AI is changing the financial industry for the better.
Artificial intelligence isn’t coming; it’s here. AI is behind almost every activity people undertake today, from Google’s traffic data to the filters in your email, from Facebook’s face recognition software to Amazon’s product recommendations. AI is even revolutionizing your finances. What began as enabling mobile check deposit has evolved into new ways to monitor, make and communicate investment decisions. Financial firms and investment managers alike are employing AI to invest smarter, faster, cheaper and easier. Here are 11 ways artificial intelligence is improving investing.
Better predictions lead to better investing decisions.
AI and machine learning are enabling asset managers to “assimilate new information more quickly and accurately into their portfolio construction processes,” says Bryan Kelly, professor of finance at the Yale School of Management and head of machine learning at AQR Capital Management. As computing power has increased, so has the financial industry’s ability to capture and analyze data with increasingly rich statistical models. This “translates into better prediction of future economic outcomes, which helps investors better allocate wealth to the most productive opportunities and better manage the risks of their portfolios,” he says. In short, smarter computers make for smarter investors.
Defense against emotional biases.
Behavioral finance has shown that try as they might, human investors are not rational. Investors of all types, from retail to institutional investors, are susceptible to behavioral bias, says Michael Cicero, director of portfolio research and management at High Probability Advisors. You need look no further than the University of Chicago’s sale of equity in 2008 for an example of loss aversion bias, or the emotional bias caused by investors feeling more pain from a loss than pleasure for a gain, by a sophisticated investment committee responsible for the endowment, he says. Irrational decisions such as those prompted by loss aversion “can be as detrimental to long-term expected return as poorly designed investment strategies,” Cicero says. AI can help investors eliminate these biases, thus increasing “the odds of investment success.”
Voice activated investing and research.
Investors don’t even need keyboards to invest anymore thanks to artificial intelligence. Firms like TD Ameritrade are rolling out voice activated investing that lets you place trades, research the markets and check on your portfolio using Amazon.com's (ticker: AMZN) cloud-based voice service, Alexa. With an Alexa-enabled device, you can now stay on top of your investments and financial education from virtually anywhere – even while driving in the car. In-vehicle features let investors query Alexa about the stock market or check account balances and investment performance while on the go. It’s an example of multi-tasking portfolio management, compliments of AI.
Stronger advisor-client relationships.
AI is making it possible for financial advisors to automate certain aspects of client relationships, from initial communications to risk profiling and all the legal documentation that goes with the client-advisor relationship, says Gopal Appuswami, lead of payments, fintech, analytics, products and innovation at LatentView Analytics. “Additionally, by using intelligent information management solutions, staff has the means to simplify how they access, secure, process and collaborate on documentation,” he says. This increases productivity as advisors and their staff are able to find and access information much faster.
Higher quality financial advice at a lower cost.
Behind these stronger financial advisor-client relationships is higher quality advice at a significantly lower cost to firms, Appuswami says. By “offload(ing) routine tasks such as preliminary data collection, research and compliance adherence to robo advisors,” advisors and asset managers can focus their time on “preparing premium strategies and packages for each client,” he says. In essence, it’s computers doing what computers do best so humans can do what they do best. “AI services also allow firms to offer a broader range of financial services for audiences in different income brackets,” Appuswami adds. Advisors can provide better advice to more people at a lower cost thanks to artificial intelligence.
Faster investor communication.
The last time you contacted a financial services firm, chances are your first line of communication was with a form of artificial intelligence. “AI chat bots now serve as the first line of support for retail clients,” says Phil Andriyevsky, a data and analytics leader at EY. While chat bots may not always be able to answer your question, every question a bot answers is one less question that needs to pass across a human’s desk. As a result, AI communication is bringing down the cost of investing for firms and investors. It’s also making communication faster and, for those who prefer digital communication, more pleasant. Unlike human advisors, chat bots can be available 24/7 and don’t necessarily require you to pick up a phone to reach them – unless it’s to chat via a mobile app.
Financial firms give investors what they want.
As digital communication becomes more effective and powerful, financial services firms can use it to create a two-way channel between advisors and investors. “Advisory firms can incorporate preemptive communication, transparent fee structures and even channels for customer feedback on product development,” Appuswami says. This can help firms guide their future product decisions. “By addressing client concerns and incorporating their ideas, firms can efficiently appropriate spending toward products and services that meet client needs,” he says. So just as your feedback helped Oreo pick its next flavor, AI is enabling investors to shape the future of the financial services industry.
Optimized portfolios and faster investor reaction times.
Before AI, “portfolio optimization relied only on human effort, which is time consuming and can’t guarantee a complete compilation and impact of all sources,” Appuswami says. With firms going increasingly digital, more information about indicators that necessitate a portfolio shift is available. Algorithmic programs allow money management systems to track these indicators and automatically adjust portfolios. Faster response times to economic, global and market trends leads to optimized returns for investors, Appuswami says. Likewise, automated portfolio optimization means less strain on financial firms’ human staff to monitor and react to these changing events.
Proactive portfolio management.
Artificial intelligence isn’t just improving investors’ and money managers’ reaction times; it’s also helping them be proactive. It’s not possible for human beings to evaluate all of the market factors that impact a portfolio’s performance, Appuswami says. But artificial intelligence can: “AI services, together with predictive analytics, can track multiple macro- and micro-economic indicators, regulatory trends and social sentiments,” he says. This enables them “to produce insights and timely advice, which financial advisors can leverage to make proactive portfolio rebalancing recommendations or help customers build the right financial management solutions based on the current phase of their life and lifestyles.”
Better risk/reward ratios.
Asset managers are using artificial intelligence and machine learning to broaden their understanding of investment risk. At Alpha Innovations, they’ve “found that in the analysis of financial risk, historical and live time series data provide subtle clues and autonomous patterns that can be used to predict future patterns with strikingly high accuracy,” says Mark Antonio Awada, chief risk officer and data analytics officer at Alpha Innovations. “This affords our asset managers with opportunities for significant improvement in performance and risk/reward ratio.” As a result, a major disruption to conventional investment portfolio construction is under way. “For investors who are seeking rejuvenated streams of returns on their investments, this is amazing news," he says.
Greater access to cost-effective investment solutions.
Thanks to the recent launch of ETFs managed by AI, artificial intelligence is easier than ever to leverage in your portfolio. That said, it will come at a slightly higher cost. The fee investors pay for an enhanced index strategy “will be slightly higher than its passive brethren,” Cicero says. But he predicts this will change: “While partially automated now, we believe artificial intelligence will add significantly to scale and efficiency, driving down price while improving the long term probability of success.” Increased competition as industries outside of financial services make advances in artificial intelligence will force the cost bar down, he says. Who knows, maybe Google (GOOGL/GOOG)will operate the next largest asset manager of the future.
How AI is improving investing.
Better predictions lead to better investing decisions.Defense against emotional biases.Voice-activated investing and research.Stronger advisor-client relationships.Higher quality financial advice at a lower cost.Faster investor communication.Financial firms give investors what they want.Optimized portfolios and faster investor reaction times.Proactive portfolio management.Better risk/reward ratios.Greater access to cost-effective investment solutions.
