Dressed simply in blue jeans and a San Francisco Giants windbreaker, a subtle smile across his face, Rich Arnold didn’t look as though he was about to blow our minds. But the prolific investor and entrepreneur didn’t hold back in warning of the impending disruption.

“There are now more than 800 startups and tech companies within a hundred miles of here that are focused purely on financial services, and that number is growing,” he told delegates to the Implemented Portfolios Thought Leaders Study Tour, perched on the edge of their seats in the high-rise, Alcatraz-onlooking boardroom.

“Silicon Valley is out to eat your lunch. Software is eating the world.”

Born in the suburbs of Melbourne, Mr Arnold was a pioneer of the Aussie brain drain, first arriving in the Bay Area as a teenager in the early ‘60s, well before the region became widely regarded as the technology industry’s global headquarters. In subsequent decades, he moved back and forth between the two countries many times in a career that gave him a unique insight into both the Australian and American business cultures and their provision of financial services in particular, including a stint as chief of Kerry Packer’s financial services division within Consolidated Press.

Asked whether these disruptors have set their gaze specifically on the Australian market, Mr Arnold said they are truly global in their focus and that the sizeable pool of Aussie superannuation assets makes it a natural target. A noticeable disquiet settled upon the room, even though the delegates represented some of the more innovative businesses in Aussie financial services and are, therefore, arguably more prepared for the onslaught to come than many others.

Fintech developments like robo-advice have moved in Australia from being a headline buzz-term and fear factor to an everyday reality, with a growing number of retail investors utilising automated investment tools and an increasing amount of financial advice businesses incorporating B2B digital advice offerings into their practices. And yet, even though many Australians are already across this particular disruption, the pace at which automation-focused startups are emerging in the US - and the considerable funding they seem to be receiving from a venture capital and private investment market that is bullish on fintech - still requires that advisers acknowledge the parts of their value proposition that are defensible, and those that the digital disruptors will challenge.

Among those 800 finance-focused startups are players that believe they can assist consumers to invest in financial markets, manage budgets, taxes and household finances and create a financial plan using automation and data analytics, thereby cutting out the professional, human adviser.

Having ventured to the San Francisco Bay Area to investigate this very dilemma, the delegates to the IP Thought Leaders Study Tour spent a number of days digesting Rich Arnold’s words of warning and crafting the blueprint for response.

For, while there is no doubt there is a growing community of global tech players seeking to “eat your lunch”, there is also a range of practicable defences open to forward-thinking advisers interested in building businesses that survive and thrive in the fintech age. But as the Chinese military tactician and philosopher Sun Tzu advised, before you can strike, you must first “know the enemy and know yourself”. So the first step is being awake to the trends on the horizon, so that they can be turned to your advantage.

A human proposition

One of the first things that strikes you when faced with a US technology demo or PowerPoint presentation is that Americans do not shy away from value proposition. Many American businesses seemingly place a higher premium on the marketing and branding functions within the hierarchy of needs than their Australian counterpoints do, and have a steely-eyed focus on simple, effective catchphrases.

HighTower Advisors, for example, has condensed its entire value proposition to three keywords: “Culture, brand and platform”.

The “value prop” is repeatable, or so HighTower head of operations Michael Parker tells us, by any adviser or employee working for the New York-headquartered independent financial advisory firm. Similarly, the entrepreneur behind personal finance mobile app startup Levanto Financial tells us his team spent a considerable amount of time debating messaging during the incubation process before settling on “everyone’s household CFO”.

Reflecting on this most recent tour and others to the US in recent years, Implemented Portfolios co-founder and chief executive, corporate development Santi Burridge said financial advisers need to take a similar approach to their own value proposition, focusing on the more human elements of their practice.

“Anything that can be done by software will be, and that includes investment management,” Mr Burridge says. “So for financial advisers the first step will be homing in on that with which the robot cannot compete: the trust element that only humanity can provide.” 

HighTower, a firm that has been at the forefront of the trend away from product-focused, institutionally-owned advice to independent, client-centric advice that is now also underway in Australia, sees the future heading in this more humanistic direction.

Mr Parker’s presentation gave us a glimpse of the firm’s vision of the adviser increasingly taking on a role as financial coach, more professionally akin to those who advise on topics such as physical fitness and psychological and spiritual wellness, rather than investment management – which software can increasingly automate.

For Mark Nagle, director of FinLife FinTech and a vocal advocate of a more behavioural approach to financial planning, this defence is already underway in Australia, albeit slowly. “In terms of thinking in Australia we are definitely getting there,” he says.

“I feel there is momentum around advisers seeing the challenges they are facing and moving to realise that the human element is crucial.”

Indeed, FinLife FinTech is developing technology that specifically speaks to advisers interested in focusing their VP in on this more personal approach in a scalable manner. The company’s soon to be released solution aims to do just that, inspired by this and other study tours to the United States. Although not fintech per se, tour delegate Alisdair Barr of Grad Mentor is also developing tech that could be helpful to advisers on this front. Mr Barr has been busy building the “e-harmony of financial planning graduate resourcing”, using algorithms and personality testing to match high quality grads to growing employers.

