Response to joint Comitteee Discussion Paper on automation in financial advice
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- The capacity to gather customers’ data and information to support, not only offering automated advice but, eventually, any other financial service adapted to the customer’s profile detected through the information and data supplied by each customer, that is, the capacity to be used as a commercial tool for products and services not directly linked to the issue of the supposed advice.
- None of the automated financial advice tools (a negative characteristic), detected until now, have any capacity to provide financial education (literacy) to customers. This is a dynamic characteristic and even a requirement for most, if not all, “human” financial advisors. That is, tools are not capable of informing and educating customers in the process of discovering, or to helping to discover the real investment objectives, time horizon and the risk aversion coefficient of each investor, which are necessary bases of financial advice.
- Offering certain execution–only tools that could be perceived as advice tools since they incorporate requests for customers’ information.
- Providing employees and tied agents from financial institutions with automated software to support dealing with customers and helping in preparing commercial offers and proposals. These proposals could be easily perceived by customers as having been produced by “human” consultants and thus be a piece of advice from them.
- As mentioned in Q.1, some automated tools generate an asset allocation proposal for each standard group of customers with the aim of managing a portfolio on a discretionary basis or strictly based on the suggested model portfolio; both could be considered personalized advice by customers.
ii. Our core competences’ framework and full syllabus of our standards are based exclusively on improving the professional performance of financial advisors and planners. The core of our standards is based on customer knowledge as a main requirement or tool in order to provide advice. Thus, customizing each piece of advice is essential; as well as continually reviewing the advice. This is basically incompatible with automated advice, which cannot be viewed as an even partial replacement for the interaction that a full “human” financial advisor maintains with each client.
iii.–iv. EFPA’s certificate holders develop their professional activity through all kinds of intermediaries. Thus, they serve also all types of customers/investors with their personal financial objectives who ready to receive financial advice.
v.–vi. Not applicable
- Consumers pay less when they receive advice through automated tools
If we could properly call the information provided by automated tools “advice”, it is obvious that the cost will be much lower than the cost of properly personalized advice. Obviously, in that case, the value provided to customers will also be much lower. We believe that only some customers with very simple savings and investing issues could eventually receive initial advice through automated means which is close to appropriate. Even in that extreme case it would depend on the appropriateness of the algorithm used.
- A wide range of consumers has access to advice through automated tools
Obviously the access to these tools could help in increasing the motivation for many people to act upon financial matters. Nevertheless, they should be advised that for any relevant decision affecting their financial future it would not be possible to expect adequate advice coming from a limited “getting to know the customers” exercise and from a standardized algorithmic response.
One of the reasons for this is that two different people with nearly equal and equivalent objectives’ data could differ from each other in psychological features which would require totally different financial solutions. To detect these subjective characteristics, human advisors should approach, handle and deeply understand their customers’ motivations.
- Consumers have access to a wider range of service providers using automated advice.
This is debatable. The access to a full range of products (open architecture) is relatively easier through the platforms where the products are contracted. The full range of “financial advice”, as previously explained should be limited to professionals capable of knowing and understanding their customers.
- Consumers obtain financial advice in a faster, easier and non-time-consuming way.
Similar response to the previous question about potential benefits. Per se, speed, 24 hour availability and ease are not very important qualities for financial advice, although it could be very useful for a lot of operating and information tasks.
- Financial institutions incur fewer costs to deliver financial advice. This may not be accomplished due to the additional compliance costs for customer information and transparency due to the use of automated tools, and due to the continual equipment and software maintenance costs.
- Financial institutions have access to a wider range of consumers. Only for services with a simple scope that are already now subject to on-line banking services, not to real advice.
- Financial institutions use automated tools to deliver a consistent consumer experience. EFPA, as a representative of the qualified financial advisors and planners in Europe, does not believe that consumer experience should, in any case, aim for standardization but rather to greater personalized delivery.
- The provision of advice by financial institutions is more easily auditable because automated tools are more easily interrogated. That benefit could be true just for providing information although it is irrelevant since real advice would not be provided.
In any case, it is relevant to remark that the use of unregulated, automated tools could have serious risks for consumers due to the inability to understand the clear limitations that may occur, not so much as a consequence of misuse or errors, but rather due to the incapacity of the tools to really interact with customers, have the ability to interpret and find out additional personal information and data, and of course, to adequately provide information or advice.
