Almost 40% of workers in the United States are woefully unprepared for retirement, with less than $25,000 in total savings and investments. That’s not a huge surprise when you consider that
- 21% of workers with an employer-sponsored retirement plan are not contributing to their plan
- 44% are saving less than 10% of their income
- 33% are not familiar with their retirement plan’s investment options.
Things in Europe and Australia are about as dire. The State of Ageing 2022 suggests England is becoming an increasingly challenging country to grow old in, with pensioner poverty and levels of poor health increasing. One in five pensioners – more than 2 million people – are living in relative poverty in the UK.
It’s a concerning challenge for wealth providers and financial advisors who are increasingly focussing on the wealthiest segments of the population where there’s a buck to be made in personal advice. But what about the bottom 90% of the population where people are urged to
- Raise Savings – Savings rates are the largest hurdle to retirement readiness. Whilst 13% of annual income is recommended the current median savings rate in the UK is 7%. Just over half reported that they don’t know how much they should be saving for retirement.
- Review Asset Mix – build potential for long-term growth into portfolios through investment choices and exposure to various asset classes.
- Revisit Retirement Plan – the longer workers can wait to retire, the more time they have to build retirement savings and the shorter the period over which retirement assets will need to fund retirement expenses.
The reason is that we're bad at imaging our future self
Unpacking cognitive biases help us understand why people defer saving. We overly discount the future, rarely or never thinking 30 years ahead. Many of us rarely even think five years out.
An online US survey of more than 2,800 adults explored how often people think about the future. It found that more than a quarter (27%) of Americans rarely or never think about their lives five years ahead; more than a third (36%) never think about something that could happen 10 years into the future; and more than half (53%) of Americans rarely or never think about their lives 30 years out.
This is backed up by numerous and interesting studies that show we struggle to imagine ourseleves in the future. Our brain acts as if your future self is someone you don’t know very well and, frankly, someone you don’t care about. This brain behavior makes it harder for us to take actions that benefit our future selves both as individuals and as a society.
Some work has been done around the ways in which people treat present and future rewards. Other work has looked into how to transform this intertemporal choice. When the future self shares similarities with the present self, when it is viewed in vivid and realistic terms, and when it is seen in a positive light, people are more willing to make choices today that may benefit them at some point in the years to come. The core of this research shows that the more associated we are with someone, the more likely we are to care and do something to help them. If we cant associate with our future self we are very unlikely to care about them.
Does Open Banking Help Longevity Planning ?
Open Banking presents the industry with great opportunity beyond helping customers get great home loans. If wealth providers can get access to more of a customer’s financial position that should be able to produce some insights into their retirement readinessand a more complete wealth , saving and spending profile.
Yet getting access to this data is hard as it requires the customer to give it up, which is hard. An individual’s consent under open banking must be explicit, fully informed, and able to be time limited or withdrawn, according to the individual’s instructions.It is hard to collect enough meaningful data to create insights until you have first established how you can get enough consumers to give their consent. We know we can do wonderful things with enough data if we can create the conditions under which a consumer can be encouraged to give their consent.
The challenge boils down to some key aspects
1/ Can we provide enough value?
2/ Can we provide enough trust
3/ Do we have or can we build a relationship ?
4/ Can we solve the present bias and build a conenction between currrent and future self?
Moroku’s research and work on creating these conditions these with financial service providers and FinTechs has lead us to conclude how we may do this.
Vulnerable customers feel bad and hopeless enough about their future without spending more time feeling worse and more hopeless. Just positioning the numbers and hoping this will spur people into action by providing some logical insights is insufficient.
The Undoing Project, by Michael Lewis of “The Big Short” fame, tells the story of two Israeli psychologists, Daniel Kahneman and Amos Tversky, and their seminal work on behavioural economics; the psychology of judgment and decision making. When asked about Artificial Intelligence in the 80’s Tversky replied “We study natural stupidity” Whilst a glib one liner for which he was renown, the key message of their work are the systematic errors in decision making we are subject to, brought largely about by our underlying biases. In my mind it’s a better read than Thinking, Fast and Slow by Daniel Kahneman. Either way it boils down to the same problem …
People make decisions and act based on how they feel, not logic and reason. Understanding this is critical to solving the problem of retirement readiness
Thus its very imporatnt to start, not with how people are thinking but how they are feeling and go from there as our post on emotion labelling details.
