Not unsurprisingly, the topic of artificial intelligence, or ‘AI’, has been on the agenda recently at many financial industry events. It’s certainly fascinating to consider how the likes of Google’s recently acquired DeepMind will impact our future. Developers at this UK-based company have created algorithms that allow computers to learn. Their program ‘AlphaGo’, which is able to play the traditional Chinese board game ‘Go’, recently beat the world champion Lee Sedol at his own game. The win has been hailed as a huge milestone for AI and has been compared to the 1997 chess match in which Deep Blue, an IBM supercomputer, famously won against the grandmaster Garry Kasparov. (Go is considered a far more complex game than Chess, hence the 19 year gap). The interesting bit is that AlphaGo learned to play Go itself; it was trained by humans, as a person would be, and practiced by ‘watching’ past games. This really is the stuff of 2001: A Space Odyssey.
As a fan of the movie and all things science-fiction, I find this advancement in artificial intelligence very exciting. There’s so much good that such technology could achieve. Think about the complex problems involved in curing diseases, for example. However, I am also cautious about the potential for misuse. Our desire for progress should not overtake common sense. It gives me chills to think of Hal, the computer in Stanley Kubrick’s film, managing my finances.
But this is no longer science fiction. Barclays, Santander, RBS and Lloyd’s are all rumored to be developing automated investment services or so called ‘robo-advisers’. It wasn’t long ago that the UK’s big banking brands walked away from mass market advice. Following the retail distribution review three years ago, most scrapped their investment management businesses. Of course, we should also remember that the last time they were in the mass-market investment advice game, people were being sold products that were wholly unsuitable for them; personal pensions, endowments, precipice bonds, life settlements, split capital investment trusts and, who could forget, PPI.
The big financial institutions are not alone. Believe it or not, social media firms are also entering into the market of automated financial advice. Snapchat, Twitter and other high-profile social players have received substantial venture capital to develop financial services applications. They may be newcomers into the market but the likes of Snapchat boasts 100 million users daily.
The key to automated investment services is the rise of ETFs. Robo-advisers basically provide automated investment portfolio of low-cost exchange traded funds (ETFs). The viability of ETFs as an investment instrument is important because they are more accessible than mutual funds. Robo-advisory services could not work or would lose most of their value if users were not able to trade in and out of products readily, as they can with ETFs. The whole point is to enable users to click-and-invest directly into financial products from a mobile phone.
As is often the case with financial innovation, the development of automation in financial advice has emerged against a background of a lack of clarity in the existing legislative framework and inconsistent regulatory treatment. The barrier into the financial investment markets for automated services is undoubtedly a myriad of regulatory requirements.
In a discussion paper issued by the European Supervisory Authorities, concerns over the suitability risks inherent in automated advice have been raised. There are serious questions about whether risks and suitability tools used for automated services are fit for purpose. It wouldn’t be difficult to develop an automated advice system that generated certain outcomes for product sales. Most obviously, it takes only one glitch in the process to trigger systematic mis-selling.
At Quadrant, we believe that part of an adviser’s job is to keep clients from making emotional decisions about their investments. I have written several blogs on the importance of staying the course of long-term goals. The greatest losses are made when investors tinker. Apple says the average iPhone user unlocks their phone 80 times per day. If we all had access to our investment portfolio from our smart phone, do you think it would be possible to leave it alone?
Would you trust your pension to a robo-adviser? Do you have an experience or opinion to share about automated investing services?
This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.