In response, delegate Brent Fairhead, managing director of the Lawrence Group in Perth, said his advice practice would benefit from this type of tech, particularly as the trend towards the human aspects of the advice process intensifies.

“Financial planners are going to increasingly want to hire people who have strong soft skills, not financial gurus,” Mr Fairhead says, adding that if psychometric-based tech can assist with this recruitment process, that may create some optimal cost- efficiencies.

For those advisers for whom investment advice and financial product recommendation is a central plank of their value proposition, this focus on wellness and the personal side of the profession may not be the right approach. But the tech entrepreneurs have made clear which side of the spectrum they seek to disrupt, and the evidence suggests they mean business.

Collaborative ‘Narrowcasting’

Like all human sub-cultures, Silicon Valley has its own internal language, with certain words being repeated ad nauseam in meeting after meeting. One of the buzzterms currently trending is “narrowcasting” (as opposed to broadcasting), a strategy of targeting increasingly niche customer bases.

For tour delegate John Hanrahan, chief information officer at Netwealth, the tactic is an interesting new development.

“Quite a few of our speakers spoke about going after very fine slices of markets and it’s all about putting together ‘co-operative syndicates’ to go after the entire market,” Mr Hanrahan explains.

“It has been really interesting to see how these startups are working together to solve problems. Importantly, most of them are not trying to solve the whole problem, [but] solve a piece of it and they collaborate with others.”

Fellow delegate Naomi Christopher, senior manager - brand, at Midwinter Financial Services, also lists marketing to a specific niche, rather than trying to “saturate the market”, as a noteworthy trend discovered on the tour upon which some Australian financial services providers could improve.

Developments in digital media and the use and analysis of data are fueling this approach, allowing entrepreneurs to identify and reach small groups of higher-likelihood or ideal customers and service them effectively by electronic means despite geographical or demographical circumstances.

But it is not only the tech entrepreneurs and their marketers that are adopting a strategy of ‘narrowcasting’. The Bay Area’s more forward-thinking advice practices are also moving to segment their client base closer to their “ideal” client, perhaps inspired by the success the tech sphere had with niche targeting, or perhaps in spite of it.

Sabrina Lowell, COO of San Francisco-based firm Mosaic Financial Partners and a two-time winner of the US FPA’s ‘heart of financial planning award’, introduces us to ‘Kate McKinsey’, a fictionalised avatar that, due to her demographic, socio-economic and life goal factors, reflects the firm’s most desirable type of client. Advisers under Ms Lowell’s management are encouraged to ask themselves “what would Kate do?”, constantly seeking to narrow and perfect their client base for the long-term.

Influential US financial advice commentator Michael Kitces also strongly encourages advisers, particularly those that charge a flat fee for their services, to consider segmenting their clients, saying no to those that do not fit within the ideal model.

Study tour delegate Sue Viskovic of Elixir Consulting says many Australian advisers are already undergoing this process and have been for some time. But, having seen some of the tech being proffered in the US, she says the “digitisation” process in Australia has a long way to go, anticipating that advisers will be able to cut out significant time and cost burdens relating to client servicing and onboarding in the future, should some of the tech solutions seen on the tour make their way Down Under.

Stewart Bell of Audere Coaching and Consulting agrees that US advisers seem to be focused far more on this process of bringing on ideal clients and servicing them in a scalable and ultimately profitable fashion.

“There is more investment going into automating and self-servicing with no loss of client experience,” the tour delegate says. “They are looking at automation at the top of the sales funnel far more than [advisers] are [back home].”

As Silicon Valley’s growing ranks of hopeful fintech unicorns embark on a process of narrowcasting, it remains to be seen just how seriously Australian financial advisers come to be seen as a lucrative niche to target.

The principle of pivoting

Another of this community’s favourite words and activities is to ‘pivot’ i.e. change course quickly following mistakes. Almost all of the entrepreneurs and investors the tour met with spoke of previous failures – almost with a sense of pride – and their ability to then alter the product, service or business strategy, with a steely eye on profitability and, in many cases, getting those precious early investors a return.

For Matt Heine, a tour sponsor/delegate and joint executive director of Netwealth, this buzzterm, and its deeper implications, stood out among the week’s findings.

“In Australia, we say that failing is OK, but if 99 things go right [in a business] and one goes wrong and a meeting is then held, what do you think the meeting is about? The one thing, not the 99,” Mr Heine says. “Until we embrace the notion that failure and mistakes are OK, then we won’t see changes.”

So too has this culture of embracing failure and making swift changes, the need to “pivot and iterate” as so many of our speakers stressed, also impacted more forward-thinking advisers in the US. Whether it be a pivot from an investment-centric business to one more focused on client values and goals, or a pivot from servicing high net worth investors to Millennials, or from a percentage-based fee remuneration model to a flat fee retainer, there is seemingly an acceptance of embracing mistakes and change – as long as it is all done in the name of increased profitability and innovation.

