Response to joint Comitteee Discussion Paper on automation in financial advice
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Above all, costs are not the only matter of importance, as it is necessary to consider also the quality of the service: for an investor to really benefit from low cost advice, the quality of the advice provided must be suitable for her/him.
B2, a wider range of consumers have access to advice. This definition is biased. As we explain in our answer to Question 1, a distinction is needed between professional advisory services and financial advice as a mere informative functionality: by means of automated tools, investors may access to a wide range of information, but not to investment advice services as defined pursuant to MiFID provisions.
B3, consumers have access to a wider range of providers and products. It is true that, by means of automated devices, investors may access a wider range of products; nonetheless, this remark omits that such an inflated offer may be disruptive. In the field of financial advisory the real milestone is not, in itself, the range of products, but the assessment of suitability: scores of products may be thought to be suitable for each investor, this is the reason why human intervention is needed.
B4, 24 hours a day, 7 days a week. It is true that online tools are always available for investors. Nonetheless, as we have previously explained, effective financial advice requires human intervention.
B5, consumers receive more consistent advice when they use automated tools. This is not the case, definitely, especially if we consider the potential risks outlined in the Discussion Paper.
B6, consumers obtain advice based on the most up-to-date market information when using an automated tool. As we explain in our answer to Question 1, information shall not be confused with advice. Information is merely a way of processing market data. Nonetheless, information in itself is meaningless: if there is no explanation of the reasons behind it, information comes to no avail. The human support is essential and irreplaceable.
B7, consumers find it easier to keep a record of the advisory process. This benefit is not an exclusive feature of automated platforms, as all “traditional” financial intermediaries employ automated devices to electronically convey relevant documents to their clients. Furthermore, pursuant to Article 25, directive 2014/65/EU (MiFID II), all financial intermediaries are required to provide clients with adequate reports on the services provided. The same article also states in paragraph 6 that when providing investment advice investment firms shall, before the transaction is made, provide the client with a statement on suitability in a durable medium specifying the advice given and how that advice meets the preferences, objectives and other characteristics of the retail client.
Risk 3 – biases in the tool It is undeniable that the tool, based on an algorithm, can have biases, with potential repercussions on end users. Without proper assessment and human support it is difficult, if not impossible, that the individual investor can realize it.
Risk 6 –personal data used for other purposes The input of personal data may be requested by the platforms for their business, as a consequence of specific agreements/links with other market participants particularly interested in the profiles of all registered users. The data collection of these platforms often does not comply with the provisions on privacy.
Risk 7 – limitations within the tool The algorithms underlying automated devices require specific fully-fledged controls, otherwise there is the risk that they become “black boxes” with no official supervision to ensure investor protection: for instance, there exists the risk that algorithms are devised so as to favour the distribution of products which entail more revenues for distribution platforms, at the expense of investors’ best interests. Supervisors shall also consider the variables underlying the algorithms: different algorithms may obviously have different underlying variables. It is unlikely that an algorithm (e.g. Excel) based on 12 variables may really collect the needs of all European citizens. Furthermore, adding or omitting a single variable may pave the way for unintended and unforeseeable consequences, especially without human support.
Risk 10 – Moving too quickly through process Automated devices may entice investors to rush into inputting data without properly reading pre-contractual information, thereby paving the way for potential infringements of privacy law. It is evident that haste does not support thoughtful choices, with the risk that the user can make thoughtless operations.
Risk 12 – similar algorithms, same products Although there is some merit in the idea that investors receive the same advice – be the investor based in Athens or Stockholm – we believe that the drawbacks of this possibility overwhelm any possible benefit: there is the risk that all the investors with similar profiles will be always recommended to buy the same products, causing detriment to the quality of service and the scope of markets. That is to say, standardised profiling questions entail the risk of standardised answers, creating the “herding risk”, as it is referred to in the Discussion Paper.
Risk 13, consumers may no longer be given the opportunity to access any human financial advice.
In the long run, excessive automation creates the risk of sacrificing human sensitivity and thus hinders the opportunity to access human financial advice at all. To avoid the peril of an Orwellian world, automated tools shall rather be conceived as a complement to human advice.
For the sake of effective harmonisation with the standards of investor protection already established for “traditional” financial intermediaries, we deem it necessary that investors do not perform all the investment process by themselves, with no assistance by professionals. The results of the investment process should be validated by specifically identified experts, in accordance with the best interests of the clients.
