Podcast: Robo-advice and related legal work
This week on The Lawyers Weekly Show a King & Wood Mallesons partner reveals the ins and outs of robo-advice and the related work that lawyers are undertaking.
Our host, Lawyers Weekly journalist Lara Bullock, is joined by King & Wood Mallesons partner Nathan Hodge, who has a strong focus on robo-advice legal work.
Robo-advice tools provide a range of financial advice to clients, from quite general to very complex, as well as recommending what assets clients should invest in next.
While there are no specific laws that apply to robo-advice tools, they must fit within the boundaries of existing laws, which Mr Hodge likens to "a square peg in a round hole".
Listen to other episodes of The Lawyers Weekly Show:
Episode 10: Fintech the way of the future
Episode 9: Opportunities in the Big Apple
Episode 8: Does in-house live up to its allure?
Episode 7: Brexit getting lawyers home
Episode 6: Drone usage and related legal work reach new heights
Episode 5: Revamping the law firm model
Episode 4: Bringing creativity back to the law
Episode 3: From outback to Martin Place
Episode 2: Is law school teaching enough critical thinking?
Episode 1: Legalising medical marijuana
Intro: Welcome to the Lawyers Weekly podcast, for an in-depth look at the issues facing the legal profession. This is your host, Lara Bullock.
Lara Bullock: Welcome to the Lawyers Weekly Show. I'm your host, Lara Bullock and today we have King & Wood Mallesons partner, Nathan Hodge, here to talk to us about robo-advice. Welcome, Nathan.
Nathan Hodge: Thank you very much.
Lara Bullock: Nathan, for people like myself who don't know a thing about robo-advice, can you just start by explaining a bit about what it is and how it works?
Nathan Hodge: At its core, robo-advice uses financial models to translate some data inputs and some assumptions into advice. The concept of robo-advice, it's really a broad church. So robo-tools can be really simple, someone puts in answers, one, two or three questions, and gets some quite general type of advice, or they can be really, really sophisticated, it can ask the person to provide lots of answers to questions, and pull in data from lots of different sources to provide some very complex advice. It can also cover things like, it can give you advice on what actual assets you should buy, what securities you should invest in.
Or it can tell you things like what types of assets to buy rather than specific types of assets. It can even range from things, telling you how much insurance you should get for death or disability. It can even go towards telling you how much you should be contributing to your superannuation. It doesn't even stop there. Some tools will just simply give advice as we tend to think of advice. Some tools will say, "Here's the advice. Here's what I recommend. If you want to implement, press the accept" and it goes ahead and actually implements the advice ...
Lara Bullock: Wow. The next step, right.
Nathan Hodge: ... to make things really simple for the user.
Lara Bullock: Nathan Hodge, what are the pros and cons of robo advisors compared to a human advisor?
Nathan Hodge: Advice by algorithm obviously is inherently different to human advice. Algorithms involve the use of financial models and assumptions to translate data into the suggested actions, so consistency is obviously a ...
Lara Bullock: A big one.
Nathan Hodge: ... a very big advantage. Low ongoing cost base. Relatively high start-up cost to get the tool up and running, but low ongoing costs. Great fraud control. Removes all the advisor conflicts, because it is a tool that's giving the advice rather than the advisor. The cons are, your robo-advice tool is only as good the person who built it, so poorly designed algorithms and tools are going to produce bad advice. By definition, they're going to be limited to a specific set of facts and a specific set of outputs. There’s always the risk that the robo-advice tool didn't ask the right question, didn't ask the right question in the right way, and produces incorrect results for that particular client.
If you look at human advice, I think the pros and cons of human advice are the human element. So the pros that human advisors have the ability to test the client, ask for further information. I think generally certainly the elder generation are in principle more likely to trust a human than a computer. But the cons of human advice are also the human elements, so there is a risk of a self-motivated advisor giving incorrect advice to get a greater revenue.
Lara Bullock: Who are the main users of robo-advice? You know, is it consumers, individuals or more businesses?
Nathan Hodge: There tends to be two types of advice tools; advice tools to help advisors give advice or advice tools that you and I can jump online and use. But who robo-advice is targeted to really much depends on the view of that organization who's providing the robo-advice tool. Now there are some who see robo-advice tools are complete replacement for financial advisors, so they provide a full suite of advice tools.
Lara Bullock: I’m sure that's not good news for financial advisors.
Nathan Hodge: No, no, but there are also those who think of robo-advice tools as more a way of enhancing engagement with people.
Lara Bullock: Right.
Nathan Hodge: Some may see it just a touch point and maybe a step on the way to getting full financial advice with a human advisor. Then you get to those who adopt a very sophisticated model where they may have a foot in each camp and they may have a robo-advice tool for those who want to do it themselves, but they may think, well, I've got some client base who want to do it themselves and others who actually want a bit of help, so we’ll give them some robo-advice help along the way, but at some point, they'll want to come and speak to us.
Lara Bullock: Okay, so I guess it caters for a real range then of different people.
Nathan Hodge: Yes. It is an inherently flexible tool and what it can be used for depends on really what you're aiming for.
Lara Bullock: Okay, and so what are the benefits of engaging with a robo-advice tool?
Nathan Hodge: When I think of benefits I think of, well, what's the benefits for the mums and dads? Then what's the benefits for those who are providing the advice? For mums and dads, the main benefit is cost. Financial advice, particularly full financial advice, can be costly. Robo-advice tools, because once you set it up, it can be used to generate lots of different advice, is a very low cost option. What that means though for the person who provides a robo-advice tool is, some don't necessarily see this as a revenue generating tool, but they see it as a way of being able to talk to and engage with their clients and their members. Saying that, there are those, particularly those with the full implementation tools, there are those who probably will see it as a revenue generating item.