Among the risks mentioned, we consider particularly relevant the possibility of taking wrong financial decisions as a consequence of:
- Lack of interaction in the process linked to the automated tool
- Misunderstanding the limits of the data and information provided by the customer and the consequent output received.
- Typical flaws in a limited tool for the unlimited cases and situations that affect each individual consumer needing advice.
- Not really knowing and understanding “who” is providing the output and the limitations of the tool.
The financial consumer, independently of what type of investment product is contracting, it is subject to the same and very relevant risks in managing its personal finances.
1. We are going to see in the next future several attempts to generalize the use of these tools for financial advice services.
2. That finally, both due to the demand and the offer together with the regulatory pressures, will verify that. These tools will never be a replacement for real human financial advice. They will progressively be used as tools to support managing information and administration tasks.
We suggest that the ESA’s should analyse the national legislation first, and with all their means prevent any negative implication for customers due to lack of harmonization between countries, and to avoid any safe harbour (less rigorous legislation).
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.
EFPA, European Financial Planning Association, as an independent professional standard-setting body and certification organization for financial advisors and financial planners in Europe, agrees with the assessment of the three characteristics of so-called automated financial advice as presented by the ESA’s in the discussion paper. Nevertheless, in the third characteristic presented, it should be added that usually the output perceived as advice by the customer is, at most, a simple asset allocation proposal based on limited information of the customer. In no case should such a limited output be considered financial advice, although it could effectively be perceived as such by customers with limited financial capabilities. In this sense, the EFPA believes that the automated financial advice tools should always provide at least the same level of investor protection as real human financial advice, and thus be adequately submitted to regulatory requirements.2. Are there any other relevant characteristics of automated financial advice tools?
EFPA understands that other relevant characteristics present in most automated financial advice tools are:- The capacity to gather customers’ data and information to support, not only offering automated advice but, eventually, any other financial service adapted to the customer’s profile detected through the information and data supplied by each customer, that is, the capacity to be used as a commercial tool for products and services not directly linked to the issue of the supposed advice.
- None of the automated financial advice tools (a negative characteristic), detected until now, have any capacity to provide financial education (literacy) to customers. This is a dynamic characteristic and even a requirement for most, if not all, “human” financial advisors. That is, tools are not capable of informing and educating customers in the process of discovering, or to helping to discover the real investment objectives, time horizon and the risk aversion coefficient of each investor, which are necessary bases of financial advice.
3. Are you aware of examples of automated financial advice tools being used in the banking, insurance, and/or securities sectors? Please provide examples, giving details of their operating process.
There are still a very limited number of examples of automated financial advice across the industry. Nevertheless, banks and investment firms are already:- Offering certain execution–only tools that could be perceived as advice tools since they incorporate requests for customers’ information.
- Providing employees and tied agents from financial institutions with automated software to support dealing with customers and helping in preparing commercial offers and proposals. These proposals could be easily perceived by customers as having been produced by “human” consultants and thus be a piece of advice from them.
- As mentioned in Q.1, some automated tools generate an asset allocation proposal for each standard group of customers with the aim of managing a portfolio on a discretionary basis or strictly based on the suggested model portfolio; both could be considered personalized advice by customers.
4. Do you offer/are you considering offering automated financial advice tools as part of your business model? If so, please briefly describe: i) what type of entity you are, e.g., long established, start-up, a product provider, an intermediary; ii) the service you provide (e.g. to what extent do you integrate human interaction in the tool you provide?); iii) the nature of your clients; iv) your business model; v) who developed the automated tool (i.e. an external company or developed internally?); and vi) the size of your activity and/or forecast activity?
i. As mentioned before, European Financial Planning Association (AISBL under Belgium law) is the largest and most respected independent standard-setting, qualification-accrediting and certification body for financial advisors and financial planners in Europe. Our “business model” is to improve the ethical and professional conduct of our certificate holders all over Europe. Thus, we are very concerned about the potential risks and benefits (both explicit and hidden) of these tools.ii. Our core competences’ framework and full syllabus of our standards are based exclusively on improving the professional performance of financial advisors and planners. The core of our standards is based on customer knowledge as a main requirement or tool in order to provide advice. Thus, customizing each piece of advice is essential; as well as continually reviewing the advice. This is basically incompatible with automated advice, which cannot be viewed as an even partial replacement for the interaction that a full “human” financial advisor maintains with each client.
iii.–iv. EFPA’s certificate holders develop their professional activity through all kinds of intermediaries. Thus, they serve also all types of customers/investors with their personal financial objectives who ready to receive financial advice.
v.–vi. Not applicable
5. Do you consider there are barriers preventing you from offering/developing automated financial advice tools in the banking, insurance and securities sectors? If so, which barriers?
