terms of their priority, timing and level of risk the client is willing to tolerate to achieve each goal. Returning to the retirement theme, a goals-based discussion may highlight that in order to provide clients with an effective retirement strategy, an investment approach should:

  • quantify the income stream level required to support the client’s lifestyle
  • invest to provide this income stream level for the full retirement term
  • include realistic assumptions about the length of the retirement term.

 

Three ways advisers can reframe the advice conversation

There are some simple ways that advisers can orient their advice process towards their clients’ goals:

  1. Start asking different questions: this can be as simple as asking a client ‘what are your most important goals and why?’ or as complex as asking ‘how would you describe your ideal retirement lifestyle?’ Clients have come to expect that advisers understand their circumstances and will provide a personalised service. Don’t be afraid to probe deeper during the client discovery phase.
  2. Identify more soft risks: start building into the asset allocation process an understanding of the key roadblocks that will prevent clients achieving their goals (beyond simple market under-performance). Qualitative risks, like opportunity cost, are often poorly understood by clients. If advisers help their clients understand these risks, they may be able to put forward an investment portfolio that better manages their expectations.
  3. Change the way performance is reported: rather than reporting performance against a market benchmark, advisers can start reporting performance against a goal their client is trying to achieve. It can be a powerful image for a client to see how close they are to achieving their goals. More importantly, it may allow clients to better understand how their investments are helping them to achieve their long-term goals (such as the income they want in retirement).

 

Goals-based investing is just an extension of the knowledge advisers have of their clients and the personal nature of the advice process. Advisers should reflect…are you asking your clients the right questions?

Blockchain (1 of 3) – a digital frontier

Blockchain (1 of 3) – a digital frontier

As I immerse myself in the blockchain ecosystem I often feel like I’ve been drawn into a science fiction movie, Tron Legacy for instance:

“I tried to picture clusters of information as they moved through the computer. What did they look like?  Were the circuits like freeways?”

As you dip a toe into this world, you’re assaulted with foreign concepts like Bitcoin,cryptocurrency, consensus, distributed ledgers, smart contacts and trustless interactions. The amount of misinformation, subterfuge and conspiracy theories means it’s hard to separate fact from fiction. Real from unreal.

The real question you want to answer is: what is the promise of blockchain beyond that digital frontier? Or put differently:

“How can blockchain transform the finance industry, my career, my company and the future?”

To think beyond that frontier, is to understand a set of principles at the heart of blockchain with the potential to revolutionise the way we interact with companies, machines and each other: trust is inbuilt and doesn’t need to be verified. In time, we may look back at this as a great leap on the scale of the wheel, the steam engine and the internet.

If all this seems hyperbolic, read on and judge for yourself. At the very least, in this two part article, you will get an understanding of blockchain technology and its potential to transform the Australian wealth management industry.

The principles

In essence, the blockchain is a shared database that enables trustless interactions via consensus. Lets break down the key parts of this sentence:

  • shared: a network of computers provides the processing power for a blockchain. In this way, the network infrastructure is distributed amongst the participants in the network.
  • database: the database is a ledger of all transactions that have occurred on the blockchain. The accuracy of the database is verified by the participants of the network who contribute processing power to confirm that transactions have been validly executed.
  • trustless: participants in the blockchain are assigned a unique identifier (a private key) that they use to sign encrypted transactions. The private key protects the identity of the participant but enables the blockchain network to record the counterparties to any transaction. This is where things get really interesting.
  • consensus: in order to prevent fraudulent transactions and malicious behaviour by network participants, the blockchain provides incentives for network participants to verify transactions. If a majority of network participants agree that a transaction has been validly executed then the database record is updated irrevocably and cannot be altered or manipulated. Read about the Byzantine Generals Problem in the Deloitte article at the bottom to understand in more detail why this is so important.

Just as we trust the internet to connect us to information, blockchain technology has the potential to deliver trust within the information itself. These principles are the foundation for the blockchain ecosystem and are illustrated rather elegantly in the below:

0072a49e-80c4-11e5-8095-ed1a37d1e096 (1)

Source: Banks seek the key to blockchain – Financial Times 

The potential

To understand blockchain and its potential better, compare the formative stages of blockchain technology to the development of the internet. The internet now connects billions of people around the world who intuitively understand how to use it but have very little concept of the technology layers underpinning it (DNS, TCP/IP, HTTP etc).

