Response to joint Comitteee Discussion Paper on automation in financial advice
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However, in relation to the third characteristic (“the output of the tool is, or is perceived to be, financial advice”), we would like to caution against the pre-conception that online investment tools and advice are less clearly demarcated from online execution-only offerings or that online execution-only investment tools can be considered or redefined as advice.
The broader online industry is very good at providing (prospective) clients with tools to facilitate the search of a desired and appropriate product. Typical e-commerce websites offer very user-friendly search, filter and comparison tools; order baskets; related product lists (“customers who bought A also bought B”); product updates (“product A in your shopping basket has fallen in price” or “product A in your basket is no longer available, try product B instead”), etc. Unfortunately regulators do not always have a clear view on this when it applies to financial products, especially in the context of interpretation of MiFID. We believe that such tools do not provide advice and we advocate clear legal and regulatory guidance on such tools which can provide invaluable help to prospective investors to discover the appropriate products for them. Clarifying that they do not constitute advice, will encourage companies to develop such tools in a simple transparent manner.
• Automation of risk profiling/ advice: algorithm that on the basis of the customer’s answers to a questionnaire, automatically assigns the customer to the appropriate risk profile. MeDirect uses an online questionnaire that profiles the customer and advises them on the type of portfolio that is suitable to their personal and financial circumstances. An often found criticism on automated profiling is that the advice is not fully personalised but rather clients are categorised in one of a number of risk categories (depending on the platform we have seen that this varies from 3 to 12 risk profiles). However, we note that most traditional wealth managers work on a similar basis for mass-affluent clients.
• Automation of asset allocation, investment/trade selection and subsequent monitoring: for instance U.S. “robo-advisors” such as Wealthfront and Betterment use automation to manage the portfolios. Some offline banks also use such automation. For example Alex Bank in the Netherlands uses automated investment decisions to manage clients’ portfolios. However not all providers of online investment advice use an automated investment decision process. MeDirect Bank for example combines manual asset allocation and manual fund selection performed by human experts at Morningstar and MeDirect, with online automated client profiling and monitoring tools for clients as well as online distribution. This is cost effective and scalable compared to branch based distribution.
Automation of trade execution: the execution of transactions in a discretionary wealth management /advice setting can happen automatically which allows to manage many client portfolios (of smaller value) at low operational cost. This automation can also be used for periodical portfolio rebalancing and regular contributions (of small amounts) to the client’s portfolio. At MeDirect we eliminated as much as possible the human intervention for the mechanical trade execution with a view to reduce costs and share these savings with clients (MeDirect charges zero entry, exit and transaction fees on mutual funds).
Robo-advisors have in common the provision of a low-cost and transparent discretionary management service, offering a suite of managed portfolios with different risk profiles. Management costs vary between 1.0% per annum to being free.
Most robo-advisors use ETFs or individual securities to build and manage portfolios.
MeDirect distinguishes itself because it is one of the few online wealth managers that (i) builds diversified portfolios for its clients using mutual funds and (ii) the asset allocation and fund selection is done manually.
ii) MeDirect offers online savings, wealth management (in scope for this Discussion Paper) and investments. The online platform is complemented by a physical contact centre that can be contacted by email, secure electronic messages and telephone. Through its online platform, it provides its Belgian client base with the services including: online discretionary wealth management; open architecture low cost trade execution for mutual funds, stocks, bonds and exchange traded funds; execution only thematic model portfolios, access to online investment analysis and tools and competitive savings rates. The platform provides access to a broad array of savings and investment products which are supplemented by free investment research and tools to search, compare and analyse investments. Its online distribution strategy, combined with a low cost operational centre, allows it to provide a high quality unbiased offering at a low cost to a wide audience.
MeDirect Bank offers discretionary wealth management from € 5,000 onwards at an annual management cost of 0.30% to 0.61% (incl VAT) depending on the size of the portfolio. Clients fill in a questionnaire online which automatically assesses the profile of the client, advises the client of his/her investor profile and proposes an investment portfolio that matches that profile. The composition of the portfolios is determined by people in the MeDirect team in co-operation with people from Morningstar. This is a manual process. The transfer of money to the client’s investment account, investment of the money into the fund portfolio, monthly additional contributions, execution of the (manually decided) rebalancing is all done automatically. Clients can call the contact centre for help in navigating the tool but the contact centre will not provide advice over the phone.
iii) As at 29 Feb 2016, MeDirect had circa 17,000 clients. The average age of clients is approximately 50 and the client base is mass affluent. MeDirect is a proponent of long term strategic asset allocation and diversified investments spread over time. We recognise this in our clients’ who are not the typical active online traders but instead invest over the longer term.
iv) The MeDirect Bank business model is innovative in the FinTech space in that it recognised the advantages already in 2013 of partial-(re)bundling of financial services. MeDirect Bank offers a one-stop solution for households that look for better solutions for their savings. The bank offers deposits as a foundation for a healthy financial portfolio and then offers non-complex investment products and services to offer a suitable product to clients irrespective of their knowledge, experience and wealth.
v) The automated tools that MeDirect offers to the clients on its online platform have been built through a combination of internal IT development and external parties, in particular Morningstar.
vi) MeDirect Bank was a pioneer when it launched online wealth management in Belgium in 2013. It now has nearly 17,000 clients across all its products, which is approximately double from one year before. Growth has continued to accelerate in 2015 and early 2016. In the first 6 weeks of 2016 the number of wealth management clients increased by 44%. We have seen a number of other banks and FinTechs enter the sector which we view as a positive as the offering widens and the provision of automated investment services becomes more recognised and can therefore benefit more households.
However, while there are no absolute barriers that prevent the offering/developing of automated financial advice tools in the securities sector, there are significant barriers and obstacles which render the offering/development of such automated services significantly materially more onerous than the offering of such services in a traditional manual and offline manner and prevent the automated offering from reaching its full potential in terms of best client service.
We observe and experience that in Belgium there is no level playing field for online wealth managers compared to face-to-face wealth managers or banks. Obstacles and barriers to offering/development of automated financial advice and online wealth management in particular can be categorised in different categories:
a) Additional and stricter legal requirements for automated / online providers of investment advice
- Regulatory texts include specific additional requirements for online automated advice in the securities sector. For example “para. 5.1.2.2.6 “Information gathering via the internet” in the FSMA note on duty of care (“zorgplicht. Vaststellingen en standpunten naar aanleiding van inspecties – Nota ”) (http://www.fsma.be/nl/Supervision/MiFID.aspx )
b) Stricter interpretation of legal requirements by the regulator for online platforms.
We list below a number of examples observed in Belgium for online wealth management / robo-advisors:
- The MiFID requirements for suitability and appropriateness testing of clients are implemented disproportionally strictly for online platforms. Online platforms are for example required to block potential clients who fail a knowledge test on the website. This would be tantamount for offline traditional wealth managers to require that a private banker escorts potential clients outside of the office or bank branch in case they answer questions incorrectly.
