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Financial advice and investment management are increasingly being provided by automated products called "robo-advisors". While robo-advisors have been considered as a major breakthrough in the Fintech industry, they present significant challenges for regulators who are rather used to human intermediaries. Some of the challenges include algorithmic defects, qualification restrictions, liability shouldering, false propaganda and black box. These challenges undermine investors' confidence and the development of Fintech in general. With a particular focus on China, this article explores the nature of robo-advisors, their core components, and the regulatory puzzles surrounding them. The capacity regulators should develop to maximize the technology's gains. Analysis in this article shows that the existing regulatory framework on robo-advisors in China is too strict and also fails to comply with the twin pillars of financial advisory regulatory framework - know your client and suitability obligation. The article, therefore, offers certain policy recommendations relating to liability system, accountability mechanism, robotic examination standardization, special insurance cover and enhanced user portrait. The article calls for an improved regulatory regime in China that will keep up with the development of robo-advisors and other technology-driven financial innovations in general.
1.INTRODUCTION
(a)Investment Robo-advisor's Ecosystem
Revolutionary changes are taking place in almost every industry. The financial advisory business is facing an impending transformational change with the advent of robo-advisors.1 Robo-advisor, also known as an investment advisor, is "an online asset management service that automatically 'constructs', 'rebalances', and manages 'portfolio' based on individual investment trends with technology such as algorithms, big data analysis and AI."2
Since the first robo-advisor, Betterment, was launched during the global economic recession in 2008, the technology has completely changed the narrative of investment planning.3 Betterment LLC, a pioneer company of robo-advising, has successfully applied algorithms to areas such as "investment strategy, portfolio allocation, tax management," making huge profits and even upending traditional financial advisory services.4 So does Wealthfront perform in the wealth management services.5
Interestingly, the technology itself is not new. Since the early 2000s, human investment advisors have been using "digital portfolio software" to perform investment advisory roles.6 However, it was not until 2008 that the technology became accessible to the general public.7 Most robo-advisors use "modern portfolio theory" and rebalancing bands to index users' portfolios.8 The technology monitors user's portfolios in line with...