Towards a Taxonomy of Robo-Advisors

This paper examines the basics of Robo-Advisors, attempts a definition, and lays the necessary groundwork for analyzing both, regulation and contractual relationship between robots-related participants and the attribution of liabilities among them. The objective of this study is to offer a taxonomy of the Robo-Advisory industry and, in order to achieve this aim, we will define a robo-advisor as the algorithm that can provide investment services to an investor. A robo-advisor will involve the participation of following roles, that could be played by the same or different actors: the programmer, the owner, the user and the investor. Considering the relations among these players we will do the taxonomy. 1. Brief Introduction to Robo-Advisory Market and Trends In recent years, we have witnessed a revolution in the financial advice field. People do not need to go to a place or concrete location to invest money (stock market, traditional bank offices) anymore, having the option of receiving such services through a virtual financial advisor that can be accessed even with the mobile phone. This revolution is called Robo-Advisory, it has not stopped growing since its inception, and is part of a bigger financial revolution called Fintech. The development of robo-advisors started in the United States and has been increasing exponentially over the years. This country has been pioneering the launch of robo-advisors, which explains why most of them are located there. In fact, the American Robo-Advisory industry is currently expecting to grow exponentially, as reflected in different reports which predict that by 2020 they will manage 2.2 billion dollars in the US. Robo-advisors increased their presence after the financial crisis of 2008. The incredibly high number of robo-advisors indicates a tendency towards a major consolidation in the near future. Moreover, there is a clear and disproportionate market dominance by a few companies like Betterment and Wealthfront that have around 7.3 billion USD and 5.1 billion USD of asset under management (AUM), respectively. This, “combined with profitability challenges upon market entry, suggests that smaller players will be absorbed by larger companies, unless they collapse first”. 1 Tracxn report: robo advisors through BlackRock (2016) 2 Burnmark through BI Intelligence (2017) 3 A.T. Kearney estimates that robo-advisors will manage 2.2 billion dollars in the United States by 2020 (EnFintech, 2017). Although nowadays robo-advisors represent a small portion of the US market, they are expected to growth till they reach a 15% of all U.S. retail asset under management with 7 trillion USD. This will happen mainly due to the adoption of robo-advisors by banks, including Bank of America and Wells Fargo. This movement will not happen just in the US, but also among banks such as UBS and BBVA, and large investment firms. Even with the impressive growth of the robo-advisors in the US, they are relatively tiny (Broughton, 2016). Vanguard leads the market with 41 billion USD followed not so close by Schwab Intelligence Portfolios, Betterment, Wealthfront and Personal Capital. 4 BI Intelligence (2017) However, in the recent years, the number of robo-advisors have been growing exponentially and is expected to continue like that, which predict a significant increase in other countries. The situation in Europe is similar but on a much smaller scale. While in the United States there are more than 200 robo-advisors, in Europe they barely exceed 70. That is why we consider that while in the United States the robo-advisors are widely used instruments, as data reflect, in Europe they largely remain as an unknown tool with great potential. Considering this market situation and current trends, this paper aims to study the basics of robo-advisors in order to clarify the main points that regulators have to take into account to provide an optimal legal framework that allow to promote and control the future developments in the Robo-Advisory industry and its relationship with other financial market players. For this reason, this paper is part of the law policy movement called Regtech which focuses on the legal implications as well as the shortcomings of the features and types of robo-advisors, and the different ways to be regulated, as the new players of the Fintech industry. 2. An Approach to a Basic Concept of Robo-Advisors through its Current Features and Legal Implications