Rather than fear AI and tech, argues, George Cliff, head of Research, Clever Adviser Technology Ltd, we should be looking at how financial advice and technology can be used to deliver better outcomes for clients.
Technology continues to radically redefine investment processes. By informing and improving decision-making at every level, it is giving rise to new and previously unrecognised opportunities.
A pressing question today is whether it might also give rise to new and previously unrecognised threats. Some advisers think artificial intelligence (AI) could put them out of business. There are even clients who worry they might lose everything to a vindictive algorithm.
Such perceptions essentially boil down to a belief that humans are placing too much faith in machines. This is an idea that has been a cornerstone of science-fiction for decades.
Maybe the classic example of turncoat tech is 2001’s HAL 9000. “No 9000 computer has ever made a mistake or distorted information,” HAL declares. “We are all, by any practical definition of the words, fool-proof and incapable of error.”
Soon afterwards HAL loses his mind and has to be forcibly disconnected. Such alarming visions of a would-be future may be especially discomforting in the financial services sphere, which is in many ways at the cutting edge of disruptive digitisation.
Yet science-fiction is very different from science-fact, which is why advisers and their clients should see tech not just as a benefit but as a source of empowerment. In our opinion, the best route to optimum investment outcomes is always likely to lie in harnessing the skills of machines and humans alike.
Meeting the challenges of market evolution
Machines’ processing capabilities have placed data at the centre of almost every investment decision and spared humans a whole heap of work. No-one seriously disputes this is their biggest strength.
What is largely underappreciated, though, is why the pace at which quantitative systems are able to carry out the “heavy lifting” of investing is becoming more important. Much of the answer lies in the escalating velocity of markets themselves.
Our research shows rates of correction have accelerated during the past two decades, most notably in recent years. This has significant implications for investors in terms of maximising upside and minimising downside.
Imagine, for instance, an investment process that switches in and out of funds on a quarterly basis. The “rhythm” of such an approach reflects a market environment in which events and their impacts unfold at a relatively sedate pace.
This might have worked well in an age when investment committees could gather at their leisure and ruminate at length over occasional ups and downs. But it is less likely to work well today, when rotations and regime shifts are commonplace and undue hesitation can prove costly.
The goal should therefore be to appraise and respond to risks and opportunities as rapidly as is reasonably possible – free from bias, ego, indecisiveness and other constraints. Simply put: speed matters.
Consistency is key
So does scale. The more inputs a decision-making process is able to draw on, the more informed its outputs are likely to be. Even the most accomplished flesh-and-blood number-cruncher cannot compete with advanced quantitative technology in this respect.
Take the Clever Marlborough MPS, which uses our proprietary fund selection and monitoring system, the CleverEngine, to rank over 4,000 funds every month. To sift these funds and score them on a range of criteria, it analyses more than 122 million data points.
The aim is to cut through the noise and generate entirely rational switching recommendations. These should be able to meet the growing challenge of finding alpha – not least in sideways markets – and drive consistently attractive performance over the long term.
According to our research, the MPS arena is witnessing a trend of long-term outperformers recently underperforming and long-term underperformers recently outperforming. This is encouraging the latter to sell themselves on their current glories while overlooking their track records.
Advisers could be forgiven for having their heads turned. Yet the reality is that many of these providers, having repeatedly made the wrong call, have at last somehow found themselves in the right place at the right time.
In any month over the past decade, based on three-year returns, a Clever-driven portfolio had an 89% probability of being one of the five best-performing balanced portfolios available to investors. This suggests our faith in machines has merit.
The human touch still matters – not least for advisers
Yet the crucial point here is that our faith is not blind. We still acknowledge the many ways in which humans can play a role in delivering optimum investment outcomes.
Humans remain the stewards of a good investment process. We develop and maintain the systems that handle all that heavy lifting. We supply the architecture and infrastructure. We approve or reject the recommendations that algorithms produce.
It would be ridiculous to deny there are areas in which tech has a clear edge. But it would be equally ridiculous to deny there are also areas in which humans have their own manifest advantage.
Nowhere is this more evident than in client relationships. Even the most remarkable forms of AI cannot recreate the kind of personalised, highly tailored advice that clients expect to receive from their advisers.
In the final reckoning, then, there are convincing arguments for machines and humans alike. But the most compelling argument of all is for using them in combination.
This has been the case for some time, and everyone in the investment value chain has benefited. Although science-fiction would have us think otherwise, there are few grounds – if any – for believing this ideal will be disrupted beyond recognition.
Clever Adviser Technology Ltd developed the Clever Marlborough MPS in collaboration with Marlborough Investment Management.
Main image: alex-knight-2EJCSULRwC8-unsplash