EFPA believes that certain uses of automated tools are not only advisable but useful. There are no barriers to preventing the use of automated tools except for the conviction that they can never replace human interaction, and that the extremely personalized and dynamic responses and advice necessarily required by each customer will never be provided by an algorithmic based tool.6. Do you consider the potential benefits to consumers to be accurately described? If not, please explain why.
EFPA believes that the potential benefits are not fully accurately described in the Paper. These are our views in relation to each of the potential benefits indicated.- Consumers pay less when they receive advice through automated tools
If we could properly call the information provided by automated tools “advice”, it is obvious that the cost will be much lower than the cost of properly personalized advice. Obviously, in that case, the value provided to customers will also be much lower. We believe that only some customers with very simple savings and investing issues could eventually receive initial advice through automated means which is close to appropriate. Even in that extreme case it would depend on the appropriateness of the algorithm used.
- A wide range of consumers has access to advice through automated tools
Obviously the access to these tools could help in increasing the motivation for many people to act upon financial matters. Nevertheless, they should be advised that for any relevant decision affecting their financial future it would not be possible to expect adequate advice coming from a limited “getting to know the customers” exercise and from a standardized algorithmic response.
One of the reasons for this is that two different people with nearly equal and equivalent objectives’ data could differ from each other in psychological features which would require totally different financial solutions. To detect these subjective characteristics, human advisors should approach, handle and deeply understand their customers’ motivations.
- Consumers have access to a wider range of service providers using automated advice.
This is debatable. The access to a full range of products (open architecture) is relatively easier through the platforms where the products are contracted. The full range of “financial advice”, as previously explained should be limited to professionals capable of knowing and understanding their customers.
- Consumers obtain financial advice in a faster, easier and non-time-consuming way.
Similar response to the previous question about potential benefits. Per se, speed, 24 hour availability and ease are not very important qualities for financial advice, although it could be very useful for a lot of operating and information tasks.
7. Are you aware of any additional benefits to consumers? If so, please describe them.
We do not acknowledge any further benefits to consumers.8. Do you see any differences in the potential benefits arising for consumers in each of the banking, insurance and securities sectors?
We do not observe any relevant differences. Although these sectors are linked, there are disparities in terms of issues regarding regulation, complexity and execution.9. Have you observed any of these potential benefits to consumers? If so, please provide examples and describe the kind of benefit that has accrued.
From the experience of regulation on financial distribution and advice in certain countries, it is known that a gap in the level of financial advice may be generated as a result of these changes in regulation. We believe that the use of automated tools, solely to support human financial advisors, could help in reducing and limiting the expansion of that gap by reducing costs in the treatment and handling of information and data, always assuming an adequate input of customer data and information.10. Do you consider the potential benefits to financial institutions to be accurately described? If not, please explain why.
EFPA believes that the potential benefits are not accurately described in the Paper. Our view is mainly due to the previously explained fact that automated advice cannot really be considered financial advice. Even disregarding this main objection to comparing and estimating potential benefits, we would not agree with most of these potential benefits.- Financial institutions incur fewer costs to deliver financial advice. This may not be accomplished due to the additional compliance costs for customer information and transparency due to the use of automated tools, and due to the continual equipment and software maintenance costs.
- Financial institutions have access to a wider range of consumers. Only for services with a simple scope that are already now subject to on-line banking services, not to real advice.
- Financial institutions use automated tools to deliver a consistent consumer experience. EFPA, as a representative of the qualified financial advisors and planners in Europe, does not believe that consumer experience should, in any case, aim for standardization but rather to greater personalized delivery.
- The provision of advice by financial institutions is more easily auditable because automated tools are more easily interrogated. That benefit could be true just for providing information although it is irrelevant since real advice would not be provided.