- Overly prescriptive interpretation by the regulator of information disclosure before allowing a client to invest. For example the requirement to fit all regulatory required information on one single webpage, not allowing the use of user-friendly tabs to present such information in a clear manner or not to allowing any information to require a click on a link or button., The result is that it not possible for online providers of automated investment/securities advice to offer to their (prospective) clients the basic industry standards for e-commerce user experience, user interface and usability. Given the importance of optimisation of websites for the conversion of visitors into new customers, such requirements result in increased abandonment rates by prospective clients.
- Assumption by the regulator that prospective clients will not read information presented online but would do so if presented with the same document face-to-face. For example, presenting a clear link on a website to the KIID which provides all the key information on a mutual fund to clients is not deemed sufficient, while in face-to-face meetings a private banker can hand out this document and subsequently sell an investment.
c) Legal and regulatory requirements not adapted or translated inadequately to e-commerce techniques and mobile requirements
- For example, presenting a prospective client with a “buy” or “invest” button online is only allowed after having previously shown all the investment information on one single webpage (no tabs or clicks allowed to present the information). On a mobile website or app this means endless scrolling for the (prospective) client before a buy button can be found, which goes against the standard rules for good online user experience and user interface
d) Stricter monitoring and enforcement of regulatory requirements for online platforms
- Online automated advice is by definition more transparent and can be audited, monitored and reviewed more efficiently than a traditional offline business model as the entire automated advice tool and information are visible 24/7 online. The transparency of automated advice, which is a positive for clients, puts additional pressure on online providers over offline providers who can by definition not be monitored so closely.
MeDirect is an example of an online wealth manager offering advice based on an unbiased open architecture universe of mutual funds.
Not all providers of automated advice share their cost benefits with their clients. Some follow the manual / non-automated approach of offering only in-house products or a biased selection of more profitable products. But the important factor is that automated providers are able to better serve clients and due to their online presence clients are very easily able to verify the costs and product details. Encouraging automation will encourage transparent platforms to develop which will benefit customers in the end.
Benefits relating to cost:
• MeDirect charges no account or registration costs
• MeDirect charges no custody costs
• MeDirect chooses not to charge any entry or exit costs on the mutual funds in its discretionary portfolios
• Discretionary wealth management fees charges are low, ranging from 0.61 to 0.30 % per year
These benefits translate into low costs and thus higher net returns for clients.
Benefits relating to consumer access:
• MeDirect online wealth management clients can start investing from € 5.000 and can make additional monthly contributions from € 100
• Automated monthly contributions allow clients to spread their investment over time and thereby decrease volatility in their portfolio
• MeDirect’s wealth management and investment tools are accessible on the public website of the bank, so everybody can consult them, which benefits retail investor awareness and financial education
• The open architecture approach followed by MeDirect spreads client’s investments across a worldwide diversified portfolio, which is a benefit when compared to the sometimes more local biased manual investment advisor.
Benefits relating to the quality of service:
• The MeDirect client investment risk profiling tool ensures that all clients are evaluated according to the same standard, based on their personal financial situation, their risk appetite and their knowledge and experience regarding investing. And without the influence of a ‘sales person’ who could bias the responses of the client
• MeDirect offers the possibility to register for a trial automated investment advice portfolio, so that clients can evaluate the investment before proceeding to actually invest
• The details of the automated advice are recorded and can be consulted by the consumers. It’s also possible to update the personal investment profile of a consumer and at least once a year the client can consult their profile online and update it.
• MeDirect’s automated financial services demands very little human interference and we are constantly improving processes by further automatisation. This allows MeDirect to operate at lower costs and share this advantage with its clients
• MeDirect experiences the benefits from the economies of scale, allowing it to reach a broader client base. The business model is also expandable locally and to other countries.
• MeDirect offers a personalised but standardised wealth management offer that consists out of 5 different discretionary portfolios. No human interpretation or influence or bias is possible and therefore the risk of mis-selling by a face-to-face advisor or sales person and the associated financial and reputational liabilities are mitigated
• Automated wealth management has a clear audit trail
We believe that the risks that are described are broadly applicable to the entire financial advice sector, whether automated or not. In fact, we believe that a number of the risks highlighted are more prominent in non-automated advice and less or not applicable to automated advice. For example face-to-face “advisors” are typically sales people who, willingly or not, may have a tendency to be biased and influence potential clients. Online automated advice is much more unbiased and transparent, especially when there is an e-commerce client-centric corporate culture in the company.
We list below our reactions to the specific points where we disagree:
50. In case of clearly presented automated advice there is no scope for clients to make mistakes or incorrect decisions.
51. Legal disclaimers online on the MeDirect website for example are not in small print but in the same font as the rest of the content. This is in any case a clear requirement by the regulator. In face-to-face meetings small print will be handed out to clients and rarely read during the meeting or after the meeting.
52. & 53. Good UI and UX can ensure very clear understanding by clients
55. The risk of advice being misinterpreted or unsuitable is more applicable to a manual offline sales process. For example a customer receiving advice that is based on his/her answers to an automated questionnaire are categorised as a defensive investment profile and subsequently a defensive portfolio is discretionary managed for the client. We struggle to see a risk of misinterpretation in such settings.
56. Applies to all advice, whether automated or not. Automated advice is better suited for regular updates from clients for example through automated emails or pop-ups when the client logs in online.
57. 58. 59. This is absolutely a higher risk and more prevalent in a manual advice setting where a higher operating cost will incentivise cross-subsidisation. For example, this is common in the Belgian mortgage market where non-automated mortgage lenders, typically large commercial banks cross-subsidise under-priced mortgages with expensive insurance products and other charges. Also, automated and online offerings typically clearly label the costs of services and operate on the basis of open architecture, whereby each product is advised for its specific client suitability.
59. The disadvantage of a client not being able to ask “clarifying questions” in an automated advice setting is more than offset by the advantage that there is no risk of being influenced by a physical advisor or sales person. And online advice services are able to post very clear information that can be controlled by regulators and is always available.
60. We believe that the public is under estimated here. We view the risk that a comparison tool / website or a calculator is viewed or interpreted as advice as very low. In fact we believe that such tools empower the public to educate themselves and challenge advice provided elsewhere, whether automated or not.
61. Again comparison websites are not providing advice and we believe that the general public recognises this. Very few people will interpret an Amazon product comparison as advice. Similarly comparison of mortgages, mutual funds, insurance products is generally regarded as an information tool and not as advice. The risk of leading the client to the cheapest product seems more of a benefit in the financial advice sector where clients of non-automated advice mostly risk being advised the most expensive products (e.g the expensive Branch 23 and Branch 21 products in Belgium) on which the advisor earns the highest fees.
64. The regulator (rightly so in our opinion) insists that it should be very clear who is responsible for the offered advice. We do see examples where this is not always clear, whether the advice is automated or not. But we believe that this can be remedied if the advisor wishes to do so.
66. 67. There are very clear rules and regulations regarding the use of data, whether obtained through an automated or manual advice process. This is not a risk relating to automation. For example MeDirect clearly states upfront that data will not be sold to third parties. If used in a transparent manner, then some data could be used to help clients understand their own behaviour and find alternative better products and services.
67. We believe that the more people use online tools and automated advice tools, the more familiar they become with online communications and the better they will be at spotting phishing and other scams. Scams have happened via mail, fax, phone and now also via internet. We do not see the need to single out automated advice as being more risky.
