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LONDON — In this special podcast, OUTvest MD Grant Locke explains the rationale and plans driving the most disruptive force to hit South Africa’s savings and investment field in decades. By focusing on attracting big volumes and offering savers extremely low costs, OUTvest is betting people who have never put money away before will now seize the opportunity. – Alec Hogg
When the now hugely successful business called OUTsurance opened shop in 1998, those running South Africa’s short-term insurers lost little sleep. Slowly but surely, however, the disruptor ate away at the establishment and is today one of the country’s Big Three alongside Santam and Mutual & Federal – with a flourishing business called Youi in Australia.
The group is now branching out into savings and investments, using algorithms, technology and ETFs to slash costs and open up opportunities for the general population. With its investment plans starting at a modest R100 monthly, the new OUTvest is reaching into a sector that had little option outside low yielding savings accounts. And it’s bringing Robo-advisors into the main street of South Africa, here’s OUTvest CEO Grant Locke.
There is an emerging industry out there where people can go and build their own investment plans without having to know everything about investment, and we’ve seen that happening in the U.S., and I think that we’re now starting to see it in SA. OUTsurance took a decision that it had a very strong direct to consumer brand already, in the insurance business. I think the Robo-advisor model in particular, gave it the ability to try and repeat a similar thing in the world of investment.
So, effectively what it is, is if you think about it, there’s a number of ways that people can invest money. One of the easiest is to go and sit with a financial advisor, who will give you a human approach. They’ll do a risk assessment on you, a suitability assessment. They’ll try and take into account your financial circumstances and they’ll recommend an investment plan for you. The other extreme is to go to an online platform and say, I know what I’m doing or I want to be able to buy some shares or some ETFs or some unit trusts and then build my own. I think what Robo-advisor does is, is it sort of sits somewhere in the middle, where effectively we’ve built a system that allows people without a huge amount of investment knowledge to answer some questions and our own systems will build a suitable investment plan for them. The nice thing about it is that it’s all online and can be done 24 hours a day, 7 days a week, and effectively, it works in a similar way to the approach from a financial advisor.
Excepting it seems to be a lot simpler, certainly from the way I’ve played around on your website. You get to those goals in an easier way than sitting across a table from someone whose punching into a calculator.
Yes, I think the thing is though, and this is where the iceberg effect sits, is that its very simple for a client to use but the real depth sits below that. If you think about it, just on the questions that we ask, and the assumptions that we’ve made around the platform. Even in just the core amount of questions we ask, there are 640 core calibrations that would map to a specific portfolio and that’s not including just the cashflow modelling that we have to do behind the scenes to make sure that (1) the client is in the right portfolio and (2) that the outcomes that we present to the client are feasible. There is something that we can stand behind and say, there was a robust process that we underwent to make sure that a client comes out with a reasonable expectation of their performance.
Sorry, Grant, I’ve got to stop you there, 640 – can you just give us some insights? Are you saying that behind what I see on the screen, when I start putting in my bits of information, there’s 640 variables?
That’s only in the core system so, effectively, the way that you enter the platform, after that, when we ask you questions about your time horizon, your short-term debt, and your cash reserves – there are 640 of those calibrations and that’s before our tax modelling engine. So, once you go through that process, we then run a check to see whether or not a tax-free savings account is suitable for the investment plan that you’re willing to make, and that has an understanding of each portfolio’s dividend yield, the proportion that is going to be capital gains tax versus interest income and dividend income. So, yes, this is the thing. It seems very simple to use but its massively complex under the surface, and it has to be because it’s not like the FAIS Act allows you to give simplified advice. You have to make sure that your advice standard is at least the same as a financial advisor.
