Robo-advisors’ transparency still needs improvement

Europe
On the 01/26/21 at 7:51AM

by

Adrien Paredes-Vanheule

The European federation of retail investors Better Finance has released its fifth robo-advice report for which it tested 17 platforms registered as financial advisers in 11 countries across Europe, Australia, the US and Singapore.
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Among other features, Better Finance assessed transparency of these robo-advisors in four categories, namely fees, portfolio allocation, risk and past performance. Regarding fees, the EU retail investor body stressed most robo-advisors (82%) disclose fees once a questionnaire is filled and the investment advice presented to the investor. Additionally, 67% of the platforms provide detailed fee information. The report also confirms robo-advice fees are still higher in Europe than in the US, Australia or Singapore. “This can be attributed to the fragmentation of the European capital markets and to a lack of product standardisation as well as insufficient competition,” said Better Finance.

Moreover, the organisation said only six out of the 17 platforms propose sustainable investing options to their clients whereas it noted that none of the platforms ask about the sustainability preferences of their clients during the questionnaire. “Only a few platforms ask whether the client wants to invest sustainably at the beginning of the questionnaire, but most of the six platforms in scope allow for tweaking their portfolio from “traditional” to “sustainable” once the investment advice is provided,” the EU retail investor federation argued.

Simple portfolio overview

As for transparency about portfolio allocation, 16 out of the 17 platforms surveyed provide the potential investor with a simple overview of the content and allocation of their investment portfolio. Better Finance found out various degrees of transparency regarding the provision of a detailed allocation. Hence, 14 robo-advisors provide information on asset class allocation but only six add funds specifications and detailed information.

Furthermore, Better Finance’s study pinpointed that 83% of the platforms surveyed showcase best- and worstcase scenarios while 61% disclose past performance to the client. Nonetheless, only three platforms compare past performance to a benchmark and five specify that the past/future performance scenarios are not reliable indicators of the actual performance. Lastly, only 66% of the robo-advisors tested clearly disclose the risk level of the investor portfolio.

Equity exposures ‘inconsistent’ with investor profiles

The association’s research team also reported extreme divergences in asset allocation and expected returns from a robo-advisor to another. It found that with the same profile investor, the equity exposure range could vary from 9% to 95%. While expecting theoretical equity allocation to range between 60% and 100% for a millennial profile and between 35% and 75% for a baby boomer profile, the real picture was quite different at European robo-advisors according to Better Finance.

“In terms of equity-bond shares, we can observe that 11 out of the 14 European robo-advisors recommended an equity exposure below or equal to 50% of the investment. In our view, such an approach is quite prudent, which does not reflect the aggressive risk profile of the millennial investor,” it said.  For the boomer profile, the association identified eight out of the 14 platforms recommending an equity exposure outside the 35-75% allocation expected. “Annual returns vary from + 1.80% to + 12.8% for the “Millennial” profile, and from +1.60% to +7.40% for the “Baby Boomer”, thus confirming the incoherent expected returns for the same investor profiles,” the association added.

Better Finance drew a few recommendations among which it calls out EU authorities to consider policy actions in order to improve robo-advisors’ processes, through the development of more detailed guidelines on investor questionnaires, on asset allocations or risk profiles. It also recommends a legislative framework aimed at AI-powered automated decision-making (ADM) to ensure that robo-advisors’ algorithms are fair, transparent and accountable to consumers.