Will AI make active managers prove their worth?
Steve Young, Citisoft: AI will be highly disruptive within wealth management
Research released late last year suggested that almost two thirds (62%) of a survey of 90 German institutional investors predict greater usage of artificial intelligence (AI) for short-term decision-making, and 17% for medium-term investment decisions. Universal Investments, the asset manager behind the research, said that “the industry’s future thus certainly appears to be closely linked with the strategic use of AI”.
Of course, “greater usage” could be a marginal rise, but I think that an increase in the use of AI is almost inevitable. It’s certainly true that the cost of investment management that can be done by a machine has reduced, to the extent that human active managers now need to really deliver value.
AI is also not purely the domain of the passive fund; active managers will increasingly deploy these tools to supplement and support their decision support. The rise of the hybrid “smart beta” funds will also be underpinned by utilising ‘smart’ technology.
All in all though, it looks like the future is going to be tougher for active managers. It isn’t just AI being used more and more in the investment decision-making process. There is also downward pressure on fees (and thus margins). The regulators have got the control of investment fees firmly in their sights.
Active managers therefore have to deliver more to supplement what the technology can’t do in an environment where their margins are shrinking.
The bigger firms will have to change their operating models and their technology stacks to better enable this. In order to retain their market position, they will need to combine the benefits of emerging technology whilst continuing to improve their current capabilities. All of this requires investment for the future.
My fear is that a lot of the big asset management firms are changing too many elements of their operational and technological environments simultaneously, and are doing so in silos. These firms risk slowly sinking into “multiple project fatigue” and project overruns.
This ongoing chaos obfuscates strategic longer-term focus and many are missing out on the potential step-change going on around them. Perhaps the advantages of being a new entrant are greater than ever before and the incumbents need to up their game, and quickly.
In the wealth management world, the argument for active managers is perhaps even weaker. In my view, machines can work better, quicker, cheaper and with more transparency. In this sector, technology can bring rapid and significant benefits to the investor. I am not optimistic that many wealth firms are prepared for this.
Investor behaviour and demands are changing rapidly. Most firms in this sector need a major review of their operating model to support this. As the profile and need of these new investors moves to move integrated management and a wider array of products and assets, how many wealth firms have the skills or operating model to support these emerging demands? New technology can play a significant part in this change.
I believe that AI will be highly disruptive within wealth management, far beyond investment decision-making.
The analysis of behaviour patterns to build highly accurate customer segmentation is the most obvious use of this technology and we can expect strong usage in product management and compliance.
Theoretically, AI could be the logical endpoint of the automated advice movement, resolving the most stubborn issues of short-term horizons and weak financial planning tools of the automated investment management and advice space. This technology is, however, still largely in the experimental stages.
Technology is evolving quickly in this area and I am certain it will play a growing role in analysing investment decisions. Human fund managers are increasingly going to have to prove their worth.
By Steve Young, principal at Citisoft
