Interview with MEA Finance on applications of AI in financial advisory services

Originally published at https://issuu.com/meafinance/docs/september-2022/22

At the beginning of 2022, several new Robo Advisory platforms were launched in GCC, can we expect to see many more coming online in the near future?

The first robo-advisors appeared in 2010 and the market has grown rapidly in recent years.  We are seeing new products enter the market that are increasingly sophisticated or targeting different segments of the market.  For example, robo-advisors targeting people interested in Islamic finance or ESG-focused investing are an example of how these platforms will segment the market; whilst we will also see increasingly sophisticated use of artificial intelligence and machine learning as both these technologies and their applications to the financial world continue to evolve.  The GCC will not be an exception and I believe that, in particular, the demographics of the Gulf, with its youthful digitally-native population, make it well suited to the adoption of robo advisory technologies.

What is your view of digital financial advisory and the role it plays in managing portfolios?

In general, digital financial advisory can play multiple roles.

Firstly, they can democratize access to financial advice for people who might otherwise not have access to a financial advisor or be able to afford their services.  Someone who wants to invest passively today could simply install an app, set some broad investing objectives (such as growth v income), some risk parameters, and then let the application manage.  They don’t need to be able to read a balance sheet or perform technical analysis, yet they are able to invest in a way that is better informed than would be possible normally.

Secondly, these types of technologies can use artificial intelligence to provide investors with a broader and often richer set of insights than would be available if they were to attempt to do this themselves.  For example, whilst analysis of company financial performance or share trading histories are widely available, there are an emerging class of insights based on alternative data sources that can help inform investment decisions but are very difficult for ordinary investors to process or get access to.  For example, we have been working with different entities in the region to explore how weather data can influence company performance.

Thirdly, these technologies make possible a high degree of automation.  A person could, for example, select an investment strategy from a catalogue, crowdsource the strategy, or create their own and have the platform automatically make investment decisions – within defined parameters – based on this strategy.  The speed, ability to operate 24x7, and ability to ingest vast amounts of data to form decisions can put these platforms at an advantage to human investors who are time-constrained.

What impact has the development of Robo Advisory had on asset management and banking businesses?

There is an entire section of the market that was not able – for financial or other reasons – to get access to financial advisors and robo-advisors have played an important role in addressing that part of the market.

Whilst there are some pure-play robo advisory platforms, I am also seeing that hybrid approaches are common and offer a richer experience.  For example, an investor might choose trading strategies of a set of human-defined offerings and the robo-advisor will then just execute or, as is often the case, the investor will still consult and engage with human advisors in addition to using a robo-advisor to trade within certain narrow parameters.

I am also seeing that there is a continuum of maturity where people may start with robo-advisors as their entry point into investing and then, as they become more sophisticated, their need for more bespoke advisory services increases.  Given they are addressing a market that is often not served by banks or asset managers, it could be argued that deployment of robo-advisors can actually lead to growth in the classic part of the business as a subset of these users graduate to more sophisticated investment products.  In this case, rather than replacing the role of financial advisors, robo-advisors could be a useful customer acquisition strategy for these higher value services.

Where particularly do Robo Advisors have advantages over human advisors, and visa-versa?

Robo Advisors have an advantage in that their cost is typically much lower than human advisors since they are, by definition, automated and software-driven.  Unlike humans, they can monitor multiple markets 24x7, act immediately, and are not swayed by the normal human emotions that can sometimes cloud our judgement.  They are digitally-native and therefore can be accessed and used anywhere in the world and at any time.  Their trading or investment heuristics are often pre-defined, based on some objective function, or based on a catalogue of trading strategies that a user can choose from.  This makes them a much simpler and lower cost way for someone with no investment experience to enter the market.

Human advisors are, unlike robo advisors, better able to understand and build strategies that are far more bespoke and take into account factors that a robo advisor would find it difficult to accommodate.  For example, a person’s family situation, complex tax scenarios, or ethical and other constraints on the types of fund or equity that they will invest in.  As robo advisors will typically address a broad market, there are often products, strategies or opportunities that only a human advisor would be aware of or be able to discern.  That said, this level of advisory typically comes at a higher price to robo-advisors.