Research from the MIT AgeLab and Bayes Business School in London suggests making wealth planning fun can make a significant difference in how people respond to retirement planning. Too often, people don’t plan for retirement because it comes across as boring, complex and scary and can’t visualize their future well enough to understand the interplay of numerous concepts. That’s where using game as a design architecture can help.
People want to see how their choices impact their retirement goals and the people that matter to them. They like to see the positive impact of a higher savings rate. They want to see their relative performance. They want to win, and improve their chances of success. As it is the game of life, we are compelled to harness that paradigm. Architecting the user experience as a game, appeals to a broad range of personality types by providing clearly defined rules and rewards, engaging friends and family members and the clear visualisation of progress. This works because we are wired for fun.
There is a real opportunity to shift the amount of attention and effort people put into financial planning by engaging customers in their own retirement planning process, through fun, giving them more control and ownership and by so doing, diminish fear and indecision. By replacing “Ease of Use” with “Fun to Use” as the central design system, it is possible to deliver a fun, interactive client experience that facilitates a more dynamic conversation, a deeper discovery process and closes the gap between now and future by provide reward in the now.
This opportunity is particularly relevant for Gen Y. Although Gen Y is often referred to as the “technology generation,” a more appropriate moniker would be the “connected” generation. Throughout their lives they have played online games to connect, compete and compare themselves with friends (both real and virtual). There’s growing evidence that superannuation and wealth management firms can leverage this mindset to design online gamified wealth management experiences that engage Gen Y around financial planning and well-being.
The approach is also relevant for older demographics, particularly the vulnerable segments who are less prepared and feel that deeply. Building empathy and support within the digital experience to generate some hope and faith is critical if we are to have any chance at scaling general advice into this population. Moroku recommends that wealth providers base any engagement on three key principles:
1/ It’s a journey – We’re not going to turn this around overnight but future customer capture is dependent on it. Take the time to map the journey from start to finish and think about all the things that need to drop for success to result.
2/ Make it fun. Planning to retire is really boring and people don’t want to think about it. Play is essential to life as it is fundamental to how we build social, problem solving and indeed many life skills. When we look at the animal kingdom we find that play is used by every species to build crucial life skills right across the age spectrum and to engage others. We find that we are designed by nature to flourish through play. Research shows us that play is not just joyful and energising, it’s deeply involved with human intelligence, progress, exploration of the possible and skill building. Accordingly there is a strong correlation between success and playful activity. The phsical fitness inudstry has seen massive gains by gamifying the digital experience. This has massive implications for wealth management – If we can make Wealth playful we can drive success.
3/ Digital .When it comes to the how, it’s got to be digital. The business of planning is expensive and resource constrained. Sitting down with everyone is impossible and only really pays off for the wealthy, which interestingly are those that need that advice less.
Engage the Financial Advice Channel
Whilst Robo Advice remains popular in the industry, people still need advice for those moments in life; the significant changes in assets, relationships, busiensses, income and so on. And as life gets more complex to demand for personal advice is increasing at a time when regulations and compliance are driving financial advisors out of the industry and retreating to just looking after the wealthy. By helping advisors scale their general advice business, to be there for clients when they need personal advice, platform providers and wealth management firms can be the connective tissue.
In Australia, advisors have to date only been able to engage in man to man marking with those that have more than $250K to invest which is only 10 – 15% of the population.
Let’s have a look at the numbers. A planner has about 220 days a year to get some work done. Seeing a customer every day isn’t regarded as feasible as there’s too much to be done. If each customer brings in $250K in Funds Under Management (FUM) that should generate about $2.5K in fees, meaning they need 140 customers each which is regarded as a good work load for man to man marking.
| Planner Salary | $250,000 |
| Overheads | $110,000 |
| Total FTE Costs | $350,000 |
| FUM Target@ 1% | $35 M |
| Min Balance | $ 250,000 |
| Required # Customers | 140 |
These numbers are well known and have lead to all those customers who have more than 250K being wrapped up in a wealth advisor relationship. If there is to be any growth in the segment we have to find cheaper faster ways to serve those with less than $250K in FUM and get them saving. The only way to serve them is via mobile and online.
