Artificial intelligence, overseen by humans, key to new robo

Davyde Wachell, whose Vancouver-based company is launching a new artificial intelligence robo-advisor, says computers will never be as smart as humans assisted by machines.

But Wachell’s Responsive Capital Management is touting artificial intelligence and deep data as its edge over automated competitors. Human decisions powered by artificial intelligence, says the company’s chief executive, will outperform the most intelligent computer or the smartest person.

“Amateur-level chess players could beat [chess champion Garry] Kasparov and [chess computer] Deep Blue, if they were given AI assistance. The Pentagon, the U.S. military, calls this the Centaur model,” says Wachell, whose company launches its eponymous machine-learning robo advisor this month. But he cautions: “There’s no substitute for thinking. If you want to plug in something [AI] and hope everything’s going to be OK, I’m worried for you.”

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Wachell says Responsive is different than competitors like WealthSimple or WealthFront (currently U.S.-only) in that it uses incoming market and economic data to actively manage asset allocations, whereas passive robos maintain a preset portfolio balance, looking only at historical prices.

U.S. competitors like Pefin are already using artificial intelligence, but Wachell says Responsive is the first to use the technology in Canada. The program analyzes historical economic and market data going back to the 1960s to spot trends and make asset allocation decisions.

While a passive robo might buy more stocks when markets drop, the Responsive program may instead back out of equities and buy more bonds.

“We’re scanning historical patterns to look for better performance and downside protection,” Wachell says. “The machines make recommendations. They present us with model output, visualizations and conviction. We usually stay with them, but there’s always that human oversight.”

Read: 4 ways robo-advisors humanize automated tools

Humans were certainly involved for Brexit. As the U.K.’s referendum approached and markets anticipated a close call, the firm, managing assets in its beta system, didn’t want to make bets. Thomas Holloway, CIO and portfolio manager, managed down equity and bought more bonds the morning after the vote. Portfolios were rebalanced as markets recovered.

Responsive’s competitor, WealthSimple, which pitches an inexpensive “unsexy-but-it-works” passive approach, says its service is meeting demand by focusing on long-term savings.

“Time will tell whether or not they’re able to deliver superior performance,” WealthSimple portfolio manager David Nugent says of its latest competitor. “The passive approach resonates with the general public. For years, they’ve been sold the pitch of superior performance by many mutual funds that have come up short.”

Responsive will rebalance portfolios on a monthly-to-quarterly horizon, with the next generation model looking at a timeframe of two to six weeks. Still, the program emphasizes growth and protection. Trading on volatility, Wachell warns, comes with the danger of “getting your neck snapped.”

The firm plans its launch later this month. This comes after a three-year beta phase where Responsive managed more than $1 billion at benchmark or better performance, Wachell says. More recently, testing has focused on the client experience.

Read: Industry reacts to robos aligning with advisors

For its active approach, the Responsive product will be more expensive than other robo-advisors, charging 0.8% for portfolios less than $200,000 and 0.5% for more than $200,000. There’s also a $10,000 minimum. There will be “competitive pricing” for institutional clients, Wachell adds.

He sees the system as a good option for independent advisors, providing a “toolset” that helps them find and onboard clients, determine risk profiles and communicate with them. Like other robos, Responsive only allocates ETFs, but the company hopes to someday include stocks and other instruments.

The service includes a chatbot that will provide economic updates and allow users to check their balance or open an account.

In May 2016, WealthSimple launched an automated platform also aimed at advisors.