Behavioral Finance, Decumulation and the Regulatory Strategy for Robo-Advice

36 Pages Posted: 26 Jul 2018

See all articles by Tom Baker

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: July 24, 2018

Abstract

This working paper surveys the decumulation services offered by investment robo-advisors as a case study with which to examine regulatory and market structure issues raised by automated financial advice. We provide a short introduction to decumulation, describing some of the uncertainties involved in identifying optimal decumulation strategies and sketching a few of the ‘rules of thumb’ that financial advisors have developed in this area in the face of this uncertainty. Next we describe behavioral effects that could inhibit consumers from following an optimal decumulation strategy, concluding that, left to their own devices, consumers are likely to make sub-optimal decumulation decisions. Then we describe some potentially useful automated decumulation services that are available on the market and present the results of a survey assessing whether those services are offered by investment robo-advisors. Finally, we discuss market structures that may inhibit financial advisors from implementing optimal decumulation strategies for their clients and explore whether there are regulatory strategies that could encourage financial advisors to provide better decumulation services. Two promising strategies are (1) adopting a record-keeping requirement for robo-advisors that is conceptually similar to the ‘black box’ requirement for commercial airlines, and (2) developing a set of robo-advice ‘do’s and don’ts’ and related input/output tests to confirm that these requirements are met.

Keywords: Investment advice, financial services, automated decumulation, retirement planning, robo advisers, robo-advisers, roboadvisers, longevity risk management, consumer protection, behavioral effects, regulatory requirements

JEL Classification: D14, D18, G23, G28, G41, K23, K24

Suggested Citation

Baker, Tom and Dellaert, Benedict G. C., Behavioral Finance, Decumulation and the Regulatory Strategy for Robo-Advice (July 24, 2018). U of Penn, Inst for Law & Econ Research Paper No. 18-19. Available at SSRN: https://ssrn.com/abstract=3219955

Tom Baker (Contact Author)

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 G. C. Dellaert

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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