Robo-advisory services and investor protection

Abstract

ABSTRACT Technological advancement has created the possibility of providing investment advice and managing funds without any, or with only limited, human intervention (so-called robo-advice). In this paper, it is argued that robo-advisory services offer additional protection to retail investors since they – contrary to execution only services provided by online brokers – require a suitability test. However, robo-advice also creates certain risks, in particular because of the lack of personal contact and the use of algorithms. Therefore, financial intermediaries offering robo-advisory services must clearly explain the concept of robo-advice, ask clear and sufficient questions, ensure their algorithms provide suitable advice and provide clear, comprehensible and not-misleading information. As far as enforcement is concerned, financial supervisors must be able to verify the algorithms used and retail investors suffering damages because of unsuitable investment advice must be entitled to compensation, without having to prove that the algorithm was flawed.