Lara Bullock: Okay. Interesting. I guess now moving into the sort of the nitty-gritty of it, what laws apply to robo-advice tools?
Nathan Hodge: The interesting thing with this is that there is no specific law which applies to robo-advice tools. There is a law which has been in existence since around 2002 with amendments along the way and these robo-advice tools have to fit into that existing law. What legal advisors, to someone who's developing a robo-advice tool, really has to do is try and translate this new technology into an existing law, so a bit of a square peg in a round hole.
Lara Bullock: Definitely. That sounds quite difficult.
Nathan Hodge: It can be difficult. ASIC, the regulator in this area, earlier this year released a consultation paper to help people work out what the main touch points are from a regulatory perspective. So the types of things ASIC looked at are things like, have you got the right resources? Have you got someone who understands financial advice? Have you got someone who understands technology? Have you got someone who understands how to review these things on an ongoing basis? And look at things at your insurance arrangements. If something goes wrong with the robo-advice tool, it's going to go wrong once. It's going to be going wrong every time advice is given.
Lara Bullock: Of course.
Nathan Hodge: The insurance arrangement is tailored to that type of problem that can occur with robo-advice.
Lara Bullock: Okay, so what legal work is required to help develop and improve robo-advice, because obviously it's quite new, how can lawyers help them along the way?
Nathan Hodge: When I'm advising a client, the first thing I work out is really what this tool is doing. Firstly, is it just providing advice, or is it also looking to implement the advice and provide execution services? If it's providing advice, then the first thing the law does is divide advice into general advice and personal advice. There's fewer legal obligations which apply to general compared to personal. The next thing I work out is, if it's giving advice, which of these two buckets it will fall into. Then I look at, there are some existing relief in the law for certain types of robo-advice tools and calculators.
Does it fall within one of those two sets of relief? If so, does it satisfy the conditions for them? Assuming it doesn't, then we've got to go down the full advice route. Any financial planner who gives personal advice has to do things like issue a legal document called a financial services guide, which describes the services they provide. When they provide advice, they've got to issue a document called a statement of advice, which sets out certain things which the law requires. Robo-advice tools still have to satisfy those same obligations, so you’ve then got to look at, "Well, here's the legal obligation. What are the different ways, technology solutions for satisfying that legal obligation?"
Other things that you need to think about is, if you're then going down the implementation route, then there's a whole bunch of things that the law requires someone must be given before their issued products. The law says, you've got to sign an application form. You need to issue a product disclosure statement. Many times you need to be identified and verified for anti-money laundering and counter-terrorism financing purposes. How are you going to fit all those processes into a very simple way for the investor to do?
Lara Bullock: Could it perhaps be in fact, once set up correctly, easier or more consistent that those things are checked off through a robo-advice advisor as opposed to a human advisor?
Nathan Hodge: One of the pros of robo-advice, you've hit the nail on the head, one of the pros is once you get it set up ...
Lara Bullock: Yeah.
Nathan Hodge: ... and it's compliant with the law, all your advice will be consistent and compliant with the law.
Lara Bullock: Of course.
Nathan Hodge: One of the limitations though with robo-advice is you're limited by reference to how much information you get at the beginning. By definition, you'll have a finite list of information that you get and a finite set of outputs. Compare that with a full financial planner with a human, the ability for complex advice is much greater. A financial planner can hear a hesitation in someone's voice when they hear an answer ...
Lara Bullock: Of course.
Nathan Hodge: ... and stop probing that to see, well, is that 100 per cent the answer? They've got the ability to ask questions around. They've got the ability to look at body language, for example.
Lara Bullock: Moving forward, do you think that there needs to be any more regulation introduced around robo-advice?
Nathan Hodge: I would say at this early stage probably less regulation, but guidance from ASIC is the things that looks for. I think the industry really welcomed the consultation paper because that was the first official thing that the regulators had said in relation to robo-advice tools. It was clear from what was issued in that consultation paper that the regulator was adopting an approach which facilitates robo-advice in a compliant way, but too they were actively encouraging innovation in this area. I think as robo-advice tools develop, more ASIC guidance will need to be developed.
Lara Bullock: Definitely. Obviously this is quite a niche sort of area of law. How did you yourself get into it?
Nathan Hodge: My background is financial services, so I tend to deal with clients who may be managed funds, may be superannuation funds, may be advisor networks, for example. Across this spectrum, they're the ones who are looking for, starting to look for digital solutions in this area. So part of it has been an increasing client appetite to look at these types of tools as a new way of talking to their clients. If you've looked at the financial press in the last 18 months, certainly you couldn't look a day last year without seeing robo-advice in the headlines.
Lara Bullock: Definitely. Do you think we'll see more lawyers getting into this area of law as the demand rises?
Nathan Hodge: I certainly do see quite a number of lawyers in my area who are developing expertise in this area. Last year it probably was more of a domain of the startups. Some of the early adopters of these tools were people who've never been involved in financial services before.
Lara Bullock: Right.
Nathan Hodge: You now are starting to see the big players take notice, so as soon as they start to take notice, then I think the law firms will follow.
Lara Bullock: Definitely. Well, it seems like robo-advice has a big future ahead of it. Look, thank you so much for coming in today, Nathan. I really appreciate it.
Nathan Hodge: Thank you very much for having me. It was a pleasure. I'm Lara Bullock and thanks for listening to the Lawyers Weekly Show.