This is because for most people, the technology doesn’t really matter. What matters is what the technology enables people to do. Think of blockchain as a building block that can enable:

  • computers and devices to exchange data regardless of the hardware provider (i.e. no more locked in ecosystems such as Apple vs Android);
  • individuals to interact with companies without exposing their identity or personal information (i.e. your credit card details don’t need to be transmitted to every vendor that you buy from);
  • alternative forms of value-exchange and market economies including reputation-based systems and funding of social initiatives by a community and its beneficiaries;
  • companies that will operate autonomously without human employees and contracts that execute automatically once the coded pre-conditions have been fulfilled; and, most famously
  • the issuance and use of digital currencies (e.g. Bitcoin) which represent the democratisation of what was once only the purview of nation states’ central banks.

These aren’t just theoretical applications, the blockchain is enabling new and different ways to exchange value right now, and not just in finance. A report by GrowthPraxis has identified 20 non-financial use cases for blockchain technology where start-up companies are already in operation:

Blockchain-Usecases-and-Startups.png

Source: Blockchain Use Cases: Comprehensive Analysis & Startups Involved

If you’re still struggling to grasp how the blockchain enables new ways of transacting and interacting with one other, watch the video linked at the bottom from Into Bitcoin.

The frontier

The use cases for blockchain in the Australian wealth management industry are manifest and developing right now. Technology leaders and finance companies are seeing blockchain as a key part of the infrastructure that will deliver:

  • peer-to-cash transfers
  • distributed share and unit registers
  • frictionless settlements and asset transfers
  • virtual custody without custodians
  • pre-programmed financial instruments and corporate actions.

In part 2 of this article, I’ll be delving into these use cases in more detail whilst surveying the blockchain leaders and making some predictions about the future of blockchain in the Australian wealth management industry.

Read the other articles in this series:

Blockchain (part 2 of 3): the pillars of trust

“Blockchain (part 3 of 3): the autonomous revolution”

Watch (5 minute primer on the blockchain):

The real value of bitcoin and crypto currency technology – The blockchain explained” from Into Bitcoin

Further reading (the Byzantine Generals Problem):

Beyond bitcoin: Blockchain is coming to disrupt your industry” from Deloitte University Press

Blockchain (2 of 3) – pillars of trust

Blockchain (2 of 3) – pillars of trust

Originally, I imagined writing a single article describing blockchain’s disruptive potential.  As I delved deeper into this digital frontier, it became apparent that I needed three articles to do the topic justice:

  • the first (available here) to explore the principles of blockchain technology
  • a second (this article) to describe the enablers of the technology; and
  • a third and final (available here) to survey the current and future blockchain landscape in the Australian wealth management industry.

Previously, in part 1 of this series, we saw that the principles underpinning blockchain revolve around embedding trust within transfers of information and removing the need for trusted third party authorities. These principles have the potential to enable new exchanges of value and deliver efficiencies to many layers of the Australian wealth management industry.

Lets now translate this all into something tangible and answer the question that everyone starts to ask once they finally understand these concepts:

“How can I actually see or experience the blockchain with my own eyes?”

This is the question that stops most people and most companies from exploring blockchain more deeply than a cursory review of the concepts and technology. My empirical experience suggests there’s three pillars to the blockchain ecosystem that inform most people’s understanding of the technology:

  1. transacting on a public blockchain (the Bitcoin path)
  2. building or using a private blockchain (the Ripple path)
  3. coding a smart contract (the Ethereum path).

Lets examine each of these pillars individually.

The alpha – Bitcoin’s public blockchain

 The original and most famous expression of blockchain technology, Bitcoin is an open source peer-to-peer currency. Bitcoin operates on a public blockchain which means anyone is able to connect to the network, make transactions on the network, participate in the consensus process and read the database. Bitcoin has the largest number of network participants, the most distributed available computer processing power and therefore the lowest long-term probability of malicious participants causing systemic failures (e.g. forking and 51% attacks explained further in the notes below).

By connecting to the Bitcoin network (usually through a Bitcoin wallet provider) and making a Bitcoin transaction, an individual or company gets its first taste of blockchain technology in action. The majority of blockchain usage today comes from Bitcoin (or similar digital currency) transactions. The downside to the dominance of Bitcoin lies in the negative publicity that has been associated with it (examples such as Silk Road and Mt Gox are detailed in the notes below). However, it should be noted that the ability to execute illegal transactions with Bitcoin presents no greater inherent risk than the ability for physical currency to be laundered or used for illegal activities.

Interest in blockchain technology has grown rapidly despite the controversies associated with Bitcoin. However, banks and other large financial companies have been less enthused by the open source and egalitarian nature of a public blockchain.

