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OECD releases new study focusing on Robo Advisors for Pensions

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The Organization for Economic Development (OECD), in December 2017 released a new report, Robo-Advice for Pensions, which looks at the rising trend of technological innovation in finance, specifically the robo-advice model.

This model has been proposed as one potential solution for helping individuals manage pensions and invest for retirement.

Essentially, ‘robo-advisors’ propose to make investing more affordable and accessible for consumers by relying on user-friendly digital platforms, algorithms, and primarily low-cost passive investments with low initial funding as an effort to encourage new investors to get into the habit of investing.

While some offer their services to institutional investors, particularly pension providers, allowing those providers to reduce the costs for their members and more easily manage their investment risk profile, others target financial advisors with the lure of improving the advice services they offer to clients while remaining competitive.

For example, one service could mean a reduction in the amount of time spent monitoring portfolios and meeting regulatory requirements, or another could focus on improving the investment interface for their clients.

The report notes that in addition to the benefits of affordability and accessibility of robo-advisors, they have the potential to increase the proportion of individuals investing, particularly in the stock market, which pays a better dividend than a standard savings account.

The absence of human error is also another lure: specifically the use of algorithms that will mean consistent recommendations, without any subjective or emotional judgment on the part of the financial advisor.

Much of this is contingent, however, on the report’s assessment of the drawbacks of robo-advisors: the definition and suitability of the financial advice; staying within regulatory compliance; the robustness and transparency of the algorithms; consumer disengagement (not taking the time to understand how the platform works or not considering the assets underlying the investment); the sustainability of the business models; and systemic risk and pro-cyclicality.

The key findings of the report show:

  • Robo-advice platforms have the potential to increase accessibility of investing to a broader market and to do so relatively more cheaply than through the traditional channels.
  • Robo-advice platforms have the potential to deliver financial advice that is objective, consistent, and transparent.
  • However, the increased level of automation may require different approaches to ensure that the users have a sufficient level of understanding of the investments they are making.
  • Policy makers will need to ensure that existing legislation applies to robo-advisors with respect to the applicability of duty of care requirements, avoidance of conflicts of interest, transparency of disclosure, and access to redress in the case of an unfair outcome for the consumer.
  • Regulators and supervisors will need to have processes in place to ensure that the algorithms that these platforms use are accurate and robust.

The report, which can be accessed here, is part of the OECD Going Digital project. This project provides policy makers with tools to help societies prosper in an increasingly data-driven and digital world.

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