Pursuant to Article 24, directive 2014/65/EU (MiFID II) and Article 29, directive 2016/97/EU (Insurance Distribution Directive, IDD), investors shall be appropriately informed in good time as to whether they will be provided with a periodic assessment of the suitability of the products they have been recommended. It is necessary to consider that the investor’s financial situation and needs change over time. In fact, platforms may not provide for any form of engagement and periodic evaluation of the advice given, or alerts that inform the investors of possible significant changes in market conditions. Instead, the constant human relationship developed with an advisor, allows the clients to change/update their investment decisions following the course of their lives and that of their families, as well as market developments.
1. Do you agree with the assessment of the characteristics of automated financial advice tools presented in this Discussion Paper? If not, please explain why.
A better definition of automated financial advice tools is needed. Automated financial tools are basically information providers which, for the securities sector, may be identified with MiFID rules on execution-only and appropriateness, but not with the higher level of investor protection ensured by the suitability assessment required for thorough investment advice services. Automated devices shall be understood as tools for basic and generic advice, which may enable investors (particularly, less experienced and less knowledgeable investors) to understand their need for effective personal recommendations. That is to say, a distinction is necessary between financial advice as a complete professional service which effectively meets investors’ needs, investment objectives and characteristics, and financial advice as a mere informative functionality. Automated tools may be helpful in the first stage of the advisory process, but in later stages they shall be complemented with a real personalised service and the interaction of a human advisor. This form of semi-automation is more likely to shape the future and meets investors’ needs (i.e. investors may input all of their relevant details by means of automated devices, and then they refer to a human advisor).6. Do you consider the potential benefits to consumers to be accurately described? If not, please explain why.
B1, consumers pay less. This supposed benefit hinges upon the idea that automated advice is always a low cost alternative to human advice, but this may be not the case: for instance, online platforms need to acquire customers and this may require huge investments in marketing and advertising, whereby these distribution costs are significantly passed down to clients. Considering the case of a client who would like to switch from a product to another, the automatisms embedded in automated advice may entail the application, in a likewise automated way, of fees by the single providers, lacking those modulating solutions that, by means of the intervention of a human advisor, are possible in the interest of investors.Above all, costs are not the only matter of importance, as it is necessary to consider also the quality of the service: for an investor to really benefit from low cost advice, the quality of the advice provided must be suitable for her/him.
B2, a wider range of consumers have access to advice. This definition is biased. As we explain in our answer to Question 1, a distinction is needed between professional advisory services and financial advice as a mere informative functionality: by means of automated tools, investors may access to a wide range of information, but not to investment advice services as defined pursuant to MiFID provisions.
B3, consumers have access to a wider range of providers and products. It is true that, by means of automated devices, investors may access a wider range of products; nonetheless, this remark omits that such an inflated offer may be disruptive. In the field of financial advisory the real milestone is not, in itself, the range of products, but the assessment of suitability: scores of products may be thought to be suitable for each investor, this is the reason why human intervention is needed.
B4, 24 hours a day, 7 days a week. It is true that online tools are always available for investors. Nonetheless, as we have previously explained, effective financial advice requires human intervention.
B5, consumers receive more consistent advice when they use automated tools. This is not the case, definitely, especially if we consider the potential risks outlined in the Discussion Paper.
B6, consumers obtain advice based on the most up-to-date market information when using an automated tool. As we explain in our answer to Question 1, information shall not be confused with advice. Information is merely a way of processing market data. Nonetheless, information in itself is meaningless: if there is no explanation of the reasons behind it, information comes to no avail. The human support is essential and irreplaceable.
B7, consumers find it easier to keep a record of the advisory process. This benefit is not an exclusive feature of automated platforms, as all “traditional” financial intermediaries employ automated devices to electronically convey relevant documents to their clients. Furthermore, pursuant to Article 25, directive 2014/65/EU (MiFID II), all financial intermediaries are required to provide clients with adequate reports on the services provided. The same article also states in paragraph 6 that when providing investment advice investment firms shall, before the transaction is made, provide the client with a statement on suitability in a durable medium specifying the advice given and how that advice meets the preferences, objectives and other characteristics of the retail client.
7. Are you aware of any additional benefits to consumers? If so, please describe them.
No, we aren’t.8. Do you see any differences in the potential benefits arising for consumers in each of the banking, insurance and securities sectors?
