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Regulating Robo Advice Across the Financial Services Industry

39 Pages Posted: 13 Mar 2017 Last revised: 16 Sep 2017

Tom Baker

University of Pennsylvania Law School

Benedict G. C. Dellaert

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

Date Written: August 27, 2017

Abstract

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.

Keywords: Banking, insurance, securities, financial technology, fintech, financial product intermediary regulation, roboadvisor, roboadvisors, robo-advisor, robo-advisors, robo adviser, robo advisers, Financial Industry Regulatory Authority, FINRA, competence, honesty, suitability, digital investment advice

JEL Classification: G18, G28, K23, K24, L86

Suggested Citation

Baker, Tom and Dellaert, Benedict G. C., Regulating Robo Advice Across the Financial Services Industry (August 27, 2017). Iowa Law Review, Vol. 103, Forthcoming; U of Penn, Inst for Law & Econ Research Paper No. 17-11. Available at SSRN: https://ssrn.com/abstract=2932189 or http://dx.doi.org/10.2139/ssrn.2932189

Tom Baker

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-2185 (Phone)

HOME PAGE: http://www.law.upenn.edu/cf/faculty/thbaker/

Benedict Dellaert (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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