ROBO-ADVICECan we trust the machines?

766B of the Corporations Act

Financial product advice is a recommendation or a statement of opinion, or a report of either of

those things, that:

(a) is intended to influence a person in making a decision in relation to a particular financial

product or class of financial products; or

(b) could reasonably be regarded as being intended to have such an influence.

What is financial product advice?

Personal advice is financial product advice that is given or directed to a person

(including by electronic means) in circumstances where:

(a) the provider has considered one or more of the person’s objectives, financial

situation and needs; or

(b) a reasonable person might expect the provider to have considered one or more of

these matters.

Personal Advice

FACTUAL

INFORMATION

GENERAL ADVICE

PERSONAL ADVICE

WHAT IS ROBO-ADVICE?

Robo-advisors generally limit themselves to providing portfolio management services (i.e. allocating investments among asset classes)

Robo-advisors generally do not address issues such as estate and retirement planning and cash-flow management.

Some people include “calculators” in the concept of robo-advice.

Calculators

Calculators

Calculators

As of December 2014, robo-advisers in the US

managed approximately $20b. This is projected to grow

to $255b by 2020.

Wealthfront

Assets under management: $2.5 billion

Fees: 0.25% annually for accounts over $10,000 (no fee for balances under $10,000)

60% of clients are under 35.

Investments are held primarily in ETFs.

Services include: tax-loss harvesting, rebalancing and a mobile application.

Wealthfront launched in 2011/2012

and already has over $2b in FUM.

Lower costs (cut out the adviser distribution channel)

Lower risk of claims relating to oral statements

A number of compliance obligations are easier to

satisfy (eg record keeping)

Appeal to a certain type of investor

Advantages for Providers

REGULATORY HURDLES

FOR ROBO-ADVISERS

ALL robo-advice is extremely scaled

RG 244

Either you or your client can suggest limiting the subject

matter of the advice. However, you (as the advice

provider) must use your judgement when deciding on the

scope of the advice. You must determine the scope of the

advice in a way that is consistent with the client’s relevant

circumstances and the subject matter of the advice they

are seeking.

RG 244

In general, as the complexity of a client’s relevant circumstances

increases, it is likely that you will need to expand the scale of

your inquiries.

RG 244

…we would expect you to ask a series of questions to

determine how advice that is limited in scope can be

provided to a client in a way that complies with your legal

obligations, including the best interests duty and related

obligations.

RG 244Scenario

A 36 year old client inherits $40,000. They

work full-time earning $85,000 and have

$66,000 in superannuation.

Using an on-line contributions advice tool

displays the costs and benefits of paying

$40,000 into their fund. The subsequent SoA

does not take into account the client’s relevant

needs (eg the ability to access the money in the

medium term). The SoA includes a

warning/disclaimer that their full financial

circumstances have not been taken into

account.

RG 244

We consider that the advice provider has not acted in the

best interests of the client. The advice is provided without

taking into account the client’s relevant circumstances and

the advice model does not provide an early filter or triage to

redirect clients for whom the advice model may be

inappropriate.

RG 175

A customer approaches a bank teller, asking them for

advice about which of the bank’s deposit accounts they

should invest in.

The bank teller would need to ask the customer some

questions about areas where the bank has incomplete

information about the customer’s relevant

circumstances. For example, the bank teller may ask

further questions to help them determine when the

customer would need to access the $5,000…

If an automated process is replacing human interaction, it

is critical that the robo-adviser asks the right questions

and modifies its responses appropriately. This is

particularly the case during the triage process when

determining whether the relevant scaled advice is

appropriate.

Probably inadequate:

I agree to limit the scope of the advice to how my

$100,000 should be invested having regard only to my

risk appetite (tick box).

Scaling Risk

Section 961B(1) The provider must act in the best

interests of the client in relation to the advice.

Best Interests Duty

Best Interests Duty

Section 961(6): A person who offers personal advice

through a computer program is taken to be the person

who is to provide the advice and is the provider for the

purpose of this Division.

Provider satisfies 961B(1) if the provider proves the

provider has done the following:

(a) identified the objectives, financial situation and needs

of the client that were disclosed by the client through

instructions

(b) identified the subject matter of the advice that has

been sought by the client (explicitly or implicitly) and the

objectives, financial situation and needs of the client that

would reasonably be considered as relevant to advice

sought on that subject matter

Safe Harbour

(f) based all judgements in advising the client on the

client’s relevant circumstances

Safe Harbour

RG 175:

Where advice relates to financial products with an

investment component, ASIC considers that the client’s

relevant circumstances may include:

• existing investment portfolio

• tax position

• social security entitlements

• family commitments

• employment security

• expected retirement age

Safe Harbour

(g) taken any other step that, at the time the advice is

provided, would reasonably be regarded as being in

the best interests of the client, given the client’s

relevant circumstances

Robo-Advice is subject to the same regulatory

requirements as advice provided by an individual.

Simplifying the process may appeal to clients (and the

marketing department will love it), but oversimplification

increases the risks.

OVER SIMPLIFICATION RISK

The subject matter of the advice can be dictated by the

provider (ie “we provide advice only in relation to X”).

However, because the “subject matter” is inextricably

linked to the scope of the advice, the robo-adviser must

still be capable of determining (via a triage process)

whether it can discharge the best interests duty by

advising on the subject matter having regard to the

client’s circumstances.

OVER SIMPLIFICATION RISK

Robo-advice linked to the immediate acquisition of a

financial product is a marketing manager’s dream

come true.

Although few of us actually read the “Terms and

Conditions” that flash up on our screens (eg iTunes)

before we tick the box indicating we accept them, the

risks are much higher when we are dealing with

prescribed disclosures under the Corporations Act.

“Quick and Easy” Trap

• Effectively filtering potential clients (triage)

• Appropriately scaling the advice

• Satisfying “best interests duty”

• Managing risk that investors could claim they did not

consider the advice and other disclosures and the

provider designed the process to encourage/facilitate

quick decisions

Summary of Critical Issues

Limitations of Robo-Advice

As this stage, it works only for scaled advice and for

investors with with fairly straightforward circumstances,

objectives and needs.

Investors will still need to see a human adviser for

holistic financial advice. And investors with complex

circumstances will probably want to see a human adviser

even for most scaled advice.

This is the reason for the development of “Cyborg

Advice”.