Malta: The Age Of Robo-Advice And Digital Wealth Management

Last Updated: 15 August 2016
Article by James Debono

Most Popular Article in Malta, August 2016

This article was published in the Times of Malta (26 July 2016)

Can you imagine C-3PO or R2D2 managing your portfolio of investments or providing you with financial advice? Robo-advisors are no longer considered to be within the realm of science-fiction but are steadily becoming a prospect you may have to come to terms with sooner than you think. Financial services is presently witnessing how robotics and technology are transforming and disrupting the market of wealth management. Fintech's robo-advisors or automated financial managers are software platforms which employ pre-programmed algorithms to perform money management tasks including portfolio rebalancing and investment advice without any human intervention. The software will offer investment advice based on the clients' responses to a series of questions.

Despite the fact that this revolution is still in its infancy, traditional banks and investment firms including the likes of Barclays, Lloyds and Santander are rapidly tapping into this novel technology and embracing such platforms. Thomson Reuters has recently revealed how robo-advisor firms like Wealthfront, Betterment and LearnVest are attracting an impressive $427 million in venture capital funding for their plans. Business Insider expects robo-advisors to globally manage $8 trillion by 2020.

What is propelling fintech's onslaught of investment management? In its Financial Advice Market Review, the UK's Financial Conduct Authority stated that more than 16 million consumers have been caught up in what has been dubbed as the 'financial advice gap'. People are simply not affording the hefty fees linked to investment advice. The FCA also reports that two-thirds of retail financial products are currently being purchased without any form of advice – interestingly this figure skyrocketed from one third in 2007. Logically, in such a context, accessible automated financial management garners obvious appeal. In the same way that other Fintech players are providing quasi-banking access to those previously 'unbanked', robo-advisory may provide access to financial advice to the 'unadvised'.

The European Supervisory Authorities ("ESAs") have also highlighted that apart from cost-efficiency, robo-advisors can offer consistent up-to-date recommendations, in an easier and quicker manner than traditional service providers. The ESAs also consider robo-advisors to be in a better position to comply with regulation obligations than the legacy firms.

Notwithstanding its benefits, robo-advice may raise eyebrows on various fronts. Primarily, since automated advice is provided on the basis of the information inputted by the customer, the software needs to somehow counteract the 'rubbish in, rubbish out' flaw whereby poor-quality information provided by the consumer results in a faulty output by the ADVISOR.

Whilst, the removal of the human element may reduce costs, the down-side to it is also that it is removing human judgement. The Financial Industry Regulatory Authority ("FINRA") in the US has expressed such concerns, particularly the fact that digital investment advice platforms lack human judgement and might be unable to assess the consumers' risk tolerance. To overcome these challenges, FINRA ascertains that while training for consumers using automated financial advisors is 'crucial', each automated firm should also have certain procedures in place whereby humans can interact with customers to warn them as soon as they input irrational or contradictory answers to the questionnaires provided to them by the online advisor.

Another shortcoming of robo-advisors might be their cookie-cutter nature which might present unsuitable to the customer's goals – for example an advisor may recommend that a client invests in fossil fuel commodities when in fact he would have preferred investing in cleaner energy sources, especially because the client does not understand how the algorithms process his answers.

Notwithstanding the pros and cons involved, robo-advice is already playing an increasingly important role in the wealth management landscape. Yet is it really a revolution or is technology simply putting lipstick on the legacy pigs of the financial services industry? Despite the fact that the market is still in its infancy, regulators across the globe are already monitoring its trend. The ESAs, while recognising the constant evolution of the financial markets, opened up the debate by publishing a Joint Committee Discussion Paper.

Malta should also look closely at this innovative sector and should follow in the footsteps of the Australian Securities and Investments Commission which is currently looking into the industry's latest developments and how they fit within the regulatory framework. The Australian regulator is also boosting the market by facilitating the possibility of firms to set-up in foreign jurisdictions by providing support for authorisations. In this regard, it has signed an agreement with the FCA to facilitate robo-advisors to access each other's market.

Undoubtedly, the impact of robo-advice will be far more profound in the coming years. The earlier Malta starts to face this new reality and boost these budding innovative concepts, the better it will be for the entire financial community. A pro-active approach in the regulatory and legislative sphere may give Malta a technological edge over its competitors in the sector. Fintech might be the new weapon in Malta's arsenal as an attractive jurisdiction in the financial services industry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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