Unravelled: The rise of 'robo advice'
6 May 2015
Other articles in this edition of Unravelled:
- Review of Card Payments Regulation
- Protecting the financial system from cross-border contagion
- Attribution MITs – why try to fix something that wasn't broken?
Written by Senior Associates Simun Soljo and Annett Schmiedel
'Robo advice' is another one of these phrases that we are suddenly seeing everywhere. The idea offers some exciting opportunities for advice providers. What are the regulatory issues? And how can lawyers help?
What is robo advice?
Before you imagine R2-D2 interviewing middle-aged couples approaching retirement and spitting out statements of advice, we should say that we are not there quite yet.
In the financial services context, 'robo advice' simply refers to financial advice provided through the means of a pre-programmed computer algorithm, rather than a human being. It is generally offered through online and digital tools such as calculators and apps.
These types of tools have the potential, if well designed and executed, to improve consumer access to advice. The use of technology should reduce costs, and it could improve the sophistication and quality of advice.
Challenges to overcome
The creation of these tools of course requires human intervention. We are not yet at the stage where computers can teach themselves the tax implications of various types of investments (even if they wanted to).
The development of robo advice tools requires significant investment both on the technology side as well as on developing the content of the questions to be asked of the client and the advice to be provided. It brings to mind the phrase 'rubbish in, rubbish out', one of the few axioms of computer programming that sticks in the mind. The quality of the information included at the planning and design phase will determine the quality of the product at the other end. (One might say that the same principle applies to many other aspects of life – even perhaps legal advice!)
There are also regulatory issues to address, which at least, anecdotally, seem to be a big inhibitor for those considering developing new tools in this area. It seems to us that the regulatory impediments can sometimes be overblown. The point of this article is to unpack them, and hopefully show that the challenges are not as great as sometimes conceived.
What are the regulatory issues?
The same basic regulatory obligations apply whether advice is given by an adviser in person or through a robo advice tool such as a calculator or online risk profiler.
The provider has to consider whether the tool will actually be providing advice to users, or whether it will produce just factual information. False assumptions are often made about this. Not every fancy graph or spinning wheel on a computer screen is providing financial advice. A critical approach needs to be taken. Is there really a recommendation or statement of opinion? Is a financial product involved? Quick assumptions and judgments based on the 'vibe' of the thing rather than the words of the legislation can mislead and kill good ideas too soon.
If advice is being provided, licensing obligations will of course apply. The level of disclosure and the adviser's duties, however, will depend on whether the advice is general or personal. If the advice is general, the general advice warning needs to be given to the client as well as a financial services guide (although exceptions apply).
Whether the line between general and personal advice has been crossed depends on whether the client's 'objectives, financial situation and needs' have been considered. Again, rules of thumb and quick judgments can be unhelpful.
If the advice is personal, it is true that more onerous obligations apply. The provider will have to give the client a financial services guide and a statement of advice, as well as comply with the 'best interests' obligations under the FOFA provisions in Part 7.7A of the Corporations Act 2001, including the duty to provide advice that is 'appropriate', to prioritise the client's interests and to warn the client if the advice is based on incomplete information.
In most ways, the issues are the same as for advice given in person. The scope of the advice needs to be agreed and disclosed, and sufficient information needs to be gathered for the scoped advice to be appropriate for the client. The added challenge with a 'robo' advice tool is perhaps that all of this work needs to be done up front with the answer for each scenario ready to go. But once the work is done, the assumptions will be transparent (including to the regulator) and the advice should be of a consistently good quality, without having to rely on the abilities of individual advisers who make mistakes and who may also be motivated by irrelevant considerations – irrelevant to client's interests at least ('can I have conflicted remuneration with that?').
Avoiding the inevitable
To avoid the added obligations of giving personal advice through online tools, and perhaps out of a misconceived notion that it is not possible, many providers are prepared to do backflips to make sure that their online tools and calculators do not cross into personal advice territory. There is nothing wrong with this if the commercial imperative is to avoid taking on the more complex disclosure obligations and duties that come with personal advice. There may also be a fear of cannibalising existing personal advice distribution channels, which tend to be either in-house advisers or associated dealer groups. There may still be a 'sales' element to financial advice that requires the human element.
But the pressure to deliver a better customer experience online and to provide an alternative to the expensive comprehensive personal advice channels will continue to grow. The fear of cannibalisation may also be replaced with the realisation that online advice can reach new customers. This may drive many to go all the way with developing online personal 'robo' advice tools.
Is it really possible to do that? The answer is obviously yes, and it is already happening in small ways. Simple personal advice tools are already being offered. They tend to focus on basic portfolio construction or asset allocation advice. Providers may also look to develop a half-way solution that may combine online tools with some level of human interaction.
Where to next?
We think the next phase of the development will see more sophisticated and comprehensive online advice tools offered directly to clients.
But this requires investment in both the technology underlying the tools as well as in working out how the regulatory requirements can be complied with in each situation.
The message from lawyers should be that it is possible. This is certainly what ASIC has been saying. It just needs sufficient commitment to work through the nitty gritty to come up with solutions that work both from a regulatory perspective, as well as giving the client the service they are after.
Other articles in this edition of Unravelled
- Simun SoljoPartner,
Ph: +61 2 9230 4635
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