Artificial intelligence poised to change investment management world

By Susan Yellin | March 27 2018 07:00AM

Photo: Unsplash

Artificial intelligence (AI) will singularly change the investment management world in the next year or two as the technology learns new ways of interpreting data. At the same time, robo advice will become more holistic and streamline the client experience, experts told a recent Morningstar forum.

Steven Hawkins, president and co-CEO of Horizons ETFs Management (Canada) Inc., told the February forum that AI is part of the new technology that will incorporate different types of strategies and new ways of interpreting data.

“I think investment analysts are going to go the way of the dodo bird at the end of the day because there are going to be computer systems that are going to be able to do all of that work in such a short time – not sleep, not put in emotion [and] no bias with respect to the analysis that they’re doing,” Hawkins said. “They’re going to be able to analyse the amount of data which increases every single day out there and be able to interpret that and come up with a better conclusion and learn from it every single day.”

Neural network

Hawkins said Horizons launched its first AI product – the actively managed AI Global Equity ETF – in October. A Korean company had already developed the algorithms and a neural network to do the stock selection so Horizons decided to take the ETF one step further – global equity asset allocation. 

The growth of AI stems from the fact that the world is full of data, he said. Feed a machine and it will be able to digest the information quickly, efficiently and without any emotion, he said.

“The AI system is simply going out there and taking the data that’s available to it and making investment decisions every single day with respect to the portfolio,” he said. “Our role is really to make sure that the decisions the AI systems make follow the parameters of the ETF to make sure it meets its objective and strategy.”

AI, said Hawkins, learns from the past and historical changes. Using the exact same data will not result in the same end strategy. Instead, he said, it will make a more improved decision as it teaches itself to become a better investor every day.

ETFs accounted for more than $150 billion in assets under management as of the end of January, a product of Canada’s status as an international thought leader, always at the forefront of launching new and innovative products, said Hawkins.

Part of those kudos belong to Canadian regulators that allowed Canada to be the first, for example, to launch a marijuana ETF last year. And, in early February, the Ontario Securities Commission approved the country’s first blockchain fund, Blockchain Technologies ETF. Both put Canada far ahead of their U.S. counterparts.  

“There might be 4,000 more ETFs in the U.S. but Canada is really an innovator in bringing in different strategies,” he said. “The U.S. regulators – the SEC – are stuck in the dark ages in my perspective. They always think that the ETF issuers or market makers are out to destroy the end client and we don’t believe that. We provide products that are new and innovative and that people want to invest in.”

Hawkins predicted that there will be more ETF providers in the near future, mainly through the banks that currently acknowledge investors are getting out of their more costly mutual funds.

Too little, too late

The major Canadian banks all offer some ETFs, as do many life insurance companies. Hawkins said some mutual fund companies have recently launched their own suites of ETFs, but he said that for many, it’s too little, too late.

On the robo advice side, Bank of Montreal has already launched an online portfolio, called SmartFolio, while National Bank has a minority investment of $6 million in Nest Wealth. National Bank signed a commercial agreement about a year ago which will see it use Nest Wealth’s cutting-edge investment technology to enhance National Bank’s internal digital platforms.


David Nugent, chief compliance officer of Wealthsimple Financial, said many dealers are struggling to figure out where robo advice fits into their overall business models.

“The reality is that it’s taking out the operations and administration layer. I think most dealers are looking to centralize their small accounts, take them away from advisors and put them onto a salaried desk” while implementing a digital strategy, said Nugent.

He said the dealers’ biggest asset is that they have distribution. But at the same time, some of these big dealers have legacy systems and bureaucracy that are holding them back.

While robo advisors like Wealthsimple have the largest chunk of the client base and the assets in the digital space right now, Nugent predicted that competition is nipping at their heels, especially banks and insurance companies, many of which he said will launch their own digital platforms in the next 12 months.

After that though, he said the proliferation of robo advisors will probably slow down and some consolidation will take place.

“As the larger players come into the space, there will be less private money that wants to fund a start up,” said Nugent.

Robo advisors themselves are also evolving, becoming more holistic and streamlining the client experience, said Nugent. Blockchain technology is next, but will probably take another year to become more widely used.

Wealthsimple is working with about 300 advisors through its Wealthsimple for Advisors division, allowing advisors to streamline their practices and focus on investors’ more complicated issues, such as taxes, trust and estate planning. In the end Wealthsimple is not only attracting millennials, but also the parents of those millennials who believe they are being underserved by their current advisors.

Nugent said there is too much emphasis on fees by clients who come to digital platforms without first doing their homework. He said investors need to understand the value of what they’re getting and what they want.

“Fees matter for the value you are providing, but I think that’s something that the robos have created; the blogging world has also created that to a certain extent.” He said he hears clients say that his company is cheaper than a full-service advisor. “But we aren’t going to be involved in your family unit the same way as a full-service advisor is going to be. You need to make that decision as a client.”

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