Melbourne fintech startup Clover.com.au is gearing up for the public launch of an automated financial advice platform its founders claim can deliver more consistent returns to investors at a lower cost.
The Clover 'robo-advice' platform uses algorithms rather than financial planners to make investment advice available at a lower price point than would be possible through traditional financial planners.
The startup’s technology is currently in the late stages of beta testing, with a public release expected by early next year.
“Robo-advice is a form of automated investment service that is delivered online rather than through the traditional method of human-to-human interaction between a financial planner and a client,” Clover co-founder and CEO Harry Chemay told BIT.
How it works
“The platform collects some information about the user, we ask them a number of questions to enable us to determine their risk profile, and then we create a recommended portfolio for them.
“If they’re amenable to our recommendations, we can manage that portfolio for them on an ongoing basis. Much of the service – but not all – is conducted through the use of algorithms that look at the portfolio constantly, rebalancing as appropriate and making adjustments.”
While robo-advisor platforms don’t necessarily outperform human advisors in terms of higher returns or lower risk, Chemay claims they can deliver more consistent behaviour.
“Robo-investing has the benefit that the algorithm is not affected by market emotions, and it’s that aspect that is one of the key aspects of [the technology] – the ability to take the heat and the emotion out of investment advice to stick to certain well-constructed rules,” he said.
Work on Clover began in 2014, inspired by Chemay’s experiences working in the finance sector.
“As a former financial planner for over a decade, I was incredibly frustrated by the fact that good-quality financial advice was very inaccessible to the vast majority of Australians. Very few Australians access financial advice, and if they do, it tends to be later in life and closer to retirement,” he said.
“I saw technology as a way of breaking down those barriers, to be able to provide advice to Australians earlier in life so they could be financially secure as they approach their retirement.
Where it's heading
“So I don’t think it’s robo-advice or human financial planners, but there will be a blending of the two such that a lot of what we’re developing in terms of robo-advice technology will be used to assist financial planners to provide better, higher-quality advice – and hopefully at a lower cost.”
Clover co-founder and CEO Harry Chemay
While algorithms are used to manage portfolios day-to-day, the Clover platform still allows for human intervention in the event of market upheavals, such as those that followed the recent election of Donald Trump as US president and the outcome of the Brexit vote.
Likewise, in the event of major long-term structural changes to markets, such as new trade treaties or significant changes to taxation law, Chemay said a panel of experts can make adjustments to the algorithm itself.
“We have built into our algorithm certain buffers to look at trading spreads, and where those are outside certain bounds, you then have human oversight. So our code allows us to pause and have human judgement at critical market times,” he said.
“The US election result was one of those market times where we would have otherwise put some trades on to the market, but our algorithms were pointing to the fact that spreads were widening, so we applied a human overlay over the top of the algorithm results.
“We have an investment committee that look at [fundamental structural changes in market behaviour]. The committee’s job is to take a view on structural as well as cyclical issues in markets and create the model portfolios accordingly.”
The technology has already attracted institutional interest from superannuation funds, with Equipsuper making an investment in the platform in September 2015 and revealed plans to make the technology available to its 50,000 members.
“For a lot of superannuation funds, robo-advice is extremely important, because it’s that ability to engage with members who might otherwise remain disengaged,” Chemay said.
“We have the ability to develop enterprise-grade software for institutions, but we are very much focused on empowering especially younger Australians to take more control of their finances earlier on in life through our Clover.com.au offering.”
Advice for fintech startups
While there is currently significant hype surrounding the fintech market, Chemay cautions that it is critical for people to have experience in the finance sector if they want to launch a finance-focused startup.
“Fintech is finance first and technology second; [it] is the application of technologies to solve finance problems. You definitely need to have a solid background in finance,” he said.
“EY revealed the average age of a fintech founder is 41, and that’s no accident. You do need years – even a decade or two – before you’re sufficiently seasoned as an investment or finance professional in order to steer a fintech business.
“That is something I would urge people to take note of before they jump in with both feet into the world of fintech.”