With regard to the securities sector, as we have explained in our previous answers, it is necessary to make a distinction between suitable advice and mere information. As for the banking and insurance sectors, automation may convey some of the listed potential benefits relating to online distribution of mass market and highly standardised products (for instance, car insurance and payment services).10. Do you consider the potential benefits to financial institutions to be accurately described? If not, please explain why.
In the assessment of potential benefits to financial institutions, it is important to avoid that these benefits come at the expense of investors. Financial institutions (actually, financial firms) are obviously expected to seek their own profit. As we explain in our answer to Question 14-R6, it is important to remind that investor profiling and relevant data have a market value, as they may be sold to third parties. By means of the underlying algorithms, platforms may access a large amount of personal data of clients, which might be used to select those products that are more profitable for platform owners.14. Do you agree with the description of the potential risks to consumers identified? If not, explain why.
Risk 1- lack of information Information gaps and the inability to seek clarifications is a significant risk, especially considering the lack of financial literacy among EU citizens. The provision of financial services supported by human interaction is an effective driver for financial education. Conversely, automation without human interaction does not convey any form of financial education: information in itself may be meaningless inasmuch as there is no human advisor to explain it.Risk 3 – biases in the tool It is undeniable that the tool, based on an algorithm, can have biases, with potential repercussions on end users. Without proper assessment and human support it is difficult, if not impossible, that the individual investor can realize it.
Risk 6 –personal data used for other purposes The input of personal data may be requested by the platforms for their business, as a consequence of specific agreements/links with other market participants particularly interested in the profiles of all registered users. The data collection of these platforms often does not comply with the provisions on privacy.
Risk 7 – limitations within the tool The algorithms underlying automated devices require specific fully-fledged controls, otherwise there is the risk that they become “black boxes” with no official supervision to ensure investor protection: for instance, there exists the risk that algorithms are devised so as to favour the distribution of products which entail more revenues for distribution platforms, at the expense of investors’ best interests. Supervisors shall also consider the variables underlying the algorithms: different algorithms may obviously have different underlying variables. It is unlikely that an algorithm (e.g. Excel) based on 12 variables may really collect the needs of all European citizens. Furthermore, adding or omitting a single variable may pave the way for unintended and unforeseeable consequences, especially without human support.
Risk 10 – Moving too quickly through process Automated devices may entice investors to rush into inputting data without properly reading pre-contractual information, thereby paving the way for potential infringements of privacy law. It is evident that haste does not support thoughtful choices, with the risk that the user can make thoughtless operations.
Risk 12 – similar algorithms, same products Although there is some merit in the idea that investors receive the same advice – be the investor based in Athens or Stockholm – we believe that the drawbacks of this possibility overwhelm any possible benefit: there is the risk that all the investors with similar profiles will be always recommended to buy the same products, causing detriment to the quality of service and the scope of markets. That is to say, standardised profiling questions entail the risk of standardised answers, creating the “herding risk”, as it is referred to in the Discussion Paper.
Risk 13, consumers may no longer be given the opportunity to access any human financial advice.
In the long run, excessive automation creates the risk of sacrificing human sensitivity and thus hinders the opportunity to access human financial advice at all. To avoid the peril of an Orwellian world, automated tools shall rather be conceived as a complement to human advice.
15. Do you consider there to be any risks to consumers missing? If so, please explain.
We believe that client profiling using a mere algorithmic application with automatic response, devoid of an objective assessment, would involve the risk of a kind of self-profiling by the user that, by trial, may complete the automated procedure, in order to obtain a specific product, without an effective evaluation of the suitability of the choice. In short, investors may repeatedly respond to the various questions in the profiling tests until they get the desired profile (probably unsuitable) depending on the products they wish to buy.For the sake of effective harmonisation with the standards of investor protection already established for “traditional” financial intermediaries, we deem it necessary that investors do not perform all the investment process by themselves, with no assistance by professionals. The results of the investment process should be validated by specifically identified experts, in accordance with the best interests of the clients.
Pursuant to Article 24, directive 2014/65/EU (MiFID II) and Article 29, directive 2016/97/EU (Insurance Distribution Directive, IDD), investors shall be appropriately informed in good time as to whether they will be provided with a periodic assessment of the suitability of the products they have been recommended. It is necessary to consider that the investor’s financial situation and needs change over time. In fact, platforms may not provide for any form of engagement and periodic evaluation of the advice given, or alerts that inform the investors of possible significant changes in market conditions. Instead, the constant human relationship developed with an advisor, allows the clients to change/update their investment decisions following the course of their lives and that of their families, as well as market developments.