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First of all we want to thank you for the opportunity to contribute to the consultation on automation in financial advice.
Ascosim is the Association of financial advisory firms in Italy. Our members provide advice services on investments, on an independent basis, to retail and institutional customers under Mifid Directive.
We believe that automation in financial advice could present significant benefits for consumers and for financial institutions. Therefore we support our members in the development of automated financial advisory services
Some our members are focused in the financial advisory services through web. More other companies use digital tools for advice with a mixed approach.
In October 2015 our Association held a conference on Robe-Advisor industry in Milan attended by numerous financial and banking operators (please find the video on our YouTube Channel)
Examples of automated financial advice tools being used in the banking, insurance, and/or securities sectors (Question n.3)

We would like to give some selected information about the development of automation of financial services in our country.

Online banking in Italy

In Italy the use of online banking accounts reached a considerable size and similar to that of other sectors such as e-commerce or mobile commerce.
Over 16 million hold an online accounts, about 57% of total banking accounts, with a share of 1.27 accounts per capita (for a total of about 21 million accounts), of which almost half in the open the last two years.
The main access is via the web (76%), via PC (81%), for an average of 2.5 times per month, but the mobile use is notably growing: 21.8% (approximately 3 million) is the regularly use of the banking apps for information operations or dispositive.
70% of online account holders declare to visit the bank branch once every three months to carry out various operations (informative and dispositive).

Automation in Financial Advice and Investment – Some examples

Automation in financial advice is still in its infancy but is growing at a considerable pace. We are pleased to refer some interesting experiences in this field.

AdviceOnly is the first FinTech firm born in Italy. The AdviceOnly website started in 2011 and provides a wide range of financial service to retail customers and institutional clients.
As far as retail customers are concerned AdviseOnly provides information on financial markets and financial products, financial education and a number of tools for portfolio investment and risk analysis.
14 people work in AdviceOnly, mainly financial analysts and engineers and web designers. The website was visited by 600.000 users in two first months of 2016. More than 40.000 persons are registered to receive the AdviceOnly newsletter. The number of users is increasing at a annual rate of 35%. AdviseOnly is also very active in the social media with more than 40.000 followers on Twitter and 12.000 on Facebook.

MoneyFarm is a Robo-Advisor. The firm was set up in 2011 and began its activity in 2012. MoneyFarm is licensed by the Italian Authority (Consob) as investment firm operating in financial advice and transmission of orders. The firm employs 45 employees. Recently MoneyFarm extended the investment advice service in the UK market. The number of users of financial advice services provided by MoneyFarm amounts to 60.000.

FundStore is a platform providing online subscription of more than 140 mutual funds providers. From December 2015 they offer a free service to their self-adviced customers for portfolio allocation (model portfolio) in mutual funds with risk analysis. FundStore has more than 5.000 customers buying and selling mutual fund via web platform.

In October 2015 InvestBanca, a bank located in Tuscany, launched a service of discretionary mandate provided by the website. The brand of the financial service is RoboInvestor and is provided in cooperation with BlakRock Ishares which provide advisory on the portfolio allocation in ETFs. Recently the bank launched a new line of business in cooperation with Diaman, an investment advice firm focused on quantitative approach in portfolio allocation. InvestBanca also provides this service to other small banks for their clients. The total number of accounts is about 400 with asset under management of nearly 10 million euro.

AcomeA is a well-known Italian independent asset management company. They manage several Italian mutual funds under Ucits Directive. At the end of 2014 AcomeA launched an application for smartphone (Gimme5) which allows unadvised retail investor to subscribe mutual fund on execution-only investment plan. The minimum size of investment is only 5 euro. The users of Gimme5 application are more than 43.000 and of which 6.200 are investors. More than 50% of Gimme5 App users are below 45 year old, while the population of Italian mutual fund industry is much older (average 55 years old). more than 20% of access to Gimme5 App occurs when banks are closed.
Benefits of automation in Financial Advice (Questions n. 6-9)

Benefits relating to cost

In financial advisory service costs are often a critical factor for consumers. High cost may be a decisive element that can seriously affect investment performance. This is particularly true for consumers who have a smaller capital.
Automation in financial advice could decrease the costs of providing advice. The average difference in the cost of the service provided by the Robo-Advisors than traditional human advice can be estimated at roughly one percentage point
As a result a wider range of consumers has access to advice through automated tools.
Furthermore when the financial advice is provided on independent basis, the Robo-Advisor tends to suggest investment in less expensive financial products (typically ETFs) in order to maximize the results for his customers.