68. 69. The example provided here that some assumptions (e.g. interest rate will always be low) do not vary per client is unclear to us. Every advisor, whether automated or not, will make some macro-assumptions to base their advice on.
Advice tools “designed to fit a customer into a range of pre-determined options” or profiles are used by a number of traditional wealth managers in Belgium. Fully personalised financial advice in a non-automated manner is only available for UHNW clients who invest significant amounts, allowing the business model to cover the operational and HR costs necessary to provide the personalised service. Some robo-advisors can personalise the advice more, for example in the US where individual tax optimisation occurs automatically.
70. Testing of tools can be done at large scale and automatically. The risk of a fault in a tool can thus be mitigated and certainly needs to be weighed against the risk of human error or bias in a non-automated advice setting
71. We would not recommend that advice tools be constructed by technology specialists without involving financial advisors at all. We also do not believe that this is widespread. There are however benefits to having specialists from other industries (e-commerce, technology, etc.) looking at automated advice tools and devising more client friendly solutions than those offered by the traditional advisors. Avoiding herd mentality can benefit client centricity.
72. Hacking of an advice tool or of any online system is possible, albeit the probability is low, especially as the potential monetary gains are usually limited. This varies with the type of advice of course but typically sensitive data is subject to extra security measures.
73. The risk of a Risk and Compliance team not understanding the advice tool needs to be put in perspective and we believe is overstated. First it underestimates the capabilities of the staff in those departments. Second it assumes that an audited automated tool that can be audited at all-times carries more risk than the operational challenge of monitoring face-to-face advice meetings where human advisors can make errors of judgement or provided biased advice.
74. We do not understand the argument that slow advice is better than fast automated, precise, efficient advice delivered at a lower cost and which the client can access and revisit online 24/7.
75. 76. The risk that consumers will lack the motivation to act on advice provided by automated advice tools is also not clear to us. In principle, automated advice can be acted on immediately. There is indeed a risk, which we have experienced, that regulatory hurdles are imposed on automated advice tools that make them less user-friendly. But in principle this should not be the case and as we have seen with e-commerce overtaking bricks and mortar commerce, the same can occur for financial advice if the platforms are given the leeway to build the tools from a customer perspective.
76. Client follow-up can happen very efficiently for automated advice. At MeDirect we use a combination of emails, secure messages and phone conversations to follow-up with clients. Clients can also consult the advice 24/7. For certain types of advice a frequent follow-up is also less recommended, if the advisor has a discretionary mandate for example.
77. Herding risk is inherent in any advice model, whether automated or not. Large wealth managers, mutual fund managers and ETF managers face liquidity risks whether their products are distributed through automated or manual channels.
78. The risk that automation of advice will reduce the availability of advisors in the future which in turn may limit access to advice is not a valid one in our opinion. Firstly, automation allows the democratisation of advice by making sound advice available to everyone. Secondly, those (typically wealthier) consumers who are target clients of non-automated advisors pay higher fees today to their manual advisors, which sustains that business model. We believe both automated and non-automated advice models are mainly complementary rather than substitutes for each other. Finally, automated advisors employ some advisors (albeit fewer) to build and maintain the tools, thus that skillset is evolving rather than disappearing.
For illustration purposes, MeDirect has mitigated potential risks in investment advice (whether automated or not) by implementing extreme client centricity as a strategy, as most digital players do.
Some examples of mitigating the lack of information:
• On screen, advice tools are accompanied by the ‘Need help’ information rectangle, containing phone and email details for a contact centre that is reachable also outside business hours.
• All tariffs and charges are easily accessible and prominent on the website and clearly displayed before any investment can made.
• We avoid ‘legal small print’ and typically put all information transparently on our website in the same font as the other content. This is in any case required by the regulator
Some examples of avoiding the incorrect information is inputted in the advice tool:
• We ask simple and short questions and we don’t use technical terminology
• The advice tool doesn’t take specific investment goals into account, only the envisaged investment period
• Customers’ circumstances can change: they can proactively inform us about changes, which we encourage, or customers can indicated them during the yearly review of his personal investment profile.
Some examples of the transparency of our online wealth management tool:
• A trial portfolio is free of any charge, the wealth management fee is displayed upfront, before a consumer can use the tool
• MeDirect don’t offer in-house products, fees are clearly indicated on our website, per product individually
• Our offer is based on qualitative and quantitative investment research, together with Morningstar, in order to avoid conflicts of interest and to be clear and not misleading.
Some examples how we give clear information:
• We make a clear distinction between our wealth management offer and the execution only part (trading and safekeeping functionalities) on our platform. We don’t offer investment advice regarding the execution only trades.
• Belgium has a pro-active regulator screening all investment offers and ensuring that the investment offer and services are compliant
• MeDirect screens the investment products in order that they are all non-complex and non-structured product.
Some examples of providing advice in a non-fragmented nature with clear accountability:
• MeDirect operates under a Belgian banking licence granted by the National Bank of Belgium and is regulated by the FSMA and is therefore clearly responsible for the performed advice and other financial services that it offers. Customers can send complaints to our contact centre or directly to Compliance Department. The contact details are prominently mentioned on the platform. There is also the possibility of contacting the Ombutsfin service department in Belgium, as regulated by law. These contact details are also easily retrievable from our website.
Some examples of how we treat personal data:
• Personal data is only used for account opening purpose (KYC) and AML checks
• The provided personal financial data is only used to determine the investment profile
• A customer must give his explicit opt-in consent in order to receive marketing materials from MeDirect
• MeDirect does not share or sell this data with other third parties.
Some examples how we mitigate the risk of malfunctioning of the tools:
• The tools have been tested with a wide range of test scenarios to be sure that the result is suitable advice in all cases.
• Automated advice allows us to see patterns in aggregate data which would highlight potential biases early on
• The proposed investment advice is based on inputs from an Investment Committee, which alleviates the risk of an algorithm misallocating investments
• The tool is hosted in a secure environment with active security surveillance.
• The consumer has always the possibility to ask for human assistance by phone or by mail or by a secure message to our contact centre.
82. We see no evidence of the risk that automated advice means that consumers will overuse alternative ‘human’ means. Advice over the phone or with a human advisor also means higher costs, not neutral advice or specific recommended products.
83. The operational risk of using internal or external developers for an advice tool is similar in our view. With proper outsourcing contracts or partnership agreements, external providers or FinTechs can provide up to date specialised skills and services. By spreading these services across numerous financial institutions, the cost for the institution to stay up to date is lower than to replicate such knowledge in-house. It also allows the institutions to change partners and stay competitive.
84. if “there are no legal agreements, no appropriate controls, inappropriate delegated authority” then no business, whether automated or not, will function correctly.
85. The advisor / financial institution is responsible towards its clients and regulators in any case. Having recourse to a third party is a positive as it presents a possibility to help the institution recoup some losses.
We believe strongly that this evolution is favourable for consumers. They have access to services 24/7, where bank branches have only limited time access. Costs are lower which means higher net returns or lower costs of credit or insurance. Complex products can be explained in an easy to understand manner with online graphs, infographics and reports. In the past, customers suffered under ‘incomprehensible’ financial advice veiled in complex jargon. The reason that usage of ‘apps’ is increasing very rapidly, is thanks to the great user experience customers have and the intuitive appeal of simple automated tools that inform the client and allow them to act on that transparent advice or service.
