Stochastic modelling increases certainty


By Daniel Paperny

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Traditional advice modelling was limited and the industry must move to fully embrace stochastic modelling as a means of delivering clients greater comfort and certainty in expected returns, according to fintech firm Investfit.

In an interview with financialobserver, Investfit chief executive Ed de Salis said changing consumer expectations meant traditional forms of advice delivery needed to adapt to maximise a client’s retirement outcomes, as well as help deliver more accurate return projections.

De Salis said Investfit was carved out of a vision to help advisers simulate thousands of different investment strategies in real time and be empowered to give greater certainty and more tailored solutions to their clients.

“In current [financial advice] modelling, the adviser will base their projections on expected returns for a particular asset class, so average returns on shares, bonds, cash and so forth,” he said.

“When you use an average, you’re actually implying that the outcomes are only roughly at a 50/50 certainty of being achieved, because it’s an average. Half the time it’s better, half the time it’s worse.

“When you explain that to them, most advisers are horrified that the advice that they’re giving is based on [flawed] projections, [but] with stochastic modelling, which is the way in which a lot of the more market-leading advice tools are now moving, you can increase the certainty of outcomes to a much higher level.”

The algorithms underpinning Investfit’s financial modelling engine evolved out of a pilot program with AMP, after which they were adapted by founders de Salis, James Claridge and Gavin Daw in 2015 to focus on personal advice.

“What we’re about is using technology to capture really powerful processing capabilities and work out what is the optimal investment strategy for a person given their circumstances,” de Salis said.

“We say that everyone has different circumstances, different age and level of investments, as well as different financial aspirations and goals – so everyone really has a different optimal investment strategy for them, but to [determine] that you have to have some pretty punchy IT power.”

While digital advice continued to grow in Australia and the algorithms powering its systems became more intelligent, he said Investfit should not be labelled as simply a robo-advice offering for licensees and their clients.

Rather, he said the fintech company’s modelling tool acted as an adjunct to traditional financial advisers, analysing the historical behaviour of returns to help improve simulations and lift the quality of advice provisioning.

“We can model up to 95 per cent certainty … but the only way you can do that is through simulations and understanding the behaviour of those returns over time,” he said.

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