Technological innovation has been affecting the financial sector for several years, by progressively changing aspects of the business. This process has seen a first phase that involved the management of information, a second phase that changed the way transactions were performed and, lastly, a third phase that changed the relationship between clients and service providers. With specific reference to this last phase, it is interesting to understand whether market players traditionally active in the financial consulting sector (i.e. traditional banks) will be able, in the future, to contribute to the development of automated consulting.

Traditional banks already have a sufficiently wide range of clients and the expertise to bring their products to a regulated market; on the other hand, FinTech companies could help the banking industry improve their traditional offerings in different ways. Traditional banks may provide, for example, white-label robo-advisors to help clients navigate the investment world and, as a result, create a better and more tailored experience for their clients. Partnerships between banks and FinTech companies are also likely to increase the efficiency of such business.

In this regard, it is worth remembering that the innovative aspect referred to the so-called robo-advisor concerns the automation of the "last-mile" that is the autonomous management of client profiling and subsequent asset allocation processes.

Advantages and limits of robo-advisor services

Robo-advisors are known as software that combines digital interfaces and algorithms, and can also include machine learning, in order to provide services ranging from automated financial recommendations to portfolio management, which require limited human intervention.

From a service provider perspective, time saving is the most important advantage of robo-advisor technology. In fact, this software helps the financial market players (i.e. banks, investment firms, asset management companies, etc.) build an optimized portfolio for their clients and create and/or choose the most convenient financial instruments for them, as specified by the clients themselves in the MiFID II suitability questionnaire.

In other words, the robo-advisor technology can help clients with the creation and optimization of their portfolio providing investment solutions whose risks are more adaptable to their needs.

However, many experts point out the limitations that occur when removing the human touch from the performance of financial services. In fact, they criticize the lack of customization of stock portfolios, which can be standardized too much and not suitable for the clients' requests. Apparently, these disadvantages are a small consequence of the full removal of the human "touch". Indeed, machines cannot provide customization and moral hazard linked strictly to the human personality.

Furthermore, some national Authorities noted that clients' lack of digital and financial literacy could represent a limit and an obstacle to the development of the robo-advisor technology. In fact, costumers with low levels of financial and digital literacy resist the use of these types of services, preferring, instead, face-to-face interaction. The lack of confidence by consumers with these new technologies and the high costs for traditional banks to attract new clients may discourage those traditional financial players from investing in robo-advisor technology development. For this reason partnerships between traditional banks and FinTech companies, apparently could also increase the efficiency of this type of business.

On the other hand, please note that there are legislative limits including: (i) the complexity of existing sectoral regulations (such as MiFID II, MiFIR, IDD, PRIIPs), (ii) the lack of a European harmonization on "digital identity" and the related identification procedures, and (iii) the lack of a consistent legal definition of "advice" in the three financial sectors (financial, banking and insurance).

Last November, the European Securities Market Authority (i.e. ESMA) issued the "Guidelines on certain aspects of the MiFID II suitability requirements" which apply to all market players providing the services of investment advice and portfolio management, regardless of the means of interaction adopted by financial market players with their clients. According to the ESMA, the application of some guidelines is strongly recommended in the event that "robo-advice" is provided by financial services players, due to the limited human interaction (or none at all) with clients. In particular, ESMA's guidelines point out the need, for investor protection purposes, to guarantee a minimum human interaction between service providers and clients, mainly with regard to the on-line questionnaire fulfilling process (for example giving the possibility to chat with human financial advisors).

In light of the above considerations, apparently, it is necessary to fill the regulatory gaps of the existing European and national legislation in order to foster the development of robo-advisor technology.

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