11. Are you aware of any additional benefits to financial institutions? If so, please describe them.
Although we challenge the idea that financial advice could be offered through “automated financial advice tools”, the use of automated instruments, services or tools by financial institutions could generate relevant advantages. These advantages would arise from their use as a supporting element in providing of securities, banking or insurance services, enhancing their markets, and facilitating advisors’ tasks.12. Do you see any differences in the potential benefits arising for financial institutions in each of the banking, insurance and securities sectors?
We do not see any differences except for those arising from the different regulatory requirements existing among the three sectors.13. Have you observed any of these potential benefits to financial institutions? If so, please provide examples and describe the kind of benefit that has accrued.
The advantages derived from the use of these tools as a supporting element in financial distribution (not as a financial advice tool) are currently widespread.14. Do you agree with the description of the potential risks to consumers identified? If not, explain why.
EFPA mostly agrees with the description of the potential risks identified. We are, by principle and experience, fully aware of the information asymmetry which still exists in financial services and which also affects financial advice provided by “human” financial advisors. A full description of the permanent risks arising from this situation is perhaps outside the scope of this consultation.In any case, it is relevant to remark that the use of unregulated, automated tools could have serious risks for consumers due to the inability to understand the clear limitations that may occur, not so much as a consequence of misuse or errors, but rather due to the incapacity of the tools to really interact with customers, have the ability to interpret and find out additional personal information and data, and of course, to adequately provide information or advice.
Among the risks mentioned, we consider particularly relevant the possibility of taking wrong financial decisions as a consequence of:
- Lack of interaction in the process linked to the automated tool
- Misunderstanding the limits of the data and information provided by the customer and the consequent output received.
- Typical flaws in a limited tool for the unlimited cases and situations that affect each individual consumer needing advice.
- Not really knowing and understanding “who” is providing the output and the limitations of the tool.
15. Do you consider there to be any risks to consumers missing? If so, please explain.
We believe the main risks are well described in the consultation document and in our comments so far. Nevertheless there is an additional risk of the possible conflict of interest between the software provided and the financial institution.16. Do you see any differences in the potential risks arising for consumers in each of the banking, insurance and securities sectors?
In general, we do not see differences, other than those derived from different regulatory requirements.The financial consumer, independently of what type of investment product is contracting, it is subject to the same and very relevant risks in managing its personal finances.
17. Have you observed any of these risks causing detriment to consumers? If so, in what way?
Permanently. As we have said, at a clear lower level of danger but still very acute, consumers are still subject to most of these risks mainly generated by insufficient financial literacy.18. Do you agree with the description of the potential risks to financial institutions identified? If not, explain why.
EFPA mostly agrees with the description of the potential risks identified to financial institutions. We would like to remark the very serious scope of the reputational damage that the misuse of automated tools could generate for financial institutions. The recently introduced regulation of financial advice (derived from MiFID II and other pieces of legislation) should also be applicable to the so-called automated financial advice, which implies an additional compliance burden with the consequent risks of not complying with it.19. Do you consider there to be any risks to financial institutions missing? If so, please explain.
EFPA is not aware of any additional major risks missing in the paper.20. Do you see any differences in the potential risks arising for financial institutions in each of the banking, insurance and securities sectors?
EFPA does not see any major difference. However, as stated before, we think that the products, the disclaimer and time horizon of each investment are quite different.21. Have you observed any of these risks causing detriment to financial institutions? If so, in what way?
EFPA thinks that Roboadvice is still in an early stage in the US and barely exists in Europe. We do not have enough data to make a proper judgment. But if we take into consideration that improper sales cause big losses in terms of revenues and harm the financial institutions’ reputation in particular and the financial sector in general, we think that the so-called Roboadvice should be implemented properly.22. Would you agree with the assessment of the potential evolution of automated advice? Please provide your reasoning.
EFPA is convinced that the use of automated tools is going to grow in general around Europe in the coming years. A different question is the so-called automated financial advice tools. In this case EFPA believes the following:1. We are going to see in the next future several attempts to generalize the use of these tools for financial advice services.
2. That finally, both due to the demand and the offer together with the regulatory pressures, will verify that. These tools will never be a replacement for real human financial advice. They will progressively be used as tools to support managing information and administration tasks.
We suggest that the ESA’s should analyse the national legislation first, and with all their means prevent any negative implication for customers due to lack of harmonization between countries, and to avoid any safe harbour (less rigorous legislation).