What are robo-advisors?
Automated financial product advisors
What do robo-advisors do?
Helping customers choose investments, banking products and insurance policies.
What are hybrid robo-advice services?
Combining automation with human advisors
What are 4 trends that appear to cause the growth of robo-advice firms?
- Increased transparency of investment advice
- Increased accessibility through relatively low fees or the absence of a required minimum amount of capital
- Enhanced customer experience via internet - and mobile app-based services
- Use of exchange-traded funds (EFTs) to build diversified portfolios
How does a robo-advice service work?
Robo-advisors take the form of automated structured questionnaire for assessing individual customer risk appetite and knowledge level, then allocating a risk profile based on the assessment and making investment proposals in accordance with that risk profile.
What are the benefits of robo-advisors? (7)
- They are cheaper
- They offer higher performance as traditional advisors and reduce emotional and cognitive biases that humans have
- They utalise passive investment strategies selected by an algorithm, providing higher returns at a lower price and thus beat active manager
- They are more inclusive (no high net wealth threshold)
- Better availability during weekends
- Reduce the need for geographic proximity
- Rebalance investor portfolios more efficiently by using algorithms
What are the risks of robo-advisors and based on which paper? (4)
ESA paper
- Consumers having limited access to information and/or limited ability to process that information
- Flaws in the functioning of the tool due to errors, hacking or manipulating of the algorithm
- Legal disputes arising due to unclear allocation of liability
- The widespread use of automated tools
When does a duty of care arise, also name the leading case?
Hedley v. Byrne
The duty arises generally as a result of the client having reasonably relied on the skill and judgment of the advisor.
What kind or liability arises in a data-processing or calculation tool where customer is provided access to?
Duty to ensure that the system was properly designed and configured.
What kind of liability arises when the computer program gives intelligent advise?
Is the advise reasonable and careful?
What is another important question that should be asked to determine the duty of care and therefore liability and why?
How is the system presented to the user? If a user is led to believe that the automated advisor is exercising some form of intelligent judgment, and reasonably relies on that, then the duty assumed by the provider in respect of the advice would be assessed on that basis, regardless of how simplistic or mechanistic the system might actually be.
What kind or questions should regulators be asking to assess robo-advice services?
- Has the robo-advisor obtained access to reasonable sources of
data, and are there any concerns that the inability to obtain data,
particularly regarding products, will bias the rankings and matching
in a way that disadvantages consumers in relation to intermediaries
and sellers? - Where there are gaps in data, what are the strategies that the roboadvisor considered to address those gaps, why did the robo-advisor
choose the strategy(ies) that it employed, and was the choice
reasonable? - Does the regulator have the authority, whether formal or informal,
to increase access to data and thereby improve the quality of the
robo-advice?
What are 3 benefits that the ESA report identified of automated advice?
- Reduced costs for both consumers and financial institutions
- Easy access to more products and services to a wider range of consumers and wider client base for financial institutions
- Improved quality of the service provided
What is a nuance made by responders to the ESA in terms of cost reduction?
The significant costs that arise from the continuous testing, maintenance and marketing of automated tools; the main benefit will not be the cost reduction, but the additional revenue streams.
Under which directive is consumer information and thus also for robo-advice covered?
MiFID II (Markets in Financial Instruments Directive)