Benefits relating to consumer access

Because automated advice is always available online, consumers can obtain financial advice in a faster way and feel that are easier to use than a service provided by human adviser; moreover they can easily compare alternative financial advice services, increasing competition between different providers.
The financial advisory service provided through the Internet is particularly, though not exclusively, aimed at young consumers who, not having large amounts of capital, are normally less attractive to the traditional financial industry.
The ease of use of the service also contributes to a wider dissemination of financial advice that mitigates risks associated with the bias that often characterize the behavior of self-advice investors

Benefits relating to the quality of service

The technology behind the automation of financial advice is typically an algorithm. A well-developed algorithm may be consistently accurate at complex repeatable regular processes.
However it is worth mentioning that the service provided by a human normally ensures greater adaptability and customization.
In a broad consensus a pragmatic approach involving investment recommendations drawn up by algorithms and the interaction between the consumer and an adviser may be the most effective solution.
The automation in financial advice could support a wider range of alternatives in the universe of products/services considered in the advice process, increasing the neutrality of the advisor and the quality of the service provided to consumers. Technology and independence support each other.
Furthermore it should be noted that Robo-Advisors provide standard investment recommendations for each type of client, regardless of the consumers’ geographical residence or ability to access a quality human adviser.
Finally we share the view that automation ensures a more up-to-date financial advice. Given the high volatility of financial markets, the rapid updating of information is often a crucial factor for the effectiveness of an investment strategy.
Additional benefits to consumers (Question n.7)

The level of specificity of the advice provided will depend on the information collected by the automated tool. For instance, some risk-profiling-tools capture information to categorize consumers, for example by risk profile and investment horizon.
In these instances, the advice provided may be the same as every other consumer who is in the same category of investor (i.e. with similar risk profile and investment horizon).
We believes that, although such a advice service that could be useful in order to ensure a sufficient level of portfolio diversification and risk control, is not sufficient to provide an adequate service to the actual personal characteristics of the client.
In our opinion the financial advisory service provided through web should not disregard the analysis of the actual existing client’s portfolio. Very often the existing portfolio suffers from some behavioral biases leading to little diversification, concentration of domestic financial instruments, poor control of costs associated with each financial instruments. Furthermore, financial instruments are often held over time as a result of losses incurred in the past.
We support the view that the financial advisory firms should also provide a service which, even without any human intervention but only with the use of simple algorithms, allows the user to highlight the main inconsistencies and bias contained in the existing portfolio including suggestions aimed to improve the quality of the portfolio depending on the detected characteristics and preferences of the customers.
In our opinion it should be in greater adherence to the obligation to serve the best interest of the customers
Potential Risks of automation in Financial Advice (questions n. 14-17)

In the securities sector in an automated financial advice tools an investor (or potential investor) uses an online questionnaire to enter information about his or her specific circumstances, including the investor’s risk appetite; investment goals; and facts relating to the investor’s life and situation (for example, this might include: the investor’s tax situation, marital or relationship status, the investor’s career and retirement plans, what other investments and assets the investor has, the investor’s financial resources and commitments, and the investor’s plans for their family in the short and longer term).
The automated tool asks prospective investors for information about their specific circumstances and, based on the answers provided, an algorithm is used to recommend transactions in financial instruments that match the customer’s profile.
Nevertheless we observed that the questionnaire proposed by some internet sites, mainly from Us based Robo-Advisors, are characterized by a limited number of questions and do not cover all the themes expected by Mifid regulation and by Esma Guidelines.
In some cases the risk profiling does not stem from an evaluation of the responses provided by the customer; the user is allowed to directly choose the risk profile that characterizes it. This results a reliance on self-assessment of the risk profile from the user in violation of the Esma guidelines. (Guidelines on certain aspects of the MiFID suitability requirements, 21 August 2012, ESMA/2012/387).
We believe that it should be more appropriate if the automated financial advice application is inclusive of all matters required by regulation preventing the user to determine independently its own risk profile.

Correct information to consumers

The main risks arising from the diffusion of automated financial advice consists of the offer of web services provided by companies not authorized to provide advisory services.
In many cases these companies present their own service with aggressive messages highlighting strong potential earnings without providing adequate information on risks of the investment strategies.
Consumers who does not receive the necessary information on financial advice service could be confused and make investments not suitable to their risk profile.
Given the ease of access to Internet, it would be advisable to establish that the financial advice provider publish in the homepage of the website correct information on the advisory services proposed to the potential consumer.
Taking the example of other regulations on transparency in offering financial products (Ucits, PRIPs) would be advisable to adopt a simplified and standardized scheme (Financial Advice Key Investor Information Document) which provide information on the following areas:

• Information on the authorization to provide financial advice to retail customers;
• whether or not the advice is provided on an independent basis;
• whether the advice is based on a broad or on a more restricted analysis of different types of financial instruments;
• whether the investment firm will provide the client with a periodic assessment of the suitability of the financial instruments recommended to that client;
• appropriate guidance on and warnings of the risks associated with investments in financial instruments or in respect of particular investment strategies;
• information on costs of the investment advice service.