The Impact of AI On Wealth Management

Though the term Artificial Intelligence still has a futuristic ring to it, the truth is this technology—from Google Maps routing to credit card fraud alerts to email spam filters to smart TVs and appliances—is already here, permeating and enhancing a wide swath our everyday experiences.

The next stop on the revolutionary trail AI is blazing through our culture?

Your investment portfolio.

The Value of AI in Financial Planning

Artificial Intelligence allows systems to sort through enormous amounts of data, detecting patterns and making predictions—a powerful capability of obvious value to trend-seeking financial planners operating in an increasingly complex and globalized marketplace.

It can also automate or speed up existing processes: Morningstar, for example, recently began using an AI-based quantitative rating system designed to simulate the company’s current analyst ratings system. In some cases, AI does the analysis and suggests the next step for a human would take. In others, AI simply takes that step itself.

Passive investing

AI is already involved in passive investing—that is, investments which are bought and sold according to a predetermined set of rules. Index funds frequently run this way. (Think of the rebalancing of holdings in a fund that mirrors the S&P 500.)

While once simpler, the rules for these investments are now becoming more complex, requiring more data analysis and predictive ability to make buy-and-sell decisions.

AI can do this quickly and efficiently.

Exchange-traded funds

AI is also active in some ETF products: Companies use the technology to choose investments based on constant tracking of data, news, metrics and social media information. Humans create the algorithms that back the decision-making technology and then the program runs on its own, selecting stocks based on its own data analysis.

“That [AI] fund is pretty much driven by the algorithm that assembles the stock based on projected returns, projected risk and so on,” says Arpan Dasgupta, senior vice president and partner at Fractal Analytics.

Still, the track record for such investments remains minimal. Experts are watching AI-powered ETFs with interest to see whether the trend catches on.

Client interaction

While the percentage of Americans comfortable with allowing AI to make investments on their behalf remains modest—currently 32%, according to a Merrill Edge report—trust is nevertheless building. One Accenture survey found that 71% of people are willing to get computer-generated advice regarding financial matters—like from a chatbot that pops up on their banking or investment account website.

It’s a statistic which is all the more impressive considering the embryonic nature of the technology.

“Our real-world experience with chatbots has not been very consistent,” Dasgupta says. “There are a few chatbots that have done okay, but in the area of answering very basic transactional questions, like ‘What is my fund balance today?’”

As the sophistication and usefulness of these interactions inevitably increase, it is likely customer willingness to embrace and engage the technology will as well.

Take, for example, robo advisors—a service offered by some wealth management firms in which your investments are automatically managed for you based on your age, risk profile and preferences. Some do so with the help of—or in tandem with—a financial planner, while others are entirely automated.

It’s estimated that about $2 trillion will be managed under robo-advisors by 2020.

What you should know

AI certainly hasn’t replaced the need for human financial advisors—particularly for high net worth clients with complex needs—but in an age of ever-increasing amounts of data, AI can bring new levels of efficiency, dynamism and power to the process of transforming raw information into good decisions.

Transcript available below graphic