Today’s robo advisers are expected to get a lot smarter.
Tomorrow’s might even have a conscience.
So say those who study the use of artificial intelligence
in finance—though a digital wealth adviser with morals is likely still a long
way off.
The robot advisers of today use algorithms to provide
low-cost, automated portfolio-management services to investors seeking discount
advice. These easy-to-use tools have grown swiftly: Assets under the control of
digital wealth managers are on track to surpass $1 trillion by 2020 after
ballooning by triple digits annually since 2013, according to research firm
Aite Group.
With their low fees and small minimum-balance requirements,
robos have been a boon to middle-income investors, enabling them to access a
service once reserved mainly for the affluent. But beyond recommending low-fee
index funds based on factors such as an investor’s age, income and risk
tolerance, and rebalancing portfolios as needed, the tools are limited in what
they do.
Critics say not only are robots incapable of providing the
kind of personalized, sophisticated financial-planning guidance that human
wealth managers can deliver, they don’t understand right or wrong. So while
robo advisers are required to put clients’ interests first when spitting out
portfolio recommendations, they can’t truly act as fiduciaries, some observers
say.
MORE IN LEADERSHIP
“A robot has no consciousness, no ethics,” says Vasant
Dhar, a professor of information systems at New York University’s Stern School
of Business who runs a robo adviser for institutional investors. For a robo to
qualify as a fiduciary, “you’d have to have a machine that has a strong moral
code and understands the implications” of violating it, such as a regulatory
fine or lawsuit, he says.
Growing smarter
AI specialists say technology could help robo advisers
develop some of the traits that differentiate human advisers from their robotic
rivals. To get there, AI would have to accumulate vastly more data, while
powering algorithms to simulate different scenarios and “keep introspecting,”
Dr. Dhar says.
That will take time, if it happens at all, AI specialists
say. But the idea is that eventually it will become much easier for an
algorithm to provide fiduciary care, perhaps better than a human adviser, who
might be tempted to recommend one product over another because of higher
commissions or other incentives.
Meanwhile, robo advisers from pioneers such as Betterment
LLC and Wealthfront Inc., as well as those from traditional asset managers and
Wall Street banks, are grabbing an increased share of assets from their human
rivals.
Firms including Bank of America Corp.’s Merrill Lynch
and Morgan Stanley have been
targeting younger investors and those with more moderate wealth, offering their
robo services to those with just $5,000 in assets. Betterment has no minimum at
all. By comparison, human advisers at Merrill typically take on accounts of at
least $250,000 in investible assets, while the threshold at Morgan Stanley
tends to be even higher.
Aite Group estimates the number of robo-advice clients will
climb to 17 million by 2021 from 1.8 million in 2016, with a big chunk of those
clients having less than $10,000 in investible assets.
As assets grow and technology advances, the expectation is
that robo advisers will become more sophisticated. Future robos might have the
ability to interview clients, instead of simply relying on answers from a
risk-tolerance questionnaire to make fund recommendations. Some envision
consumers accessing robo services though a platform that looks like Amazon.com , where the robo
will be armed with troves of data to help it understand investors’ lives.
Today’s robo advisers aren’t really all that intelligent,
says Tucker Balch, professor of interactive computing at Georgia Institute of
Technology. They’re essentially simple programs doing what human advisers do,
like making trades and rebalancing clients’ portfolios—just much faster and
more frequently. Eventually, that will become the baseline expectation of every
investor, he says, which will push firms to use AI to try to differentiate
themselves from competitors.
Portfolios managed through robots likely will stretch
beyond index-tracking funds into more active approaches that aim to spot
opportunities in, say, specific stocks.
Some robos are expanding their offerings already.
Wealthfront in March added a higher-cost fund that uses derivatives to
replicate a popular hedge-fund strategy known as risk-parity. Wealthfront and
others also offer smart-beta funds, which weight stocks by factors other than
traditional market capitalization.
Human touch
Some say human involvement may always be part of the
equation. Someone has to write the algorithms for robos, even if the algorithms
then teach themselves. And it is humans—the firms that employ them and the
clients who hire them—who will chose which metrics to maximize.
Mr. Balch is among those who believe human designers can
equip robos with ethics. As for a conscience? “The best AIs will ruthlessly
strive to maximize their profit,” he says, with a conscience arising “as a
consequence of what that formula looks like.”
Click
here for the original article from