Technology has a profound impact on almost every aspect of our lives – and there is no doubt that it will continue to do so. We have become increasingly reliant on technology in our daily lives, particularly when it comes to some of the most challenging and complex decisions. Whether we’re using an app or website to source information, conduct daily transactions or for some, even find a partner, it’s become increasingly common that we rely on technology for several of the most challenging and uncertain and complex decisions in our lives.
A trend over the past five years and arguably the real big game changer is financial technology or ‘fintech’ – the use of technology in the financial services sector. More and more, fintech has come to represent small and agile start-up businesses using technologies to disrupt traditional business. We have already seen big disruptions in areas such as mobile payments, money transfers, loans, fundraising and asset management – most notably across three broad areas - increased access to services, reduction in barriers to open and downward pressure on fees.
Take for instance the evolution in share trading over the past decade. While previously reserved for only experienced stock exchange traders, today investors can search the web to see which brokerage company has the lowest transaction fees and buy and sell shares themselves at the click of a button.
Not only is this information easily accessible but it is also available at a fraction of the cost thanks to the advances in online investing which has pushed a dramatic decline in broker commissions and trade fees.
Digging deeper into the tech realm of investing, we are seeing the emergence of ‘invest-tech’, a sub-set of fintech as we know it. Ashby Monk* describes invest-tech as the technologies that help investors raise their expected risk-adjusted net return, get their risks and costs in order, and ultimately provide investors with a better opportunity set.
The rise of the robo-advisor
One of the biggest innovations of the past ten years in this space has been the advent of the robo- advisor. First to market in the US and more recently in South Africa, these companies employ artificial intelligence (AI) techniques to create automated investment portfolios based on the characteristics of investors. In other words, bringing the advice of an advisor and the full expertise of an investment manager online. Most robo-advisors invest in low-cost ETFs or passive funds, removing or augmenting the online experience with human interaction and drastically lowering the cost of investing.
More and more investors are choosing the DIY route to invest and seeking other avenues of financial advice. According to an iQuantifi survey done in April 2015, only 29% of young workers have looked to professionals for advice, while 71% asked family members and 45% turned to friends.
So these products have been aimed at providing investment services to those that potentially know very little, or nothing, about the market. They do not have the time or expertise to pick stocks or funds by themselves and only want to invest their money in a diversified portfolio that meets their long term goals. This requires low effort on the part of the investor who is benefitting from high automation built into the robo-advisor.
Still room for human advice and guidance
While robo-advisors can provide real benefits for the investor such as ease of use, convenience, lower fees and the transparency that investing directly offers, the value of a human advisor should never be underestimated. Robo-advisors only see a snapshot of the investors’ circumstances. There are still some concerns about a robo’s ability to accurately determine risk tolerance, other assets, residency status, emigration plans, tax planning and estate planning that already may be in place, and the impact of the investor’s marital status and dependants. If the benefit of paying no advice fees outweighs the risk of not getting totally holistic advice then a robo-advisor could work to the investor’s benefit. However, the deep understanding of an investor’s complete financial situation that the very good financial advisors have should never be overlooked by investors.
What does the future look like?
The next emerging stage for technology in investments is responsive artificial intelligence (AI). This is where the computer understands an investor’s situation and starts to offer concrete short-term and long-term advice to improve an investor’s financial planning. This is already underway in the investment industry where technology is currently being developed to apply all the data available about an investor to their financial plan.
Responsive AI gleans information from Facebook posts, tweets, pins on Pinterest, spending habits or investment choices and finds patterns to customise a financial plan and investment strategy for a specific investor. The intention is to produce smarter technologies that can actually “think”, analyse data and make suggestions, predictions and decisions based on all the available knowledge. And the implementation of these advancements is already here.
For example, global asset manager, BlackRock is already directing its quantitative research toward machine learning and exploiting social media and web search information to develop passive strategies that give investors exposure to specific return factors.
AI and the investor
AI can also help improve efficiency for the investor. Investment chatbots enable investors to communicate and transact on investments in much the same way that they would on other messaging apps such as Facebook and Whatsapp - offering complete familiarity and convenience. This helps to break down some of the traditional barriers (like having to meet someone face to face or call someone) to access investment information.
As it should, technology will continue to improve and is going to help us collect and manage data and information in new ways, mobilise it and turn it into actionable knowledge. Investing will be no different. How much understanding and insight can we get from these technology advancements and data and convert it into investment actions and decisions will change dramatically over the next decade.
While the possibilities for improvement in investments is exciting, for now, these technologies should be seen primarily as an assistant to investment and advisory professionals , helping them to deliver better solutions to investors. Although AI can help process and gather a lot more data, when it comes to making judgement decisions, the human touch remains superior. Although improvement in AI processing and learning will accelerate in the next few years, AI still has a long way to go to replace human understanding in the investment world.
*ASHBY MONK, Executive and Research Director, Stanford Global Projects Center -2016 CFA Institute Annual Conference 10 May 2016 Montréal http://mmd.cfainstitute.org/pdf/transcripts/2016/how_technology_will_change_the_business_of_investing.pdf