Robo advice shines for borrowers: study

By James Langton | August 30, 2022 | Last updated on August 30, 2022
2 min read
International business network with connected lines, worldwide communication for internet of things, finance, trading, blockchain and web technologies, concept wit businessman using tablet computer (International business network with connected lines,

Robo advice can significantly improve outcomes for financial consumers, particularly those with low financial literacy and numeracy, according to new research.

But many people reject free advice that would benefit them, while others would overpay for it.

U.K. regulator the Financial Conduct Authority (FCA) published a report detailing an analysis by FCA economists — along with academics from Georgetown University and Boston College — that found a simple “robo advice” tool led to much better repayment decisions by borrowers.

Unlike investment decisions, which involve risk and uncertainty, debt repayment decisions have an optimal outcome to minimize interest and fees.

“Our trials show that a significant proportion of people struggle to make good debt repayment decisions even when all the information is available to them; and that a simple robo-advising tool may help improve decisions significantly,” they said.

The researchers ran an online experiment with 3,500 participants to test whether robo advice could improve consumers’ debt management decisions.

In a randomized control trial with a robo tool that always proposed an optimal repayment strategy, the researchers found that the provision of free advice led to starkly better outcomes.

Without advice, people selected repayment strategies that squandered 21.9% of their possible savings in fees and excess interest. With free advice, that dropped to just 2.4%.

The researchers noted that the losses did not drop to zero because some participants rejected the robo-advisor’s recommendations.

Indeed, the researchers noted that about 25% of consumers refused free robo advice.

“Many of them go on to make costly mistakes in their decisions,” it said.

Researchers suggested that consumers reject free help for reasons including data privacy concerns and a lack of trust of algorithms generally.

Addressing these obstacles should be a consideration for policymakers seeking the benefits of automated advice.

At the same time, the research found that other consumers who were offered paid robo advice in the experiment indicated that, on average, they would be willing to pay more than the monetary benefit provided by the advice.

This outcome indicated that there may be “a significant mental cost to consumers in juggling debts and making repayment decisions,” the researchers said.

Additionally, the researchers found the participants in the trial didn’t learn much about optimizing debt repayment from the advice they received that could enable them to make better decisions on their own in the future.

“This suggests that that one-off interventions and/or money management education may not be enough to improve long-term decision-making and that sustained improvements in consumer outcomes in this setting may be achieved only where an effective advice tool is available ‘on demand’,” they said.

The researchers concluded that debt repayment decisions are particularly suitable for automated advice.

“All in all, given the high stakes for many vulnerable consumers, the potential need for ongoing decision support to navigate debts, and the fact that optimal advice depends on neither individual risk preferences nor beliefs, debt management may be a particularly promising domain for robo advice,” they said.

James Langton headshot

James Langton

James is a senior reporter for and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.