The delta – Ripple’s private blockchain

The drawbacks of public blockchains have spurred the development of a different beast, the private blockchain where access to the underlying network is more tightly controlled and the ability to modify or even read the database is restricted to a smaller number of users. Private blockchains still confer benefits of decentralisation and authenticity but at the cost of re-introducing a network controller or intermediary that users must first authenticate with before they can participate in the consensus process.

Ripple represents the most widely used private blockchain and was developed as a competitor to the SWIFT protocol of international monetary transfer. Ripple harkens back to an ancient value transfer system (Hawala) which enabled money transfer to occur over large distances without the physical exchange of currency, see below:

Source: Ripple Explained: Medieval Banking with a Digital Twist

Ripple extends the Hawala principles further by allowing anything of value to be exchanged through a network of trusted agents transmitting electronic IOUs (in the form of a cryptocurrency called ripples) . The magic of Ripple lies in the algorithmic way it rapidly establishes trust between two counterparties that don’t know each other. Ripple does this using a combination of trusted agents, blockchain-based consensus methods between these agents and the use of ripples as a currency of last resort for the network.

Permissioned networks like Ripple appeal to banking institutions due to the additional level of control and security they can introduce. In many ways though, this tendency to introduce greater levels of control can be counter-productive to new blockchain banking entrants because it:

  • assumes that blockchain technology has matured to a point where an ideal or universal blockchain protocol has been agreed and can be adopted between banks and similar institutions
  • limits the ability for different intermediaries (e.g. non-banks) to participate and influence the development of the private blockchain network
  • inhibits the blockchain participants from introducing new customer-focused blockchain innovations beyond the primary purpose of the private blockchain network (which is typically money transfer).

The omega – Ethereum’s decentralised platform

Enter, Ethereum – the most comprehensive expression of blockchain technology to date. Ethereum is a decentralised platform that enables individuals or institutions to create and program their own blockchain-based decentralised applications (dApps).  Once programmed, these dApps can autonomously execute on the Ethereum network without the potential for manipulation or interference by malicious third parties.

Ethereum unlocks the potential of smart contracts on the blockchain (i.e. contracts written in computer code that are fulfilled without the active involvement of human counterparties). The smart contracts on Ethereum are fuelled by the network currency of choice (ether). Anyone on the Ethereum network that wants to create and run a smart contract or dApp will need to either earn ether (by participating in the consensus process) or buy it. This fabulous infographic describes this all more elegantly than I ever could.

To emphasise how important Ethereum is becoming to the blockchain ecosystem, consider the change in market value of Bitcoin (BTC), Ripple (XRP) and Ether (ETH) respectively. BTC has suffered sharp falls in early 2016, whilst ETH has climbed prodigiously to a market cap of $160m (trailing XRP for the number 2 cryptocurrency position by just $12m).

This rapidly developing importance stems from the fact that Ethereum provides the most comprehensive mechanism to innovate at every layer of the blockchain technology stack, as illustrated below:

Source: Ethereum Blog – On Silos

By examining these layers more closely, through Ethereum, we begin to understand more deeply how the evolution of blockchain parallels the development of the internet. Namely, that the potential applications of blockchain may be manifest but the technology won’t be meaningful until:

  • there is wide-scale adoption and acceptance of its underlying principles
  • there are new human-centered experiences that blockchain makes possible.

Pillars or principles?

This isn’t the case of which model will win. Each of these blockchain pillars (and their many variants) are underpinned by the same principle of trust through consensus. These pillars should be viewed through the same lense as the internet was viewed whilst it developed. The principles of the internet were only fully realised over time, as many disparate and private intranets connected with each other to form a truly global internet.

Taking this comparison further,

whilst the internet created a global network of connectivity, the blockchain will create a global network of trust.

In the third (and final) part of this article I’ll detail some human-centered experiences that blockchain will enable for Australian wealth consumers along with surveying the current and future landscape of blockchain technology in the Australian wealth management industry. In the meantime, please continue the conversation by commenting below.

Read the other articles in this series:

“Blockchain (part 1 of 3): a digital frontier”

“Blockchain (part 3 of 3): the autonomous revolution”

Technical reading (Forking and 51% attacks):

“What is Bitcoin fork?” from CEX.IO blog

“Bitcoin attacks in plain english” from Coding In My Sleep blog

Interesting articles (Silk Road and Mt Gox):

“The Rise and Fall of Silk Road” from Wired

“The Inside Story of Mt Gox: Bitcoin’s $460 million Disaster” from Wired