Robo-Advice Risks and Benefits

Dec 15 2015

The Joint Committee of the European Supervisory Authorities (JCESA) is considering what regulations, if any, will be required for robo-advice throughout the European Union (EU). JCESA has released a discussion paper on automation in financial advice to assist it evaluate how robo-advice is currently being used in the EU and its potential growth in banking, securities and insurance. The discussion paper highlights what the JCESA identify as the main potential benefits and risks to both consumers and financial institutions which offer some form of robo-advice.

Benefits to consumers

more affordable to a wider range of consumers
wider range of service providers and investments
faster, easier and non-time-consuming
more consistent advice
advice is based on the most up-to-date market information
easy record keeping

Risks to consumers

reduced opportunity to ‘fill the gaps’ in information or to seek clarification
unsuitable advice because of lack of understanding how their information is used
not aware of bias within the advice tool
unclear information about the extent to which the recommendations are tailored
limitations, assumptions or errors within the advice tool
underlying advice algorithms being hacked and manipulated
many consumers receive similar advice which may impact investments

Benefits to financial institutions

fewer costs to deliver financial advice
access to a wider range of consumers
delivery of consistent consumer experience
easier to audit the provision of advice

Risks to financial institutions

exposure to litigation and reputational damage due to faulty automation
legal disputes due to unclear allocation of liability when a number of parties are involved in the provision of advice tools

The JCESA expects that automation in financial advice will continue to grow in the future and incorporate more sophisticated tools and increased integration of different data sources.

The discussion paper can be found here.