As already indicated, the risk of the dual society between the ‘connected’ consumers and those who are not is real. Governments and regulators must therefore accelerate their efforts for provision of internet connections for all European citizens. There is also a dependency on the legislation being adapted and maintained up to date to allow and encourage the provision of financial services in the broad sense online and in an automated fashion.
We see that e-commerce is booming as the customers have gained trust in the online medium. We see that online deposits are well accepted and offer clients substantially higher interest income than the traditional banks. Online automated financial advice is more recent and less known, but has the same potential to improve the financial situation of the broad population which today has no access or awareness of financial advice.
We do observe in automated (online) financial advice the same restrictions as for e-commerce in terms of local legislation hampering the development a true unified European market and product offering. We welcome this Discussion Paper as a sign that the regulators and legislators are open to listen to the potential advantages of encouraging automated advice in a European context. The benefits to an ageing population of European citizens who will need increasing retirement income is significant.
The possible fragmentation of the financial services landscape is an advantage for consumers. For example, in Belgium, consumers often have one bank that offers all their financial services and products. They are not aware of pricing or other possible alternative products. Luckily, the internet made all product offers more transparent and accessible.
Also in Belgium and across Europe, the financial literacy of consumers is very low. The internet and online tools give the possibility to enhance the knowledge of financial products and make them more accessible.
This will not mean that the traditional players will disappear. There still is complementarity for certain types of financial advice and services in general.
Most importantly we expect that the offer and choice available to consumers will broaden. The consumer’s behaviour will also change as the ‘internet natives’ will want access to automated advice. They are not used to the policies of a traditional bank, such as limited opening hours. Internet is for them the same commodity as water from a tab.
We believe that after the initial extreme unbundling of financial services with FinTech start-ups focusing on one single product or service, the future lies in partial (re-)bundling of financial services. This will encourage more co-operation between the incumbents and the challenger FinTechs. Evidence of this trend is mounting already. If this means that FinTechs can make the incumbents more client-centric then the consumer will win in the end.
MeDirect Bank is a Belgian Bank offering a one-stop shop for online wealth management, execution only investments and savings. MeDirect was a pioneer, launching this niche partial-(re)bundling business model in Sept 2013 and launching the first online wealth management platform in Belgium.
The opinions expressed in our comments are from the MeDirect management team and focus principally on the ‘securities sector’ and ‘investment advice’ as defined in paragraph 9 of the Discussion Paper. However, we believe that a number of our generic comments (e.g. benefits of standardisation, removal of human bias/influence, greater transparency and efficiency) also apply to the banking sector and the insurance sector as defined in para. 9.
We have launched MeDirect Bank to provide a better alternative to retail investors and savers compared to what they have available today, especially when considering those individuals who have limited amounts to save and invest. The discussion paper highlights numerous benefits but also some risks of automated investment advice. We are convinced that, when done professionally and client-centrically, automation provides a large share of the population access to materially better alternatives for their savings. Removing the barriers to entry to good and appropriate investment advice for the broader public brings such significant macro advantages (e.g. broad increase in wealth across socio-economic population categories, mitigating national pension shortcomings, second degree externalities of a wealthier population, etc.), that we believe it is vital that an adequate and constructive regulatory framework is implemented to support the growth of such automation and technology.
We believe that it is very important that the European government and regulator strike a balance between (i) supporting the FinTechs who create innovation and generate significant benefits for consumers, and (ii) ensuring that the FinTech development occurs in a safe environment with sufficient but overly burdensome regulation. Trust in financial services is essential. Regulation has a very important role to play in supporting that trust. But we should ensure that regulation is constructive and benefits the consumer in the end. At least there should be a level-playing field between the new FinTechs and the incumbents’ regulation. In addition allowing the new players in a controlled environment to demonstrate novel business models is beneficial. Essential is also a level playing field across Europe and avoiding national gold-plating.
We see very positive evolutions in the UK for startup and FinTech development and for financial innovation. Applying this approach at European level would generate the engine of growth that Europe needs and ultimately stimulate allocation of capital more efficiently to the real economy. “Robo-advisor” fees for example are much higher on average in Europe than in the US. This is mainly due to the fragmentation of the European markets. Products and services have to be tailored to regulatory requirements of each national regulator rather than being rolled out efficiently across Europe as a whole. This increases costs, reduces (potential) economies of scale and prevents product standardisation which would stimulate competition.
FinTech players are organising themselves in order to be heard by their local regulator and at the European level. Examples include FinTech Belgium, FinTech Nederlands, FinTech France, …
We hope that the sector’s voice will be heard.
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.
We broadly agree with the main characteristics of automated financial advice tools presented in paragraphs 18 to 28 of this Discussion Paper.However, in relation to the third characteristic (“the output of the tool is, or is perceived to be, financial advice”), we would like to caution against the pre-conception that online investment tools and advice are less clearly demarcated from online execution-only offerings or that online execution-only investment tools can be considered or redefined as advice.
The broader online industry is very good at providing (prospective) clients with tools to facilitate the search of a desired and appropriate product. Typical e-commerce websites offer very user-friendly search, filter and comparison tools; order baskets; related product lists (“customers who bought A also bought B”); product updates (“product A in your shopping basket has fallen in price” or “product A in your basket is no longer available, try product B instead”), etc. Unfortunately regulators do not always have a clear view on this when it applies to financial products, especially in the context of interpretation of MiFID. We believe that such tools do not provide advice and we advocate clear legal and regulatory guidance on such tools which can provide invaluable help to prospective investors to discover the appropriate products for them. Clarifying that they do not constitute advice, will encourage companies to develop such tools in a simple transparent manner.
2. Are there any other relevant characteristics of automated financial advice tools?
We note that there are a number of other relevant characteristics of automated financial advice tools which are worth mentioning as well. Most providers of automated financial advice use or exhibit at least one of the following:• Automation of risk profiling/ advice: algorithm that on the basis of the customer’s answers to a questionnaire, automatically assigns the customer to the appropriate risk profile. MeDirect uses an online questionnaire that profiles the customer and advises them on the type of portfolio that is suitable to their personal and financial circumstances. An often found criticism on automated profiling is that the advice is not fully personalised but rather clients are categorised in one of a number of risk categories (depending on the platform we have seen that this varies from 3 to 12 risk profiles). However, we note that most traditional wealth managers work on a similar basis for mass-affluent clients.
• Automation of asset allocation, investment/trade selection and subsequent monitoring: for instance U.S. “robo-advisors” such as Wealthfront and Betterment use automation to manage the portfolios. Some offline banks also use such automation. For example Alex Bank in the Netherlands uses automated investment decisions to manage clients’ portfolios. However not all providers of online investment advice use an automated investment decision process. MeDirect Bank for example combines manual asset allocation and manual fund selection performed by human experts at Morningstar and MeDirect, with online automated client profiling and monitoring tools for clients as well as online distribution. This is cost effective and scalable compared to branch based distribution.
