Schalast | Robo Advisory

High-frequency trading is not the only use of AI that comes to mind for banking law experts; they also consider “robo-advisory” (or “robo-advice”). While no statutory definition of this term exists, investment advisory, investment brokerage, and portfolio management are all components of this type of financial service, which is based on an algorithm.

The process is set up in a way that requires little to no involvement from humans at the financial institution. As a result, the legal issues surrounding robo-advisory involve both “general” matters of financial services regulation and issues specific to the functioning of the algorithm or the absence of human involvement.

Hybrid offers are also feasible, in which the supply of computerized guidance is combined with human involvement. In this case, the best features of the two methods may be combined. As robo-advisors advance in sophistication, however, hybrid approaches will take a back seat. Meanwhile, the only human connection available will be through a phone helpline or hotline.

Although “fully automated investment advice” is not yet available in Germany, solutions with “equal decision makers” (i.e., blending of algorithm-based result and human decision on the part of the financial services provider) are nevertheless prevalent at the present time. It will be challenging to implement “hybrid” solutions if the absence of connection between consumer and human advisor is seen as the central feature of robo-advisory. In spite of the presence of human advisors and other individuals in the procedures and ultimate judgments, a true robo-advisor model is given (and not a hybrid model).

There’s no denying the importance of robo-advisors in the financial sector. Former startup Betterment’s market entry in 2010 is widely considered the “birth hour” of robo-advisory. Numerous robo-advisors have also appeared in Germany during 2013/2014. Approximately 30 robo-advisors are operating from Germany right now, jointly with numerous service providers from other EU nations that are also offering their services in Germany. In addition to new businesses, traditional financial institutions such as banks and mutual funds have recognized the potential of robo-advisors, which they employ to diversify their offerings and expand their customer base.

It is obvious that robo-advisors offer some sort of financial guidance. In general, financial services law is meant to be independent of particular technologies. Therefore, it is contingent upon the provision of a supervised service, such as portfolio management or investment advice. It is up to the service provider’s discretion as to whether or not they employ specific technology. Therefore, robo-advisors fall under the purview of the preexisting legal framework for financial services. In this setting, special legal concerns arise from the need to adapt general statutory provisions to the peculiarities of robo-advising.

Future lawsuits for damages against the operators of robo-advisory will most likely center on issues such as lack of information about or failure to prevent conflicts of interest. The quality of contract drafting is set to become more crucial in this context.

Schalast Law | Tax provides guidance and support throughout the whole process of creating, developing, and marketing your robo-advisory models, including all applicable parts of liability law. We provide you with comprehensive or issue-specific assistance while keeping a close watch on the commercial success of your AI solution.