HKCSView: Robo-advisory in Asia -- to be or not to be

Explaining robo-advisory to investors

The lack of understanding of the concept by the mass public also contributed to the slow adoption.  First of all, the return that AI contributes to the investment performance is difficult to quantify and explained to investors. Also, it is hard to clearly define the roles of robo-advisory as investment firms pursue different business models, investment philosophies and the use of technology. 

The applications of AI within the wealth management process also varies, some in modeling customer behavioral patterns, some in asset allocation and some in product selection.  The role of human involvement also differs.  For examples, the robo-advisor Youyu, launched early this year by Yunfeng Financial, a firm backed by Jack Ma of Alibaba, involves a team of professionals in its fund selection and asset allocation process.

With the lack of ETFs product selections, Youyu focuses on advising mutual funds investment. Whether it will be successful is yet to be seen, but it is catching attention in the fund industry and banks, as it will have a profound impact on the traditional distribution model of mutual funds.

The final piece of the puzzle is the regulatory framework. With the biggest advantage of robo-advisory is applying AI and machine learning in portfolio management, regulators are expected to act as gatekeepers to ensure providers have sufficient expertise to develop advanced algorithms that manages investment and technology risks. This could be tricky as the algorithm advance through machine learning, it is more difficult to trace the AI decision-making process. This means ensuring accountability, investment suitability and compliance of the AI-driven investment decision is also more challenging.

On the other hand, the existing and potential new players are also seeking clearer guidance from the regulators, particularly on the licensing requirements of robo-advisors in providing order execution, distribution and advisory services via online platforms. Another area that needs clarification is the compliance of suitability obligations in the robo-advisory environment. The suitability obligations guidance issued by the Securities and Futures Commission (SFC) late last year aims to ensure the suitability of recommendations given by financial intermediaries to their clients.

The SFC recently launched a three-month consultation on Guidelines on Online Distribution and Advisory Platform. We think it is a timely move to take the first step in bringing clarity to these questions.

Sammy Ho is a committee member of FinTech SIG at the Hong Kong Computer Society (HKCS) and a senior consultant of the Hong Kong Institute of Bankers (HKIB).  He is also the MD of Plus Concepts, a research and event management firm serving the finance and technology sectors.