Automation of trade execution: the execution of transactions in a discretionary wealth management /advice setting can happen automatically which allows to manage many client portfolios (of smaller value) at low operational cost. This automation can also be used for periodical portfolio rebalancing and regular contributions (of small amounts) to the client’s portfolio. At MeDirect we eliminated as much as possible the human intervention for the mechanical trade execution with a view to reduce costs and share these savings with clients (MeDirect charges zero entry, exit and transaction fees on mutual funds).
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.
“Robo-advisors”, a term used generically for providers of various types of automated investment advice, are a relatively recent phenomenon, appearing only a few years ago in the US. However today there are multiple actors in the sector, both in the US and across the world. In the US the largest (in terms of AuM) players are Wealthfront and Betterment, whilst in Europe MeDirect in Belgium, Nutmeg in the UK and MoneyFarm in Italy have been pioneers. This sector shows significant growth potential: for example the FCA in the UK received requests for information from 39 potential robo-advisors between Aug 2014 and 2015. In Belgium, after the launch of online wealth management by MeDirect Bank in September 2013, Fortuneo and Keytrade Bank have followed suit and more recently Dutch online bank Evi.Robo-advisors have in common the provision of a low-cost and transparent discretionary management service, offering a suite of managed portfolios with different risk profiles. Management costs vary between 1.0% per annum to being free.
Most robo-advisors use ETFs or individual securities to build and manage portfolios.
MeDirect distinguishes itself because it is one of the few online wealth managers that (i) builds diversified portfolios for its clients using mutual funds and (ii) the asset allocation and fund selection is done manually.
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) MeDirect Bank is an online bank offering savings, wealth management and investments based on an open architecture approach. The firm was launched in Belgium in September 2013, initially as a branch of its parent company and now operating as a fully-licensed Belgian bank, following the granting of a Belgian banking license by the NBB in June 2015.ii) MeDirect offers online savings, wealth management (in scope for this Discussion Paper) and investments. The online platform is complemented by a physical contact centre that can be contacted by email, secure electronic messages and telephone. Through its online platform, it provides its Belgian client base with the services including: online discretionary wealth management; open architecture low cost trade execution for mutual funds, stocks, bonds and exchange traded funds; execution only thematic model portfolios, access to online investment analysis and tools and competitive savings rates. The platform provides access to a broad array of savings and investment products which are supplemented by free investment research and tools to search, compare and analyse investments. Its online distribution strategy, combined with a low cost operational centre, allows it to provide a high quality unbiased offering at a low cost to a wide audience.
MeDirect Bank offers discretionary wealth management from € 5,000 onwards at an annual management cost of 0.30% to 0.61% (incl VAT) depending on the size of the portfolio. Clients fill in a questionnaire online which automatically assesses the profile of the client, advises the client of his/her investor profile and proposes an investment portfolio that matches that profile. The composition of the portfolios is determined by people in the MeDirect team in co-operation with people from Morningstar. This is a manual process. The transfer of money to the client’s investment account, investment of the money into the fund portfolio, monthly additional contributions, execution of the (manually decided) rebalancing is all done automatically. Clients can call the contact centre for help in navigating the tool but the contact centre will not provide advice over the phone.
iii) As at 29 Feb 2016, MeDirect had circa 17,000 clients. The average age of clients is approximately 50 and the client base is mass affluent. MeDirect is a proponent of long term strategic asset allocation and diversified investments spread over time. We recognise this in our clients’ who are not the typical active online traders but instead invest over the longer term.
iv) The MeDirect Bank business model is innovative in the FinTech space in that it recognised the advantages already in 2013 of partial-(re)bundling of financial services. MeDirect Bank offers a one-stop solution for households that look for better solutions for their savings. The bank offers deposits as a foundation for a healthy financial portfolio and then offers non-complex investment products and services to offer a suitable product to clients irrespective of their knowledge, experience and wealth.
v) The automated tools that MeDirect offers to the clients on its online platform have been built through a combination of internal IT development and external parties, in particular Morningstar.
vi) MeDirect Bank was a pioneer when it launched online wealth management in Belgium in 2013. It now has nearly 17,000 clients across all its products, which is approximately double from one year before. Growth has continued to accelerate in 2015 and early 2016. In the first 6 weeks of 2016 the number of wealth management clients increased by 44%. We have seen a number of other banks and FinTechs enter the sector which we view as a positive as the offering widens and the provision of automated investment services becomes more recognised and can therefore benefit more households.
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?
The launch of MeDirect Bank’s online wealth management platform in 2013 and subsequent launch of the offering by Keytrade Bank (late 2015) and Evi (early 2016) illustrates that it is possible to provide automated investment services in Belgium.However, while there are no absolute barriers that prevent the offering/developing of automated financial advice tools in the securities sector, there are significant barriers and obstacles which render the offering/development of such automated services significantly materially more onerous than the offering of such services in a traditional manual and offline manner and prevent the automated offering from reaching its full potential in terms of best client service.
We observe and experience that in Belgium there is no level playing field for online wealth managers compared to face-to-face wealth managers or banks. Obstacles and barriers to offering/development of automated financial advice and online wealth management in particular can be categorised in different categories:
a) Additional and stricter legal requirements for automated / online providers of investment advice
- Regulatory texts include specific additional requirements for online automated advice in the securities sector. For example “para. 5.1.2.2.6 “Information gathering via the internet” in the FSMA note on duty of care (“zorgplicht. Vaststellingen en standpunten naar aanleiding van inspecties – Nota ”) (http://www.fsma.be/nl/Supervision/MiFID.aspx )
b) Stricter interpretation of legal requirements by the regulator for online platforms.
We list below a number of examples observed in Belgium for online wealth management / robo-advisors:
- The MiFID requirements for suitability and appropriateness testing of clients are implemented disproportionally strictly for online platforms. Online platforms are for example required to block potential clients who fail a knowledge test on the website. This would be tantamount for offline traditional wealth managers to require that a private banker escorts potential clients outside of the office or bank branch in case they answer questions incorrectly.
- Overly prescriptive interpretation by the regulator of information disclosure before allowing a client to invest. For example the requirement to fit all regulatory required information on one single webpage, not allowing the use of user-friendly tabs to present such information in a clear manner or not to allowing any information to require a click on a link or button., The result is that it not possible for online providers of automated investment/securities advice to offer to their (prospective) clients the basic industry standards for e-commerce user experience, user interface and usability. Given the importance of optimisation of websites for the conversion of visitors into new customers, such requirements result in increased abandonment rates by prospective clients.
- Assumption by the regulator that prospective clients will not read information presented online but would do so if presented with the same document face-to-face. For example, presenting a clear link on a website to the KIID which provides all the key information on a mutual fund to clients is not deemed sufficient, while in face-to-face meetings a private banker can hand out this document and subsequently sell an investment.
c) Legal and regulatory requirements not adapted or translated inadequately to e-commerce techniques and mobile requirements
- For example, presenting a prospective client with a “buy” or “invest” button online is only allowed after having previously shown all the investment information on one single webpage (no tabs or clicks allowed to present the information). On a mobile website or app this means endless scrolling for the (prospective) client before a buy button can be found, which goes against the standard rules for good online user experience and user interface
d) Stricter monitoring and enforcement of regulatory requirements for online platforms
- Online automated advice is by definition more transparent and can be audited, monitored and reviewed more efficiently than a traditional offline business model as the entire automated advice tool and information are visible 24/7 online. The transparency of automated advice, which is a positive for clients, puts additional pressure on online providers over offline providers who can by definition not be monitored so closely.
