Regulating Robo Advice across the Financial Services Industry

Automated financial product advisors – “robo advisors” – are emerging across the financial services industry, helping consumers choose investments, banking products, and insurance policies. Robo advisors have the potential to lower the cost and increase the quality and transparency of financial advice for consumers. But they also pose significant new challenges for regulators who are accustomed to assessing human intermediaries. A well-designed robo advisor will be honest and competent, and it will recommend only suitable products. Because humans design and implement robo advisors, however, honesty, competence, and suitability cannot simply be assumed. Moreover, robo advisors pose new scale risks that are different in kind from that involved in assessing the conduct of thousands of individual actors. This essay identifies the core components of robo advisors, key questions that regulators need to be able to answer about them, and the capacities that regulators need to develop in order to answer those questions. The benefits to developing these capacities almost certainly exceed the costs, because the same returns to scale that make an automated advisor so cost-effective lead to similar returns to scale in assessing the quality of automated advisors.