This is why investors are pouring billions of dollars into startups that provide online financial guidance. Some of these companies offer portfolio-management tools in competition to traditional advisors and banks. Although they are startups and have yet to generate substantial revenue or profit, they are fetching lofty valuations as investors view them more like Internet companies than as conventional financial-services firms. Redwood City, Calif.-based Personal Capital, for example, has no branch offices but offers access to human advisers in addition to online account-tracking tools and automated investing. 30% of the more than $1 billion in assets it manages are in accounts of $1 million to $10 million. Other firms, including Betterment and Wealthfront, charge lower fees—or for some small accounts, zero fees—and cut out human advisers almost entirely. Wealthfront focuses on younger investors, with half of its customers under the age of 35. In Australia, Scientiam is scaling general advice for financial planners.
Pension, Superannuation, 401K and wealth management providers must move to mobile with fun, guided experiences because its the only way to grow and if they don’t the Betterments of the world will begin to eat their lunch. They must also find ways of supporting financial advisors with tools to run theuyr busienss and deliver general advice to clients digitally so the financial advisors can be there to support customers when they need personal advice.
The Next Generation of Wealth Management Applications
There are two great quotes in a good article in Forbes for those that are tasked with building next generation wealth management solutions:
- Jason Gurandiano, head of financial technology investment banking at Deutsche Bank AG , “You have a shift from baby boomers to a tech-savvy generation that’s inheriting the wealth and doesn’t have an appetite to deal with a traditional broker at the golf club,” he said. But he added that his 20 years in the industry have taught him that “behavior also takes longer to disrupt than you originally think.”
- Daniel R. Odio was CEO and co-founder of Socialize, Inc. The 39-year-old, who sold his social-media company two years ago, said he often uses Betterment’s iPhone app to add more money to his account. “It’s the gamification of investing. I love the feeling that I get when I use it,” he said.
The global financial services market is undergoing an enormous change brought about by technology that is changing the expectations of customers in terms of how they want, expect and are being served. Lead by Google, Apple, Facebook, Physical Fitness paltforms like Apple, Nike, Fitbit, Strava and Garmin as well as mobile video game companies like GameSpot, Zynga and Farmville, customers expect everything to be available from their smartphones and those services to be always on and be fun.
A report commissioned by Saylent to assess consumer and small business banking preferences, highlighted some key opportunities for those with the foresight and courage to act:
- The large underbanked and millennial markets present a substantial opportunity for customer growth and revenues
- Millennials are three times as likely to report that mobile is their preferred channel
- Financial services companies that differentiate and package products for different audiences, include incentives and rewards for specific behaviors, as well as optimize for the mobile channel, will drive adoption, more effectively serve customer needs and bolster satisfaction and loyalty
While most of us appear to be relatively good at short-term money management, other behaviours are more troubling. These include the lack of active and long-term savings in formal financial products, excessive reliance on credit (including to make ends meet), difficulties in choosing adequate financial products and uninformed financial decision making.
Games bring structure to play. Games define outcomes, rules, behaviours and winning within which to play. Tennis, backgammon, cards and board games are all very examples of how play can be structured and still be fun, sometimes more fun. Games not only bring the fundamental element of play to the table but also introduce the rules, constraints and objectives that define winning and do so in a way that is incremental and evolving. Rather than study a text book or read a website, games give us incremental feedback on guidance as we build skills and are able to take on increasingly complex scenarios and do so at improved speed and accuracy. Sports are very good examples of this. We can introduce children to almost any of the classic sports games and as they get bigger, stronger and smarter, developing skills everyday they are able to compete at a higher and higher level. At Moroku we imagine that the possibilities for Financial Services of harnessing game elements are endless, purposeful and very sustainable.
The Moroku engagement methodology, On Ramp, combines agile, human centred design and game design to think about customers as players, define what winning means, define the problem or opportunity and then begin solution design and validation.
As we look at the customer as a player, question the shape of the game, a host of possibilities arrive as to what the digital insurance experience could be. From these we collaborate with our partners to build applications on top of the Moroku Odyssey cloud platform that manages much of the player interaction before handing off to the back end system of data exchange and transacting.
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