Artificial intelligence (AI) has been omnipresent in our lives for decades now but has only recently caught the attention of the masses, thanks to the likes of ChatGPT that have made it more accessible and visible to all.
Asset management is a sector where AI is unlocking fresh paradigms and opportunities. AI-powered investment algorithms have moved from being a matter of interest to wealth managers’ R&D teams to moving markets in real-time.
With more money being managed by bots, traditional (human) financial advisors and asset managers are left wondering if they will be replaced soon! In today’s journal, we will explore the current state of AI in investing, its potential implications for the industry, and whether AI will truly replace human expertise.
AI that elevates client experience
Client Delight: Chatbots are now capable of handling sales inquiries & even resolving first level service queries. These bots are only as good as the data they are fed, so a proper training set with eclectic scenarios and frequently asked questions often result in better responses. While these responses are increasingly becoming humane, a few exchanges with these IVR style options leave the users gasping to talk to a human quickly. However, it is now a matter of time before the human feel will also be replicated in these conversations.
Personalization: Personalized asset management, which was the erstwhile exclusive territory of the High-Net-Worth and millionaire investors, is now democratized for the retail investors using AI. Human advisors often consider and use soft parameters including the body language of the investors, understanding their ethnic, cultural financial perspectives and behaviour with money across various in-person meeting to build portfolios that reflect their preferences. This personalization of portfolios ensures that the end investments are aligned to the investor’s goals, values & increase odds of success. While an AI is still not ready to conduct in-person meetings with clients, it surely is smart enough to capture digital behaviour & patterns and build a profile of the client.
Savart’s EFG (Emotional Financial General) Analysis captures dozens of data points including the adherence of the investor with the recommended advice & the time spent on unique points of the application to understand the client’s risk appetite and financial behaviour better. This is a continuous process of collecting information and creating an accurate profile taking at least 6 months to craft an EFG composite score and portfolio that reasonably aligns with the client. Most conventional risk profiling and assessment methods do not work due to rigid questions, one-time response collection and failure to capture insights behind the interactions, behaviour of the client – and restricted to the actual responses alone.
Investment research: AI has been particularly impactful in investment selection. The sheer volume of investment options available can be overwhelming for investors. AI algorithms can help investors select the best funds based on data and evidence, considering various factors such as investment objective, risk profile, and investment horizon. These algorithms provide objective and rule-based recommendations, simplifying the investment selection process for investors.
Robo-research not Robo-advice: Robo-advisory refers to the use of automated platforms that provide investment advice based on algorithms and mathematical rules. These platforms typically use predetermined algorithms to allocate and rebalance investment portfolios based on an individual’s goals and risk tolerance. On the other hand, AI-based financial planning involves the use of advanced machine learning algorithms and natural language processing to provide more tailored and personalized advice. AI can analyse vast amounts of data and identify patterns that may not be apparent to human advisors, leading to more sophisticated investment strategies.
Robo advisory was a buzz word in the wealth management industry once upon a time just like AI now is. When we first encountered the idea of robo advisory at Savart, we understood that this model is deficient and too vague to add value to the client’s investments. Most cutting edge robo advisors used an analyst recommended set of rules to make investment decisions. Basically, it was a process automation! There was no attempt to reduce the human bias in investing or to transform the research process. We thus decided not only to re-invent the way advice is shared but also research is conducted, from investment discovery until exit – this is how APART was born. And AI is playing a key role in making robo-research mainstream. From increasing investment coverage to helping uncover insights about investee securities that would have easily been ignored by the human eye, AI Is helping investors find alpha faster & at scale.
The Judicious use of AI
While AI has the potential to revolutionize the financial advisory industry, there are limitations to its current capabilities. Some experts have warned against blindly trusting AI with financial decisions, as they can still make errors or misinterpret information. GPT based AI applications may outperform human analysis in predicting stock movements based on news headlines, but their accuracy rates are still comparable to flipping a coin. This is why Savart is focused on building APART as an assessor of information to generate fundamental insights rather than creating inexplicable models that magically predict stock prices.
A survey conducted by Morgan Stanley’s wealth management arm revealed that investors view AI as a “game changer” in the financial services industry. In fact, 72% of respondents believed that AI would revolutionize the field of finance. While investors acknowledge the groundbreaking potential of AI, they still prefer a human touch when it comes to financial guidance. More than 80% of survey respondents stated that AI would never completely replace human advisors. This sentiment highlights the importance of maintaining a balance between AI technology and human expertise in the financial advisory space.
While investors still value face-to-face interactions and the human touch in their financial planning journey, we at Savart believe it is only a matter of time before investment research & management become fully automated.
The emergence of AI in asset management is set to bring significant changes to the industry. It will render many roles & functions obsolete but also open many new opportunities. Enterprises that embrace AI and integrate it into their services are likely to gain a competitive edge.