‘Robo-advice’, also known as ‘digital advice’ or ‘automated advice’, is on the rise in Australia. Labels aside, it is the provision of automated financial advice using software algorithms, without any direct involvement from a human adviser.
Typically, once you are at a robo-advice website, you will enter some details, fill out a questionnaire, pay a fee, and then, with the click of button, you’ve got yourself a piece of tailored financial advice. All in the convenience of your own home and without once having to speak to a real person.
With only 20% of adults Australians currently seeking professional financial advice, many in the financial services industry see robo-advice technology as an opportunity to provide low-cost and convenient advice to those who might not otherwise seek it. ASIC supports the development of the robo-advice market and recently issued a draft regulatory guide with a view to encouraging the industry and new entrants.
But if you are a consumer thinking about getting robo-advice, what legal issues do you need to be aware of before clicking ‘Proceed’?
1. Know the adviser
Not all financial advisers are the same. Some may be restricted by their financial services licence to providing advice only about a limited range of investment options. For example, a robo-advice company might only give advice about investing in direct shares, managed funds, and nothing else.
Under the Corporations Act 2001 (Cth), the adviser must provide retail clients with a Financial Services Guide (‘FSG’) which includes information about what financial services they provide and the fees they charge. It is also a requirement that the adviser provide Product Disclosure Statements (‘PDS’) for the investments being recommended. The PDS will contain details about the nature of the investment and any significant risks. The FSG and PDS are usually available on, or can be requested via, the adviser’s website.
Although sometimes long and technical, it is essential for prospective investors to read the FSG and PDS(s) to know what they are getting into.
2. ‘Know thyself’
The legal obligations of a financial advisor to provide appropriate advice are often colloquially summarised as 1) “Know the client” and 2) “Know the product”. “Know the client” encompasses the legal obligation under the Corporations Act to act in the best interests of the client, including by taking into account their personal circumstances, needs and objectives.
By its very nature, robo-advice will only take into account what personal information the customer has inputted, through filling out online forms and questionnaires. These will be pro-forma, and may not necessarily ask you the right questions or give you scope to answer in a way which fully captures the nuance of your instructions.
Better robo-advice platforms will force you to seek less-automated advice if you input information which suggests the advice the service provides may be inappropriate. However, in any case, you should carefully review any answers or information you provide to the robo-advice program and any summary of those instructions in the Statement of Advice which it provides. If such information does not reflect your true instructions, you should consider seeking alternative financial advice.
3. Know what you don’t know
One of the benefits of obtaining advice from a high quality, human financial advisor is they will likely recognise deficiencies in your understanding of financial matters and educate you about what you need to know to make a fully informed decision.
With robo-advice, you are largely on your own. No one is going to ‘pull you up’ if you are thinking about making an investment which is inappropriate once viewed in light of your broader financial circumstances, or because you don’t know what other options are available (which might not be investments offered through a particular robo-adviser).
In a significant proportion of the legal claims against financial advisers we encounter, it is only after they have incurred significant losses, that an investor realises what was the true nature of the investments they made, or that there were better options of which they were never advised. With robo-advice, more than ever, investors need to do their homework, research the investments they are considering and have a reasonable working knowledge about different classes of investments, the associated risks and the process of obtaining financial advice itself. Reading the financial advice section of ASIC’s Moneysmart website is a good starting point.
If you have concerns about the financial advice you have received from your financial planner or adviser, contact us to speak to one of our experienced lawyers about your options.