AI and machine learning to augment robo advisory offerings
The future will increasingly involve automated services using artificial intelligence (AI) models such as machine learning where computers can make inferences about client behaviour and needs based on a large quantum of data.
Responsive AI is upping the ante when it comes to wealth management robotics. The next stage is financial planning driven by context and having goal based systems. Coupled with AI, machine learning is also gaining traction where the task involves making the computer learn the necessary relationships and actions involved in completing a task intelligently. This training involves using a large data set that the computer algorithm can repeatedly go through. Thus, it would learn, through trial and error, how to connect the input data (e.g. credit history, employment history, assets, purchasing history) with the desired output (e.g. the correct identification of a suitable risk portfolio). Once this is learned, the algorithm can be used on real world data offering largely positive results.
For example, global firms have started developing wealth management software, which will mine, manage and analyse all the data available about an investor – Facebook posts, spending habits, investment choices, tweets, etc, – using AI to find patterns to customise a financial plan and investment strategy. The benefits of developing enhanced software for the industry go beyond helping to understand clients better. Responsive AI, for example, currently provides software that handles the back-end office and compliance work for a wealth management operation. However, the future would involve creating AI that draws on a discipline of social psychology called psychometrics that uses statistics to build profiles of investors. This will help map personality traits etc., which can help prepare strategies that the advisor puts together for clients.
Global robo advisory adoption
The idea of a robo advisory business model surfaced a decade back when a start-up company Betterment ventured into the domain and attempted to alter the way the advisory business was done. Since then, its AUM has scaled to $7.4 billion and attracted cumulative funding of ~ $200 million (source: Bloomberg). The global robo advisory industry since 2012 has also attracted PE funding to the tune of $1.32 billion (source: Reuters), thereby highlighting the business model is gaining acceptance. Scalability benefits have also attracted mainstream players such as Charles Schawb, which has launched its offering Intelligent Portfolios in 2014. Within three years of its operation, the offering commanded an AUM of $10.2 billion serving over 75000 clients. In the process, it has also surpassed the AUM of its smaller counterparts like Betterment and Wealthfront. Other instances also include firms like Vanguard that have scaled up their robo advisory as they manage an AUM of ~$47 billion while firms like Black rock and Fidelity have taken up the M&A/partnership model to shore up their offerings.
Shilpa Kumar, Co-Chairperson, FICCI Capital Markets Committee and Managing Director & CEO, ICICI Securities Limited writes piece for us.