6. Do you consider the potential benefits to consumers to be accurately described? If not, please explain why.
Yes, we agree with the listed benefits.7. Are you aware of any additional benefits to consumers? If so, please describe them.
An additional benefit of automated providers of advice is that thanks to their efficient business models, they are able to offer a true client-centric offering. Offline and manual providers of advice have higher operational cost bases which mean that almost by definition the client will face higher costs, higher barriers to entry and often the product selection is limited to in-house products or to a biased selection of more expensive products which pay higher fees to the advice provider. Online automated providers are best suited to offer advice based on open architecture, offering the most suited products to clients.MeDirect is an example of an online wealth manager offering advice based on an unbiased open architecture universe of mutual funds.
Not all providers of automated advice share their cost benefits with their clients. Some follow the manual / non-automated approach of offering only in-house products or a biased selection of more profitable products. But the important factor is that automated providers are able to better serve clients and due to their online presence clients are very easily able to verify the costs and product details. Encouraging automation will encourage transparent platforms to develop which will benefit customers in the end.
8. Do you see any differences in the potential benefits arising for consumers in each of the banking, insurance and securities sectors?
No comment.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.
Yes, in launching MeDirect Bank’s online / automated wealth management offering in Belgium, we have demonstrated these benefits to customers. In the first 6 weeks of 2016 the number of wealth management clients increased by 44% which indicates that there is demand for the MeDirect automated investment advice service and interest in the sector.Benefits relating to cost:
• MeDirect charges no account or registration costs
• MeDirect charges no custody costs
• MeDirect chooses not to charge any entry or exit costs on the mutual funds in its discretionary portfolios
• Discretionary wealth management fees charges are low, ranging from 0.61 to 0.30 % per year
These benefits translate into low costs and thus higher net returns for clients.
Benefits relating to consumer access:
• MeDirect online wealth management clients can start investing from € 5.000 and can make additional monthly contributions from € 100
• Automated monthly contributions allow clients to spread their investment over time and thereby decrease volatility in their portfolio
• MeDirect’s wealth management and investment tools are accessible on the public website of the bank, so everybody can consult them, which benefits retail investor awareness and financial education
• The open architecture approach followed by MeDirect spreads client’s investments across a worldwide diversified portfolio, which is a benefit when compared to the sometimes more local biased manual investment advisor.
Benefits relating to the quality of service:
• The MeDirect client investment risk profiling tool ensures that all clients are evaluated according to the same standard, based on their personal financial situation, their risk appetite and their knowledge and experience regarding investing. And without the influence of a ‘sales person’ who could bias the responses of the client
• MeDirect offers the possibility to register for a trial automated investment advice portfolio, so that clients can evaluate the investment before proceeding to actually invest
• The details of the automated advice are recorded and can be consulted by the consumers. It’s also possible to update the personal investment profile of a consumer and at least once a year the client can consult their profile online and update it.
10. Do you consider the potential benefits to financial institutions to be accurately described? If not, please explain why.
Yes, we agree.11. Are you aware of any additional benefits to financial institutions? If so, please describe them.
Financial institutions that use automated advice tools can focus their resources on providing the best products and the most client-centric solutions. Especially for advice services where operational economies of scale are not straightforward (e.g. mortgage lending) or are only achieved at large scale (e.g. wealth management), automation can lower costs significantly for start-ups and thereby encourage new entrants to the sector. The result is to stimulate more competition which ultimately benefits the customers.12. Do you see any differences in the potential benefits arising for financial institutions in each of the banking, insurance and securities sectors?
No comment13. 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.
Yes:• MeDirect’s automated financial services demands very little human interference and we are constantly improving processes by further automatisation. This allows MeDirect to operate at lower costs and share this advantage with its clients
• MeDirect experiences the benefits from the economies of scale, allowing it to reach a broader client base. The business model is also expandable locally and to other countries.
• MeDirect offers a personalised but standardised wealth management offer that consists out of 5 different discretionary portfolios. No human interpretation or influence or bias is possible and therefore the risk of mis-selling by a face-to-face advisor or sales person and the associated financial and reputational liabilities are mitigated
• Automated wealth management has a clear audit trail
14. Do you agree with the description of the potential risks to consumers identified? If not, explain why.
No we do not agree.We believe that the risks that are described are broadly applicable to the entire financial advice sector, whether automated or not. In fact, we believe that a number of the risks highlighted are more prominent in non-automated advice and less or not applicable to automated advice. For example face-to-face “advisors” are typically sales people who, willingly or not, may have a tendency to be biased and influence potential clients. Online automated advice is much more unbiased and transparent, especially when there is an e-commerce client-centric corporate culture in the company.
We list below our reactions to the specific points where we disagree:
50. In case of clearly presented automated advice there is no scope for clients to make mistakes or incorrect decisions.
51. Legal disclaimers online on the MeDirect website for example are not in small print but in the same font as the rest of the content. This is in any case a clear requirement by the regulator. In face-to-face meetings small print will be handed out to clients and rarely read during the meeting or after the meeting.
52. & 53. Good UI and UX can ensure very clear understanding by clients
55. The risk of advice being misinterpreted or unsuitable is more applicable to a manual offline sales process. For example a customer receiving advice that is based on his/her answers to an automated questionnaire are categorised as a defensive investment profile and subsequently a defensive portfolio is discretionary managed for the client. We struggle to see a risk of misinterpretation in such settings.
56. Applies to all advice, whether automated or not. Automated advice is better suited for regular updates from clients for example through automated emails or pop-ups when the client logs in online.
57. 58. 59. This is absolutely a higher risk and more prevalent in a manual advice setting where a higher operating cost will incentivise cross-subsidisation. For example, this is common in the Belgian mortgage market where non-automated mortgage lenders, typically large commercial banks cross-subsidise under-priced mortgages with expensive insurance products and other charges. Also, automated and online offerings typically clearly label the costs of services and operate on the basis of open architecture, whereby each product is advised for its specific client suitability.
59. The disadvantage of a client not being able to ask “clarifying questions” in an automated advice setting is more than offset by the advantage that there is no risk of being influenced by a physical advisor or sales person. And online advice services are able to post very clear information that can be controlled by regulators and is always available.
60. We believe that the public is under estimated here. We view the risk that a comparison tool / website or a calculator is viewed or interpreted as advice as very low. In fact we believe that such tools empower the public to educate themselves and challenge advice provided elsewhere, whether automated or not.
61. Again comparison websites are not providing advice and we believe that the general public recognises this. Very few people will interpret an Amazon product comparison as advice. Similarly comparison of mortgages, mutual funds, insurance products is generally regarded as an information tool and not as advice. The risk of leading the client to the cheapest product seems more of a benefit in the financial advice sector where clients of non-automated advice mostly risk being advised the most expensive products (e.g the expensive Branch 23 and Branch 21 products in Belgium) on which the advisor earns the highest fees.
