Research On Investor Protection Mechanism Of Robo Advisors

Fintech companies such as Betterment,Futures Advisor,and Wealth Front have been launching Robo Advisors since 2012.The Robo Advisors with advantages in technology,cost and efficiency has been rapidly developed globally after being favored by investors in the United States and has become a representative product of Fintech.In China,the company has been scrambling to launch products with “Robo Advisors” as the highlights of different types of operators,such as Mi Cai,China Merchants Bank and JD.The industry has developed rapidly and attracted many investors.Robo Advisors brings investors to new risks while bringing intelligent services to investors.How to protect the interests of investors while the development of the industry is the basis for discussion in this paper.Inconsistent definitions of Robo Advisors' business scope have resulted in different definitions of Robo Advisors in different national regulatory documents.Through the current Robo Advisors business model,Robo Advisors has the following three business levels: First is the General Advisory Robo Advisors that do not make investment suggestions for specific investors.Because it will not directly affect the investment intention of investors,this business model does not have the characteristics of investment consulting business,does not belong to Robo Advisors.The second is the Independent Advisory Robo Advisors,which only provides investment advisory services to specific investors.Such Robo Advisors does not directly provide investors with services for investment or asset management.The third is the Entrusted Robo Advisors,which is based on the provision of investment advisory services,and can be subdivided into General-trusted Robo Advisors that provides proxy investment services and Discretionary Robo Advisors that provides asset management services.Robo Advisors is just an intelligent program that provides the essence of the business without radical changes due to the use of artificial intelligence.In combination with the above three business models,the business nature of Independent Advisory Robo Advisors is still to provide investment advisory services through intelligent programs,and Entrusted Robo Advisors can further extend the provision of agency investment and asset management services.Although investment advisory is a basic business model,Robo Advisors has different services,methods and scopes than general investment advisory services.For the service object,unlike the high net worth customers in the traditional service,Robo Advisors is mainly targeted by small and medium investors due to the reduction of service object requirements and service fees.For the service mode,the Robo Advisors business is to replace the investment consultant with artificial intelligence,mainly to obtain the investor information by means of questionnaire,and to make suggestions to investors by using the intelligent algorithm to calculate the benefit maximization product combination which conforms to the investor's investment demand and risk taking ability.For the scope of services,the services that Robo Advisors can provide are no longer limited to investment consulting.In addition to the above-mentioned agency investment and asset management business,there is also the possibility of expanding into other fields.The above specialities also bring new risks to investors:(i)the intelligent approach to service provides investors with inherent risk and operational failure risks,as well as special moral hazard;(ii)the risk of imperfect regulatory supervision in emerging industries and the risk of compliance with business models caused by diversification of services;(iii)the risks arising from the generalization of service objects lie in the fact that small and medium-sized investors are unable to accurately identify and bear the risks arising from accepting Robo Advisors services due to their lack of investment experience,accumulation of investment knowledge and weak risk tolerance;it is also easy for operators to use the strong speculative psychology of small and medium investors to carry out the risk of fraud.The above specialities and new risks put forward higher requirements for the protection of Robo Advisors service investors.Combined with the current status of investor protection and these requirements,Robo Advisors investor protection is insufficient to protect the investor's obligation base,the lack of mechanism and the lack of civil liability identification standards.The basis for the recognition of Robo Advisors' protection obligations lies in the subject of the obligation and the content of the obligation when providing services to investors.Although the Robo Advisors business is based on artificial intelligence,it is still in the stage of weak artificial intelligence,and it does not have the conditions that can be recognized as the legal subject.Robo Advisors is still mainly reflected in the will of its operators.After investors choose to accept the Robo Advisors service,the operators become the subject of such obligations.The operator's obligation comes from the legal relationship between the operator and the investor.The operator and the investor are in a relationship of belief and contract,and the statutory obligations of the operator mainly include the fiduciary duty and the agreed obligations arising from the service agreement.Operator's fiduciary duties are different in different business models:(i)Independent Advisory Robo Advisors is the most basic business model,operators need to have a loyal obligation in designing intelligent algorithms that shall not harm the interests of investors for the benefit of others,and the diligence obligations of operators mainly include ensuring the effectiveness of intelligent algorithms and “know your customer”;(ii)based on Independent Advisory Robo Advisors,the loyal obligation of the General-trusted Robo Advisors operator requires further disclosure of self-dealing and transaction fee collection methods,such as existing or potential conflicts of interest,and the operator has the duty of diligence for optimal execution;and(iii)operators of Discretionary Robo Advisors are subject to the above-mentioned fiduciary duties,and the operator's fiduciary duties also include fair trade,separation of investor assets from data management,and obligation to invest cautiously.In addition to the fiduciary duty,the operator also has the contractual obligations arising from the contract,and the Independent Advisory Robo Advisors operator is required to assume the obligations as an intermediary to the investor;General-trusted Robo Advisors has the obligations to act as an agent;the Discretionary Robo Advisors operator is also required to have obligations to the investor as a general trustee.Based on the operator's obligations,the specific mechanism of investor protection should be returned to the business model of Robo Advisors.The first is the appropriate content and form of the service agreement.The appropriate content of the service agreement refers to the necessary terms for the Robo Advisors service,such as the scope,method,period and cost of the specified service,and reasonable setting of dispute resolution clauses,exemption clauses.Secondly,the appropriateness of investors should be guaranteed in the Robo Advisors service,that is,the operator should ensure that appropriate advice is provided to the appropriate investors,both to ensure that the type of investor is appropriate and that the provision of services is appropriate.In the Robo Advisors service process,the electronic questionnaire is filled in as the main means to realize "know your customer" for the investor portrait,so it is necessary to ensure that the electronic questionnaire is scientific and reasonable.Thirdly,as FINRA mentioned in its report,regulators don't care how Robo Advisors works,but only what Robo Advisors provides to investors.For investor protection,the disclosure of algorithms is the focus of the entire Robo Advisors information disclosure rules.The disclosure of the algorithm should be truthful,complete,accurate and in line with the level of understanding of the average investor,and must be disclosed to investors in a timely manner in a way that investors can easily obtain and know.Finally,the operator should ensure the effectiveness of the intelligent algorithm,which includes both the effectiveness of the intelligent algorithm design and the effectiveness of the intelligent algorithm in the running process.The focus of effective relief after the investor accepts the Robo Advisors service is how the criteria for civil liability are determined.The conditions for the operator to take civil responsibility to the investor are as follows: the operator's behavior violates the agreed obligations or the fiduciary duties in the service agreement and causes damage to the investor's interests,and the operator can not prove that it is not at fault and that there is no causal relationship between the injuring behavior and the investor's loss.The main way for the operator to take civil responsibility should be to compensate for the damage and to limit the actual damage to the investor.In addition,in order to strengthen the relief of investors' interests,compensation mechanisms such as compulsory insurance or mutual funds can be introduced.