Investment flaws, miss-selling seen as biggest risks to robo-advice

Added 5th May 2016

Faulty algorithms and miss-selling are seen as the biggest risks to the development of robo-advice, a survey by Chartered Financial Analyst (CFA) institute revealed.

Investment flaws, miss-selling seen as biggest risks to robo-advice

The FinTech Survey Report asked more than 3,000 financial analysts from around the world what impact automated technology will have on the financial services industry.

46% of respondents warned that flaws in automated financial advice algorithms could be the biggest risk of introducing robo-advice tools, followed by mis-selling (30%) and privacy and data protection concerns (12%).

Analysts argued that automated advice tools cannot account for behavioural biases in clients or account for personal circumstances. In addition, they raised the risk of herding as more and more investors are directed towards passive strategies.

The data shows that those from the Asia-Pacific (APAC) region are less likely to consider mis-selling as the biggest risk compared with analysts from the Americas and EMEA regions – possibly due to more stringent regulation in those countries.

Mass Affluent

Mass affluent investors are more likely to use a robo-advice service in place of a human financial adviser than higher net worth individuals or institutions, the survey revealed.

More than a third of those questioned said ‘mass affluent’ investors - those with a moderate sum to invest - are the most likely to replace a human adviser with automated advice tools.



Cost benefit

This may be down to cost, as 89% of the analysts surveyed said launching automated services would reduce costs for consumers, improve access to advice (62%) and improve the products on offer (52%).

The research explained that this group of investors are also most likely to benefit from “relatively more straightforward” advice, as opposed to institutional investors and ultra-high net worth individuals.

The findings support the idea that robo-advice could plug the ‘advice gap’ currently facing the industry worldwide. Increased regulation and greater adoption of RDR-like fee based models have left middle income earners – deterred by the high fees charged by advisers – unable to access financial advice.

Ultra-high net worth

“It is unlikely that automated financial tools will replace engagement with human advisers for institutional investors and ultra-high net worth investors. Both these groups typically require complex, tailored advice,” said the report.

In fact, almost 70% of analysts agreed, adding that financial institutions and the very wealthy will continue to use human advisers as opposed to the “relatively unsophisticated advice” offered by automated tools. The CFA revealed that automated advice tools typically offer a diversified portfolio.

Time frame 

When asked which technology will have the greatest impact on the financial services industry in the next year, 37% named robo-advice, while 40% also said robo-advice will have the greatest impact five years from now.


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About Author

Monira Matin

Senior Reporter

Monira joined International Adviser in March 2016 from Informa Global Markets where she worked as a eurobond reporter for over two years, covering fixed income markets. She has previously held a number of editorial positions covering politics, insurance and technology. Monira has a degree in Journalism and Economics from City University.



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