The Impact of AI On Wealth Management
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. While once simpler, the rules for these investments are now becoming more complex.
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.
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.
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.
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.
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Robo advising is on the rise—here's where the statistics land now:
Increasing number of funds. The U.S. counts more than 200 robo advisors now, compared to estimates of ~100 globally as of 2016.
Fund assets are growing. Assets under management for U.S. robo advisors have exploded to $292.8 billion as of June, up more than 160% from two years ago. Forecast is that assets will more than double to $634.1 billion by 2022.
More people are turning to robo-investing. The number of investors using robo advisors in the U.S. is 6.6 million this year, double the total of 2016. Statista projects a total of 12.7 million for 2022.
People are devoting more money. The average robo investor has $44,462 committed to the platform, up 31% from 2016. Statista sees that amount rising to $50,115 in 2022.
Whether you decide to use a robo advisor depends on your personal financial goals as well as your comfort level with automated investing.
Robo Advisor Considerations
Consider the Advantages:
Low fees, low account-balance minimums and low time requirements.
Robo advisors offer well-known investment options and complete portfolio services such as tax harvesting. Some even offer automatic portfolio rebalancing.
Many combine their investment selection with advice from a live investment advisor.
Since most of the investments go into exchange-traded funds (ETFs), investors pay a fee of ~0.25% to ~0.35% of their robo-investment assets per year.
The lower the fee, the better it is for you—but don’t sacrifice your objectives just to secure low fees.
Anyone who wants to engage in robo investing can do it—account minimums range from zero to ~$100,000.
Consider the Disadvantages:
Some robo advisors connected with money-management firms may have a bias toward funds managed by their own firm, so you may want to avoid robo advisors with this potential bias.
Most robo advisors started up in the last few years, so they haven’t experienced a bear market in stocks. Make sure your robo advisor has a good plan to deal with the next market decline.
Quell These Common Fears:
If the idea of turning over your investment management to a computer makes you uneasy, don't fear: many robo advisors offer the option of contact with a human advisor.
If you’re worried about how a market decline might affect your portfolio or what’s the best way to rebalance your holdings, you can receive counseling.
Many robo advisors invest in well-known ETFs that have provided solid returns for years. If you’re considering a robo advisor, check out the funds that will be in your portfolio to make sure they align with your risk tolerance and investment goals.
To learn more about robo-investing, contact your Fifth Third advisor who can offer programs tailored to your unique investment goals and appetite for risk.