When you think of AI, do you think of Alexa, Siri and Rosie, the helpful robot from The Jetsons? Or do you think of Skynet taking over the world, like in the Terminator movies?
Regardless, artificial intelligence (AI) has burst out of sci-fi screens and into our everyday lives. It is now used in a wide range of applications, from facial recognition to self-driving cars. But what about the investment industry? Could AI revolutionize the way we invest? And should advisors be worried?
Some experts believe AI could have a profound impact on the investment industry. They argue AI could help remove human biases and emotions from investment decisions, leading to better returns. For example, AI could identify and eliminate behavioural biases, such as the tendency to buy high and sell low. And of course, there’s stock-picking.
A recent survey by online investing platform eToro found that a majority of U.S. investors are open to using AI to help with stock-picking and trading. Younger investors were especially open, with 71% of those aged 18–44 willing to let AI pick their stocks and 69% willing to let AI make trades for them.
Other experts are skeptical about the potential of AI to revolutionize the investment industry. They argue AI is still a relatively new technology, and that several challenges need to be overcome before we can fully integrate it into the investment industry. For example, AI algorithms are trained on data; if that data is biased, then the algorithm will be biased as well. This could lead to problems we can already observe, such as discrimination in lending decisions and inaccurate or inappropriate investment recommendations.
Despite these challenges, AI could play a significant role in the investment industry. In the future, AI will likely be used to automate tasks such as data analysis and risk assessment. This could free up human advisors to focus on more strategic tasks, such as portfolio management and asset allocation.
We are already seeing that change. Any advisor who relies on their superior stock-picking skills likely didn’t do so well over the last 10 years, and many will get pushed out of the industry completely in the next 10. Because technical, quantitative actions are exactly what AI is good at, human advisors will have a hard time competing.
The human touch
Luckily, investing is about more than just crunching numbers. Dalbar, JP Morgan and others have reported that investors underperform the market by around 5% annually on average. This so-called behaviour gap is not because of poor stock-picking skills but because of poor investor behaviour — chasing returns in good markets and panic-selling in bad markets. This is not something AI can fix, at least not anytime soon.
For example, AI doesn’t understand the fear a client feels when their portfolio value drops. This fear can lead to irrational decisions, such as selling stocks at a loss. Because AI can’t understand these emotions, it can’t help people overcome them.
Creating the perfect meal of protein and vegetables doesn’t solve anything if people decide to gorge on junk food instead. Similarly, building better and cheaper products won’t make a lasting difference if investors are still prone to chasing returns and panic-selling.
AI also doesn’t understand the “why” — the reason a client was saving for retirement or for their kids’ education — which human advisors can use to calm their clients in tough markets. It can’t answer, in a compelling and empathetic way, the one and only question clients care about: Am I going to be OK?
Behavioural coaches help clients understand their own biases and triggers, and provide them with tools and strategies to overcome them. There is no AI or technology solution on the horizon that can help clients help themselves in the moments that count.
The advisor who complements their strong technical skills with the skills of behavioural coaching is the advisor of the future.
Sam Sivarajan is an independent wealth management consultant and behavioural scientist