64. The regulator (rightly so in our opinion) insists that it should be very clear who is responsible for the offered advice. We do see examples where this is not always clear, whether the advice is automated or not. But we believe that this can be remedied if the advisor wishes to do so.
66. 67. There are very clear rules and regulations regarding the use of data, whether obtained through an automated or manual advice process. This is not a risk relating to automation. For example MeDirect clearly states upfront that data will not be sold to third parties. If used in a transparent manner, then some data could be used to help clients understand their own behaviour and find alternative better products and services.
67. We believe that the more people use online tools and automated advice tools, the more familiar they become with online communications and the better they will be at spotting phishing and other scams. Scams have happened via mail, fax, phone and now also via internet. We do not see the need to single out automated advice as being more risky.
68. 69. The example provided here that some assumptions (e.g. interest rate will always be low) do not vary per client is unclear to us. Every advisor, whether automated or not, will make some macro-assumptions to base their advice on.
Advice tools “designed to fit a customer into a range of pre-determined options” or profiles are used by a number of traditional wealth managers in Belgium. Fully personalised financial advice in a non-automated manner is only available for UHNW clients who invest significant amounts, allowing the business model to cover the operational and HR costs necessary to provide the personalised service. Some robo-advisors can personalise the advice more, for example in the US where individual tax optimisation occurs automatically.
70. Testing of tools can be done at large scale and automatically. The risk of a fault in a tool can thus be mitigated and certainly needs to be weighed against the risk of human error or bias in a non-automated advice setting
71. We would not recommend that advice tools be constructed by technology specialists without involving financial advisors at all. We also do not believe that this is widespread. There are however benefits to having specialists from other industries (e-commerce, technology, etc.) looking at automated advice tools and devising more client friendly solutions than those offered by the traditional advisors. Avoiding herd mentality can benefit client centricity.
72. Hacking of an advice tool or of any online system is possible, albeit the probability is low, especially as the potential monetary gains are usually limited. This varies with the type of advice of course but typically sensitive data is subject to extra security measures.
73. The risk of a Risk and Compliance team not understanding the advice tool needs to be put in perspective and we believe is overstated. First it underestimates the capabilities of the staff in those departments. Second it assumes that an audited automated tool that can be audited at all-times carries more risk than the operational challenge of monitoring face-to-face advice meetings where human advisors can make errors of judgement or provided biased advice.
74. We do not understand the argument that slow advice is better than fast automated, precise, efficient advice delivered at a lower cost and which the client can access and revisit online 24/7.
75. 76. The risk that consumers will lack the motivation to act on advice provided by automated advice tools is also not clear to us. In principle, automated advice can be acted on immediately. There is indeed a risk, which we have experienced, that regulatory hurdles are imposed on automated advice tools that make them less user-friendly. But in principle this should not be the case and as we have seen with e-commerce overtaking bricks and mortar commerce, the same can occur for financial advice if the platforms are given the leeway to build the tools from a customer perspective.
76. Client follow-up can happen very efficiently for automated advice. At MeDirect we use a combination of emails, secure messages and phone conversations to follow-up with clients. Clients can also consult the advice 24/7. For certain types of advice a frequent follow-up is also less recommended, if the advisor has a discretionary mandate for example.
77. Herding risk is inherent in any advice model, whether automated or not. Large wealth managers, mutual fund managers and ETF managers face liquidity risks whether their products are distributed through automated or manual channels.
78. The risk that automation of advice will reduce the availability of advisors in the future which in turn may limit access to advice is not a valid one in our opinion. Firstly, automation allows the democratisation of advice by making sound advice available to everyone. Secondly, those (typically wealthier) consumers who are target clients of non-automated advisors pay higher fees today to their manual advisors, which sustains that business model. We believe both automated and non-automated advice models are mainly complementary rather than substitutes for each other. Finally, automated advisors employ some advisors (albeit fewer) to build and maintain the tools, thus that skillset is evolving rather than disappearing.
For illustration purposes, MeDirect has mitigated potential risks in investment advice (whether automated or not) by implementing extreme client centricity as a strategy, as most digital players do.
Some examples of mitigating the lack of information:
• On screen, advice tools are accompanied by the ‘Need help’ information rectangle, containing phone and email details for a contact centre that is reachable also outside business hours.
• All tariffs and charges are easily accessible and prominent on the website and clearly displayed before any investment can made.
• We avoid ‘legal small print’ and typically put all information transparently on our website in the same font as the other content. This is in any case required by the regulator
Some examples of avoiding the incorrect information is inputted in the advice tool:
• We ask simple and short questions and we don’t use technical terminology
• The advice tool doesn’t take specific investment goals into account, only the envisaged investment period
• Customers’ circumstances can change: they can proactively inform us about changes, which we encourage, or customers can indicated them during the yearly review of his personal investment profile.
Some examples of the transparency of our online wealth management tool:
• A trial portfolio is free of any charge, the wealth management fee is displayed upfront, before a consumer can use the tool
• MeDirect don’t offer in-house products, fees are clearly indicated on our website, per product individually
• Our offer is based on qualitative and quantitative investment research, together with Morningstar, in order to avoid conflicts of interest and to be clear and not misleading.
Some examples how we give clear information:
• We make a clear distinction between our wealth management offer and the execution only part (trading and safekeeping functionalities) on our platform. We don’t offer investment advice regarding the execution only trades.
• Belgium has a pro-active regulator screening all investment offers and ensuring that the investment offer and services are compliant
• MeDirect screens the investment products in order that they are all non-complex and non-structured product.
Some examples of providing advice in a non-fragmented nature with clear accountability:
• MeDirect operates under a Belgian banking licence granted by the National Bank of Belgium and is regulated by the FSMA and is therefore clearly responsible for the performed advice and other financial services that it offers. Customers can send complaints to our contact centre or directly to Compliance Department. The contact details are prominently mentioned on the platform. There is also the possibility of contacting the Ombutsfin service department in Belgium, as regulated by law. These contact details are also easily retrievable from our website.
Some examples of how we treat personal data:
• Personal data is only used for account opening purpose (KYC) and AML checks
• The provided personal financial data is only used to determine the investment profile
• A customer must give his explicit opt-in consent in order to receive marketing materials from MeDirect
• MeDirect does not share or sell this data with other third parties.
Some examples how we mitigate the risk of malfunctioning of the tools:
• The tools have been tested with a wide range of test scenarios to be sure that the result is suitable advice in all cases.
• Automated advice allows us to see patterns in aggregate data which would highlight potential biases early on
• The proposed investment advice is based on inputs from an Investment Committee, which alleviates the risk of an algorithm misallocating investments
• The tool is hosted in a secure environment with active security surveillance.
• The consumer has always the possibility to ask for human assistance by phone or by mail or by a secure message to our contact centre.
15. Do you consider there to be any risks to consumers missing? If so, please explain.
There is a possible risk of the ‘dual society’, where consumers who are internet skilful have access to qualitative automated advice at low costs and that other consumers will be deprived of such access. But offering automated advice vastly extends the access to advice to a broad part of the population that previously had no access.16. Do you see any differences in the potential risks arising for consumers in each of the banking, insurance and securities sectors?
No comment.17. Have you observed any of these risks causing detriment to consumers? If so, in what way?