Even with all those calibrations, what we do is that a client has to come to us with a need so, we don’t do a full financial needs assessment. A client comes to us and says, ‘I know I would like to make an investment. I want to just make an investment for this time period. All I want is to save for my kids’ education,’ and the system operates very strictly within those bounds. Even with that, there’s a huge amount of complexity that we’ve had to do so, yes, there’s a lot that’s going on behind the scenes and we’re very proud of that fact, that we spend so much time making sure that clients end up in suitable portfolios and, of course, at lower cost.
So, you’re embracing the complexity of financial affairs, you’ve got all of this artificial intelligence (AI) going on in the background, but it becomes simple for someone to use. It sounds though that you’ve had to have a whole bunch of very, highly qualified people putting these algorithms, as you guys call it in tech industry, together?
Yes, we do. I’ll say one thing for financial advisors, and I have a lot of respect for what they do. But the thing is, is that to give algorithmic financial advice is actually incredibly difficult. To take into account all the variables or to control the variables that go into building a suitable investment plan, is a very difficult thing to do. So, you’re right, it takes a lot of skill and I think what we found out most, and one of the biggest learnings for us, is that this is actually not necessarily about investment. It’s actually more about the actuarial calculations involved. It’s mostly statistics that we use to be able to do our calibrations and our assessments of designing those algorithms. So, we use actuarial skills in our systems and then we also have quite a lot of highly qualified people helping us in making sure that the algorithms are tested. We even use independent consultants, where required, to make sure that things like our cashflow modelling system, is correctly built and the advice systems that we design, because we build our own. We don’t use an external advice system. We actually build our own internally and then we have a committee that verifies that each system is correctly built and then we implement it.
I think we’ve taken that risk, and the risk that we take now is that we give advice. So, I think it’s very important to note that there’s a lot of systems out there that purport to be simple, online places where you can build portfolios. But the crucial difference is that they’re not regulated, or they don’t offer advice, and there’s a lot of examples in the UK of this. There’s one or two examples in SA already, and I think we took the risk to say, listen, anything that a client uses on our platform, we have to do it under the guise that we provide advice and we have to stand behind that, which means that of course, that if anything goes wrong with that advice or that it’s not deemed to be correct, or that we’ve been negligent in some way, we can get taken to the ombudsman. So, we’ve taken a lot of risk to make sure that this thing works.
And a lot of investment, no doubt. How long did it take to put it together?
Alec, I’ve been trying to do something like this for well over 12 years now. But I think, just at OUTsurance we started in July 2015, and that was just building the business case. Then we got approval to launch, to build the business in 2016, and we’ve been going hammer and tongs since February 2016, and we launched in October 2017. I think one of the things that we’ve learnt and we now know is that the business evolves at an incredible pace. It’s difficult to see it when you go to the website every day and it doesn’t look like things change. But I cannot tell the number of things that we’ve evolved the platform, and this is where the learning comes. When you build a digital business it really is about the everyday where did someone fall off? Where can I make this better?
We’ve had a problem with someone trying to log in. That particular phone, we need to make sure that that works better. It’s those thousands of little fixes that you do every single day that builds people’s confidence in your platform and also, improves the user experience. There’s been a huge amount of learning in there. I’ll give you a very simple example. We thought that because we were aiming at people in the advice gap so, people who may not have invested before. They would have never heard of something called a lump sum because although it seems quite simple to those who’ve dealt with investments before, a lump sum can sometimes be a bit tricky, especially if you’re in an online environment and no one has heard about it. So, what we did was we said, let’s call this, the initial lump sum, let’s call it a starting deposit. It’s something that aligns to the banking industry, and maybe someone has heard of that before.
So, we put that into all the wording in our digital platform and it was amazing because some of the applications were coming through, where the monthly contribution and the initial lump sum, or the starting deposit, were the same figure. So, we were like, hang on, what’s going on here? So, our contact centre, and thankfully we’ve got human advisors in our contact centre, gave these guys a call and said, what do you think is a starting deposit? They all thought that it was the first monthly contribution that they were making, which is why they sometimes used to go off on the same day and for the same amount. So, we again, had to evolve the platform of those learnings to make sure that people are able to use the platform and easily understand how to make decisions around it. So, it’s been a fascinating learning experience.
