Published on: 23-11-2016 Author: Justinas Gapšys Source: vz.lt
Artificial intelligence is coming to personal finances. If the automated management of investment portfolios will be widely recognized in the global market of financial services, then personal investment management services could become accessible to small investors and not just customers with multimillion portfolios.
Investment portfolio management advice is offered to investors online or on mobile platforms. Bank or investment management company specialists do not participate in consultations – the investment portfolio management recommendations or advice are created by algorithms. Investors requesting such types of services only have to enter the parameters that reflect their level of risk tolerance. The algorithms offer investment portfolios tailored specifically for them, with proportions of different property classes, and continuously offer advice on the reallocation of the portfolio.
Robots advisers are not much different from the software that has long been used by investment management professionals, instead, they replace the current army of financial consultants and bank financial product sellers serving the wider community of small customers.
Market research analysis has shown that the market acceptance stage of automated portfolio management and its advisory service is only at its initial stage. However, these services are expected to be highly successful, and will contribute towards building the market, as was the case in exchange traded funds (ETF). Incidentally, it is assumed that they gave rise to automated investment management advice.
Robot portfolio managers have already made their first steps in the United States. AT Kearney estimates that this year, the assets in the US market from the planned 300 billion USD portfolios supervised by robots will rise to 2.2 trillion USD by 2020, or up to about 5.6% of the total invested assets. The research firm predicts that the automated portfolio management service will grow profoundly in the US over the next 3–5 years.
(Chart) Predicted share of US assets invested using robotic services, %
Deloitte estimates that the portfolios managed by robots will control over 16 trillion USD in assets by 2025, or approximately three times more than is currently managed by BlackRock, the largest investment management company in terms of assets under management.
Being aware of the forthcoming changes and the need to adapt to them, major participants in the investment management market have already invested in automated investment management services, and, according to Accenture Research, it is expected that these services will be offered by them in this year or the next.
Back in 2013, Goldman Sachs invested in the start-up Motif, which forms equity portfolios based on various investment ideas and sells them to investors on an online platform.
Vanguard has already invested in the robotic advisor market by launching their Vanguard Personal Advisor Services. No consultation fees are charged when using the Charles Schwab Intelligent Portfolios service of the Charles Schwab investment company. You can use its online adviser robots if you have at least 5,000 USD of investments. Both companies are currently the largest players in the market of robot advisers – the amount of assets controlled from this service amounted to 41 billion USD and 8.2 billion USD respectively in the middle of the year.
Another major participant in the US investment sector, Fidelity Investments, also launched an automated consultation service in late July. A week ago, it was reported that the Wells Fargo Advisors investment management unit of one of the biggest US banks, Wells Fargo, will launch a pilot program, where the bank investment advisors will use robots to service smaller retail customers and those who prefer digitalised services. Investment banks targets the younger generation with this service.
Robot advisers have not only spread throughout the United States. The biggest such players in Europe are MoneyFarm, company based in Italy and the United Kingdom, Nutmeg from the United Kingdom, and the French version, Yomoni.
Projected growth of automated investment management services in Europe and the United States, million consumers (Chart).
As explained by enthusiasts in this field, robot advisors provide a cheap but sophisticated investment management and advisory service, therefore, investment portfolio management services will become available to the general public, which is not of interest to private banking departments who work with clients whose investment portfolios amount to a few hundred thousand euro.
Andrejus Cyba, business development manager of INVL Asset Management, said that the company sees this direction as potentially viable, because it expands the capabilities and availability of financial services.
“The personalized financial asset management service enables financial service providers to advise people for whom it was hardly accessible so far, for example, on investing a few thousand euro”, explains Mr. Cyba. “This is because this type of customer approach enables the provision of services at significantly lower costs, and therefore, customers can expect the attractive pricing of products and services.”
According to him, automation of services can also cause the tighter supervision of financial advice, which increases the cost of such services.
When assessing the opportunities for the automated advisory service to appear in Lithuania, Mr. Cyba said that people here prefer consultations through direct communication with advisors.
“Here, the popularity of investment services is still very low”, says Mr. Cyba. “In Lithuania, those models should combine the automation of customer data and proposed solutions with opportunities to discuss them directly with the customer, or through an alternative method of remote interaction.”
Robot advisers, as predicted, will have a significant impact on the investment management market: more funds should come to financial markets by employing the money of those small investors who are not currently served by private banks because of the high required starting assets. Cheap robots also may force market participants to reduce the prices of financial services. This leads to the eternal question here – will the investment managers justify the salaries paid for them?
“The idea is that advisors do not provide better results than the automated advisory system. Meanwhile, automated adviser is cheaper. However, a large amount of people need the psychological, human factor, which is not available from the automated advisors”, says Dr. Aistis Raudys, the manager of the Algorithmic Trading Portfolio fund. “This will be more attractive to small investors who do not have much money.”
He admits that automated portfolio management and advisory systems will not be able to replace financial advisors completely.
The human position
The possibility for the small investor community to have full-fledged investment management is another opportunity for banks, since it is likely that the robotic advisory platforms created by banks will be geared to sell their own financial products, rather than offering the most appropriate solutions in the global financial markets.
“Now, banking advisors advise investing in bank products for the benefit of the bank itself. I do not know how much of the advice is objective when they offer investors to buy their own products. The adviser (automated, VZ) can also be programmed in such a way that it advises the products for which it receives a commission for advisor”, says Mr. Raudys. “Everything will depend on how they will design the automated advisor and what products it will advise to you.”
Finance professionals agree that robots advisors will not replace peoples completely. First of all, robots – at least so far – cannot provide the services that are associated with highly individual personal financial solutions, such as tax, cash flow, retirement planning, and investment advice on real estate.