No, these potential risks, where applicable, are been taken into account and mitigated. By following a focused ‘client centric’ approach, beyond all regulatory requirements, potential risks for customers are mitigated.18. Do you agree with the description of the potential risks to financial institutions identified? If not, explain why.
We do not agree with most risks highlighted here. Please see our comments below.82. We see no evidence of the risk that automated advice means that consumers will overuse alternative ‘human’ means. Advice over the phone or with a human advisor also means higher costs, not neutral advice or specific recommended products.
83. The operational risk of using internal or external developers for an advice tool is similar in our view. With proper outsourcing contracts or partnership agreements, external providers or FinTechs can provide up to date specialised skills and services. By spreading these services across numerous financial institutions, the cost for the institution to stay up to date is lower than to replicate such knowledge in-house. It also allows the institutions to change partners and stay competitive.
84. if “there are no legal agreements, no appropriate controls, inappropriate delegated authority” then no business, whether automated or not, will function correctly.
85. The advisor / financial institution is responsible towards its clients and regulators in any case. Having recourse to a third party is a positive as it presents a possibility to help the institution recoup some losses.
19. Do you consider there to be any risks to financial institutions missing? If so, please explain.
No20. Do you see any differences in the potential risks arising for financial institutions in each of the banking, insurance and securities sectors?
Not applicable21. Have you observed any of these risks causing detriment to financial institutions? If so, in what way?
No. Our experience is that these detriments are not valid.22. Would you agree with the assessment of the potential evolution of automated advice? Please provide your reasoning.
We agree in general with the indicated potential evolution of automated advice.We believe strongly that this evolution is favourable for consumers. They have access to services 24/7, where bank branches have only limited time access. Costs are lower which means higher net returns or lower costs of credit or insurance. Complex products can be explained in an easy to understand manner with online graphs, infographics and reports. In the past, customers suffered under ‘incomprehensible’ financial advice veiled in complex jargon. The reason that usage of ‘apps’ is increasing very rapidly, is thanks to the great user experience customers have and the intuitive appeal of simple automated tools that inform the client and allow them to act on that transparent advice or service.
As already indicated, the risk of the dual society between the ‘connected’ consumers and those who are not is real. Governments and regulators must therefore accelerate their efforts for provision of internet connections for all European citizens. There is also a dependency on the legislation being adapted and maintained up to date to allow and encourage the provision of financial services in the broad sense online and in an automated fashion.
We see that e-commerce is booming as the customers have gained trust in the online medium. We see that online deposits are well accepted and offer clients substantially higher interest income than the traditional banks. Online automated financial advice is more recent and less known, but has the same potential to improve the financial situation of the broad population which today has no access or awareness of financial advice.
We do observe in automated (online) financial advice the same restrictions as for e-commerce in terms of local legislation hampering the development a true unified European market and product offering. We welcome this Discussion Paper as a sign that the regulators and legislators are open to listen to the potential advantages of encouraging automated advice in a European context. The benefits to an ageing population of European citizens who will need increasing retirement income is significant.
The possible fragmentation of the financial services landscape is an advantage for consumers. For example, in Belgium, consumers often have one bank that offers all their financial services and products. They are not aware of pricing or other possible alternative products. Luckily, the internet made all product offers more transparent and accessible.
Also in Belgium and across Europe, the financial literacy of consumers is very low. The internet and online tools give the possibility to enhance the knowledge of financial products and make them more accessible.
23. How do you think that the market for automation in financial advice will evolve in the near future in the banking, insurance and investment sectors? Please also provide details of any relevant data or information to support your views, where available.
We believe that new FinTech players will have a substantial impact on the direction of the financial sector and therefore on the perception of the financial sector. There will be a more diversified offer, more easily accessible for consumers.This will not mean that the traditional players will disappear. There still is complementarity for certain types of financial advice and services in general.
Most importantly we expect that the offer and choice available to consumers will broaden. The consumer’s behaviour will also change as the ‘internet natives’ will want access to automated advice. They are not used to the policies of a traditional bank, such as limited opening hours. Internet is for them the same commodity as water from a tab.
We believe that after the initial extreme unbundling of financial services with FinTech start-ups focusing on one single product or service, the future lies in partial (re-)bundling of financial services. This will encourage more co-operation between the incumbents and the challenger FinTechs. Evidence of this trend is mounting already. If this means that FinTechs can make the incumbents more client-centric then the consumer will win in the end.
24. Are there any other comments you would like to convey on the topic of automation in financial advice?
The MeDirect Bank management team welcomes the initiative taken by the EBA, EIOPA and ESMA to produce this Discussion Paper on automation in financial advice and is pleased to have been given the opportunity to provide its comments.MeDirect Bank is a Belgian Bank offering a one-stop shop for online wealth management, execution only investments and savings. MeDirect was a pioneer, launching this niche partial-(re)bundling business model in Sept 2013 and launching the first online wealth management platform in Belgium.
The opinions expressed in our comments are from the MeDirect management team and focus principally on the ‘securities sector’ and ‘investment advice’ as defined in paragraph 9 of the Discussion Paper. However, we believe that a number of our generic comments (e.g. benefits of standardisation, removal of human bias/influence, greater transparency and efficiency) also apply to the banking sector and the insurance sector as defined in para. 9.
We have launched MeDirect Bank to provide a better alternative to retail investors and savers compared to what they have available today, especially when considering those individuals who have limited amounts to save and invest. The discussion paper highlights numerous benefits but also some risks of automated investment advice. We are convinced that, when done professionally and client-centrically, automation provides a large share of the population access to materially better alternatives for their savings. Removing the barriers to entry to good and appropriate investment advice for the broader public brings such significant macro advantages (e.g. broad increase in wealth across socio-economic population categories, mitigating national pension shortcomings, second degree externalities of a wealthier population, etc.), that we believe it is vital that an adequate and constructive regulatory framework is implemented to support the growth of such automation and technology.
We believe that it is very important that the European government and regulator strike a balance between (i) supporting the FinTechs who create innovation and generate significant benefits for consumers, and (ii) ensuring that the FinTech development occurs in a safe environment with sufficient but overly burdensome regulation. Trust in financial services is essential. Regulation has a very important role to play in supporting that trust. But we should ensure that regulation is constructive and benefits the consumer in the end. At least there should be a level-playing field between the new FinTechs and the incumbents’ regulation. In addition allowing the new players in a controlled environment to demonstrate novel business models is beneficial. Essential is also a level playing field across Europe and avoiding national gold-plating.
We see very positive evolutions in the UK for startup and FinTech development and for financial innovation. Applying this approach at European level would generate the engine of growth that Europe needs and ultimately stimulate allocation of capital more efficiently to the real economy. “Robo-advisor” fees for example are much higher on average in Europe than in the US. This is mainly due to the fragmentation of the European markets. Products and services have to be tailored to regulatory requirements of each national regulator rather than being rolled out efficiently across Europe as a whole. This increases costs, reduces (potential) economies of scale and prevents product standardisation which would stimulate competition.
FinTech players are organising themselves in order to be heard by their local regulator and at the European level. Examples include FinTech Belgium, FinTech Nederlands, FinTech France, …
We hope that the sector’s voice will be heard.