You do open the doors at R100 per month, is that what people can put in?
Yes, we do. But I think it’s very important to note here that when someone goes through our online process they will get an algorithm-based advice approach.
What’s an algorithm?
An algorithm is effectively, a formula. It’s a system that takes a couple of inputs and provides an output. So, we don’t use AI in our system at the moment. It’s what’s called deterministic. So, every single input is mapped to an output. That’s how we do it at the moment, to keep it simple and also, because we’ve got to be very careful that we are able to prove, at all times, how a client got into a portfolio. But there are so many variables, just on those calibrations of the interaction. So, someone comes in with R100, they invest for three-months, for example. That’s fine in normal situations but once they get through the process every single application is reviewed by a human financial advisor. This is where we’re a hybrid. So, we don’t just use algorithms.
We’ve got a human being in the contact centre as well, and every time someone goes against our advice, we see that there’s an inconsistency in that recorder advice, where a client has gone against the advice of the algorithm or perhaps they’re only saving for a very short period of time. We generally give those clients a call and say, ‘sir/madam, are you sure you’ve understood what you’ve done here? This is where we think you might need to amend your plan.’ That’s a very powerful approach, we use it consistently, every single day, where we find applications need some help or people need some help in making decisions.
Grant, that’s so interesting because there’s a low savings rate in SA, not just SA but in most parts of the world, part of the reason for this is that it’s high cost. So, I just think about if you want to go to a full-service stock broker today, it’s going to cost you R150 just to make the transaction. You can’t take R100 because that isn’t enough to invest in, your money is gone, and it’s similar on the financial advisors. They’re aren’t going to sit in front of somebody whose only got R100 a month to invest so, where does this all come from? Clearly, it’s a business but is there a social underpin to all of this?
No, I think if you looked at all Robo-advisors, I think people do wonder if there is a social underpinning to the business model because the margins are very tight. It’s a very low-margin business but effectively, it’s designed to operate at scale and that is effectively, the secret behind the business is the fact that we need to attract a huge number of scale for the business to be successful. But also, what that means, is that we can accept very low minimums because our revenue per client, because of the cost of interaction of a client on an online platform, and the way that we’ve put the digital platform before the human advisor – we can get efficiencies out of that engagement. So, a human advisor does not need to drive to someone’s house or someone needs to drive to their house. Most of the initial engagement is done using the digital platform, and the cost of a client using that platform is quite low. So, we can then pull our charges right down to make them very attractive.
So, someone coming in on our platform they can pay something from 1.5% that is, on our tier, the most expensive cost. That is including the investment funds. That’s including the administration and including advice so that’s the full cost of engagement. It can be from 1.5% and the more money that someone invests with us the lower that cost. So, the lowest potential cost that someone could have on our platform is 0.73% and that includes everything. It’s a very attractive full-service cost on our platform and we’re very proud of it.
So, R1.50 for R100 a month, are you serious?
No, we’ve got a caveat. There is a minimum charge on our platform of R5.00 per month for investments below R5,000. That’s just to cover our variable costs.
That hardly sounds excessive. So, that’s R6.50 for my R100 that I’m putting in, crumbs. How are you expecting to make a living out of doing this if you think that there are millions of people in SA who would like to be able to find a way of putting R100 a month into it. Are you betting that they’re going to get wealthier and they’re going to be able to put money into it in time?
Yes, that’s really it. So, one of the key aspects of the platform is that people have the ability to add different goals. I think we’re also not going to stay as just having tax-free savings accounts and voluntary accounts, which is what we’ve got at the moment. But even within that. Even if you just have a tax-free savings account and a voluntary account, you can have an account for your child’s education, you could have an account for a wedding, you can build an account that’s just savings or an emergency fund. So, what happens is that those small amounts per goal build up into what is a reasonable premium. In addition, if we add additional products on our platform, then we get a greater contribution per client but it’s broken down by the client’s own needs.