Importantly however, Netwealth’s Mr Hanrahan notes that the great American pivot is rarely an emotive decision but is rather focused squarely on that other prominent topic: data.

“[These entrepreneurs] have put structures in place to measure exactly what they set out to achieve and then they have gone hard after it,” he says. “There is very little gut feel.”

Should the space invaders choose to enter, you get the impression they won’t be too worried about turning around again and exiting should the Australian market prove not to be as lucrative as they imagined. Whether Australian financial services providers and startup innovators will be willing to pivot and iterate when mistakes are inevitably made is less certain.

Funding the future

Silicon Valley is not only home to some of the world’s most innovative technologists and entrepreneurs, but also to their commercial backers. Menlo Park’s famous Sand Hill Road in the heart of the valley is arguably the world’s most concentrated and sought after cluster of venture capital firms. Almost all of the technology companies the tour met with spoke of early stage capital injection being a major factor in their subsequent success. For those that do not secure seed funding from VC or private equity sources, recent changes to the legislative regime governing equity crowdfunding has also opened up new avenues for business-starters.

In addition to capital itself, other resources such as accommodation, workspace and business mentoring can be as precious as cash in this place, leading to the rise of incubators that provide these services to select startups, usually in exchange for equity. Meeting with Envestnet | Yodlee’s Y-Next incubator, which focuses specifically on tech enabled by financial data, including a number designed to be used by a number designed to be used by a number designed to be used by (or to replace) financial advisers, it became clear this roundabout form of capital injection is also key to the levels of innovation in this region. A comparatively more relaxed industrial relations system also plays a role, with many companies utilising unpaid interns – especially in product development phase – in a way that Australian laws no longer generally allow.

Financial advice firms have also been a beneficiary, with an increasing number of private equity firms – including the more established, old school New York- based outfits – are taking stakes in growing, independent, advice firms. Prominent recent examples include Genstar Capital’s acquisition of Mercer Advisors and Captrust’s stake in Parker, Carlson and Johnson.

Indeed, in its early years, HighTower raised upwards of US$100 million in private capital, based on a sales pitch that reportedly had only one slide detailing why the future of advice was independent and not bank- owned. Not only is capital less accessible in Australia but, culturally, few business starters seek such a heavy return on investment burden so early in the development cycle, says tour delegate Amreeta Abbott, CEO at NowInfinity.

“In Australia, it’s not the first thing people think about when they start a business – going to get a whole pile of cash to go and spend on marketing or product development.”

Julian Plummer, managing director of Midwinter Financial Services, says greater capital injection, however, wouldn’t just result in a greater pile of cash with which to develop and market products and services, but also in an important change in mindset. 

"The Australian market tends to take its time with development – it gets to the same point but it takes a lot longer,” Mr Plummer explains. “Aussie fintechs (particularly startups) just aren’t at the stage where they have the capital or resources. Australia is still thinking about the three extra engineers. They need to be thinking about the 200 extra engineers.” In other words, a bigger pile of dough can lead to bigger thinking, neither of which the United States, and this region of its western coast in particular, lacks.

The silver lining

While there are evidently some structural obstacles to turning Sydney or Melbourne into Silicon Valley anytime soon – access to capital, industrial relations, regulation and cultural attitudes towards success and failure among them – the tour delegates concluded there was also ample room for optimism when looking at the Australian advice profession and its use of technology.

For example, tour delegate and sponsor Malcolm Palmer of Joseph Palmer & Sons, reflects that while we were presented with some of the most well-oiled and impressive fintech firms in America, that the Australian innovators present are by no means behind. Indeed, it was suggested that demoing delegates such as NowInfinity, Midwinter and FinLife FinTech were ahead of their American counterparts, particularly as they relate to a less investment-centric view of the future of advice.

On that particular issue, it was concluded many Australian advisers are far more advanced, having been forced – albeit by legislative intervention to some extent – to forge more professional, client-focused businesses some time ago.

On the issue of access to capital, Matt Heine sees the potential beginning of a similar trend with private equity plays slowly emerging, such as the entry of American firm Focus Financial into the market and the high profile acquisitions made by Paul Barrett and AZ NGA.

Moreover, his father and business partner Michael Heine says that having access to too much money – particularly that belonging to other people – can lead to sub-optimal business decisions, arguing that the traditional Australian independent model of private or family ownership can ultimately be advantageous.

However, while there are some promising trends emerging, and some of the more innovative and enabling fintech may already be available to advisers in Australia, all agreed that a slight cultural shift would also be required in order to truly foster a culture of innovation back home.

“I think we do have an issue in Australia that is cultural,” says Brent Fairhead. “But that doesn’t mean we can’t inspire people within our businesses to think a little differently.”

With a growing army of well-funded, success-hungry and globally-ambitious fintech entrepreneurs on the march, Aussie advisers have plenty of motivation.

Correction: A previous version of this article mistakenly referred to Mark Nagle as “executive director of FinLife FinTech”. Instead, Mr Nagle is a director of FinLife FinTech and executive director of Treysta Financial Life Management.