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The Actuary The magazine of the Institute & Faculty of Actuaries

What’s the big idea?

Ben Pollard, actuary and founder of SmarterInvestment.co.uk, talks to us about the challenges of launching a startup


Bright idea - iStock
Photo: iStock

A few years ago, I set out to buy a stocks and shares ISA. As a consulting actuary, I’d spent a lot of time helping big companies set up systems to look after their own money, so I expected buying an ISA for myself to be pretty straightforward.

I was amazed at just how difficult it was. Most of the information available was just marketing material and of no real help in choosing a portfolio. After a bit of digging, I found that I wasn’t alone. According to IPSOS Mori research commissioned by Platforum in 2013, of those 13 million UK adults holding a risk-based investment, just 32.6% enjoy involvement with investments, 54.3% know it’s important but dislike it and 13.1% pay very little attention to their investments at all.

I thought there was a gap in the market to help this ‘bored majority’, so I gave up the comfortable career prospects and secure income of actuarial employment, and set off to launch SmarterInvestment.

The idea was to take the hassle out of investing. I wanted to:

● provide high-quality information that would make it really easy to choose a sensible investment (no more opinionated articles, ‘top 150s’ or star ratings);

● provide decent aftercare so people weren’t just left on their own with a nasty surprise if their investment wasn’t working out.

I had lots of experience with the asset liability management (ALM), portfolio optimisation and risk oversight technology used to solve these sorts of problems in the corporate world. I decided to make the same sorts of techniques more widely accessible to consumers.

The biggest challenges were not technical. Building a robust asset model for the UK collective fund universe was tricky, but doable. The toughest challenge was undoubtedly packaging all the technology up in a way that makes sense to non-actuaries.

We live in the age of Amazon and Aleksandr the meerkat, and people are used to using comparison tables to make informed decisions. But what have comparison tables got to do with ALM and portfolio optimisation? Well, quite a lot, if you use them to compare likely returns on different diversified portfolios of funds.

This might not sound that revolutionary, but using comparison tables enables powerful and simple communication of some quite complicated concepts. For example:

● the benefit of diversification (better diversified portfolios will show up higher in the tables because they have higher likely returns for the same overall risk);

● the benefit of lower charges (lower charge portfolios show up higher in the tables because there is less drag on the returns);

● the difference between systemic and diversifiable risk (funds which include mainly risk that can be diversified tend to show lower in the tables due to a reduced equity risk premium);

● the meaning of risk (for example, the ‘bad case’ for each portfolio shows how much you might lose at a 1-in-6 probability level).

Simple tables can be used to communicate complicated concepts, like the benefit of diversification and real meaning of risk. 

I also wanted to provide good-quality aftercare. Big firms have entire departments keeping an eye on their investments on a daily basis, producing risk dashboards and the like. Consumers, on the other hand, are pretty much left on their own. So how do you build a consumer equivalent of an investment risk department?

We settled on an email alert service. This means we run a full ALM review for each customer every night, and email them if:

●  their investment is now unlikely to hit the target they’ve specified;

● the risk/return profile of their investment has changed;

● a better alternative investment is available in the comparison tables;

● performance breaches a certain threshold.

Again, these triggers might seem very simple, but they encapsulate some quite sophisticated concepts, taking account of the latest market conditions, yield curves, VIX (volatility index), and fund performance. To translate the triggers into conventional actuarial language, the first is a sort of long-term value at risk (VAR) monitoring, the second is keeping tabs on portfolio volatility, and the third is checking that the portfolio is reasonably close to optimal.

We’ve used traffic lights and plain English to make a very sophisticated investment monitoring service easy to understand.

Challenges ahead

The website has been launched for just a few months now and we’ve been really pleased with the reaction so far. The ISA deadline is coming up, which will make this a busy time of year.

The next challenge is distribution. We’re doing a lot of PR work and advertising to let more people know about what we’re doing, with a particular focus on the junior ISA market as a loss-leader. We don’t charge for junior ISAs. This means you can pick up a junior ISA and only pay the fund manager charges – just circa 15 basis points (bps) all in.

We are primarily a retail brand, but we’re also considering packaging up parts of our technology for use by third parties to increase our reach, for example, embedding the comparison tables in other websites. We’ve also been looking at offering a similar service via employer-based platforms so people can get access at work.

We have had discussions about a pensions version of our service. The relaxation of pension rules means more people are likely to appreciate something that keeps an eye on their money to help avoid running out of cash later in life. Our monitoring service does exactly that.

Lessons learned

I’ve made an awful lot of mistakes along the way. The ones that really hurt are those that cost you a lot of time.

Probably the biggest one was managing the dependencies on third parties. Getting authorised by the Financial Conduct Authority took nine months and it wasn’t until this came through that we could engage seriously with other regulated companies that we needed to supply services. This then took a further nine months, making 18 months in total.

Another mistake was not being grateful enough for criticism. I started off feeling quite protective of my ideas, so when people pointed out things they didn’t like I would explain and defend, rather than just listening.

This was counterproductive – real customers aren’t as kind as friends and family. It’s particularly true for an impersonal web-based business where people just leave the site if they don’t like something. You don’t get the chance to ask them why they’re leaving!

My actuarial experience has made a big difference, and not just on the technical side. One of the most useful skills I learned as an actuary was how to get along with people at all different levels of seniority.

Being an actuary gives you credibility and exposure to many different parts of an organisation relatively early in your career. This is a fantastic opportunity to watch how different people interact with one another, learn what they do and don’t care about and to practise your own communication skills.

This experience was invaluable for me in getting the business off the ground. I had to deal with a lot of different people in all sorts of organisations. Knowing how to get along with the administration folks, how to deal with IT developers and how to get a meeting with the boss if you need to, are very useful skills.

Overall, the experience so far has been fantastic. But it’s early days and fingers crossed, people will like what we’re doing.

Ben Pollard is an actuary and the founder of smarterinvestment.co.uk