So, some clients may not have children but they would like to save for their holidays and then they’d like a tax-free savings account that is part of their retirement planning strategy, for example. The platform has the flexibility to have lots of different goals for things that people want to achieve and that is really, where we start to build up some of the scale and also, help the client over their lifetime. The second thing is that of course, every year a client must get an annual review and as we have multiple goals on our platform we can then start to give slightly more holistic advice to say, ‘Mr client, you’ve just phoned us today. You say, you’d like to take some money out of your tax-free savings account but I see that you’ve got a voluntary fund over there already. It has invested in the money-market fund, you’ve told me that you don’t have any other interest-bearing money anywhere else. Why don’t you take it out of the voluntary account because you’re not going to affect your interest exemption around that?’ So, we can now start to get slightly more holistic around how we do this and improve the service levels for clients and improve client’s think in this.
You’ve mentioned scale a few times. How many people do you need to have on the platform to make it into a business?
I think we’re betting on somewhere in the region of 100,000 – that would be nice for us to get to.
It’s interesting to look at that because if you look, for instance, at another disrupter, EasyEquities, who are doing the same kind of thing with fractional investments into shares. They’re also saying 100,000-ish would be a level where it starts becoming a business, which doesn’t sound like a lot of people in a population of 58 million.
Yes, but I think we also need to just be aware of the fact that, specifically in the advice gap, where we’re playing at the moment. A lot of people are under quite difficult financial circumstances and I think that we must also just be aware of the fact that this is also one of those businesses that’s not going to be solved overnight. To my understanding, and I could be wrong about this, but there is no profitable independent Robo-advisor in the world, at this moment in time, and the business model has been going for more than 10 years. So, even the big ones are not necessarily profitable in their own rights, at this moment in time, despite having assets under management of north of $10bn. That’s because the margins are so small and I think also, the cost of attracting clients is very high.
So, it is one of those things. It’s a bit of a leap of faith. We’re effectively starting a new way in which people can make savings and investment a more important part of their daily lives. But if you look at the data at the moment, it’s still tough to say, ‘hey, listen, these things are going to shoot the lights out,’ as everyone thought they would have done 5 years ago. So, although 100,000 seems like an achievable figure, and certainly we’ve been quite happy with the number of registrations on our platform. Getting people to fund and stay invested consistently is going to be a challenge, and I don’t think it’s new different, even in the world of financial advisors, even today.
Yes, education and kind of guiding people. Just to close off with, you’ve also mentioned this advice gap. So, you’re now starting at R100 a month, which most South Africans could afford. Where does the advice gap end? Where do people get to a level? How much do they need to be investing before it makes sense for them to have a personal financial advisor?
I don’t know if there is a defined figure. It’s more what a financial advisor would deem that they would be happy to accept, and I think it varies by financial advisors. So, I don’t know if there’s a level, per say, in my mind at the moment. But I think what struck me very hard was when we were doing some of the business case research for this, there’s two elements. The first is that in an Old Mutual savings and investment report of 2015, only 18% of the working metropolitan population of SA have access to a financial advisor. So, there is a huge amount of people that just don’t have anyone to give them advice, whether it be savings, investment advice, or any type of advice. The second thing is that the ratio of person debt to income has been rising over the last 20 to 30 years. I think if we had access to decent advice around for enough of the population, I don’t think we would have seen the rise in debt that we have seen, or it would have been muted, to some extent.
In my opinion, I think there’s at least 2 to 3 million people that we think are in this target market at the moment, and again, these are very subjective figures, based on our understanding of earnings around the number of people earning around R150,000 a year, according to SARS. So, there is a calculation figure of around 2 to 3 million people but of course, you’ve got to take into effect that a proportion of those people might already be in there, so it’s a tough exercise.
This special podcast was brought to you by OUTvest.
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