The rise of the machines

  • Posted on January 4, 2017

robots and AI in banking

For years, we have been fed an almost constant diet of sci-fi prediction about the consequences of artificial intelligence and our deepening lack of self-reliance. Be it at the hands of vengeful robots, octopedal searcher drones or an omnipresent networked villainous super-brain; we are just fleshy victims waiting to be usurped.

Well, the age of artificial intelligence is upon us and predictably, a debate rages on. Ironically, considering the warnings that assail us across the airwaves, one of the realms that is embracing AI is the financial services industry.

In 2008, several small technology-oriented startups stole headlines with their move into fully automated investment services. Chief among them were the bicoastal duo of Betterment and Wealthfront that were able to secure sizeable venture funding. Since then, most of the household names in banking have made the move and either have AI products in the market or are working out the kinks in development Twitter [CLICK TO TWEET].

Charles Schwab’s Intelligent Portfolios offer investors a portfolio of exchange-traded funds (ETFs) with very low entry points and no fees or commissions. It is a model that is becoming popular in the industry. Most early stage robots typically work with passive investing of index funds and ETFs, which is a less complex activity than active management.

The suitability of robo-advisors for the passive market has coincided with a shift in market conditions to create a perfect storm. Between 2007 and 2015, there was an active inflow of $1.2 trillion into domestic ETFs and stock index funds while actively managed mutual funds lost around $835 billion. This shift seems set to continue creating ample opportunity for money managers who can master the space.

The Case for Robots over Humans

In a recent article, Lisa Kramer wrote, Humans come hard-wired with cognitive biases that often lead them to make suboptimal financial decisions. Research shows that people see patterns in data where none exist, they believe they are more knowledgeable or skillful than they actually are, and they overlook potentially important information, even when it’s as obvious as a gorilla on a basketball court…”

So, why do human managers persist in an industry that is so cost competitive? Let’s consider the matchup:

robots vs. humans

Challenges of adoption in robo-advisory seem to be more than a simple perception issue. At present, complex portfolios that might include exotics or estate elements and have sophisticated tax or reporting needs may not be a fit for robots. But that is changing. Advances in predictive analytics and machine learning are advancing the paradigm and the attraction of robots across all industry lines is forcing technology vendors to accelerate to keep pace.

So it seems that the robots are here to stay and their prevalence in investment management is only set to grow. But how do banks and managers position their offerings in order to garner more of the market and help adoption among their customers?

The Cyborg

One option would be to fashion a hybrid approach that utilizes robo-advisory elements at the lower end of the market and gradually brings in greater human intervention as complexity and net assets grow across the spectrum. The trick would be to ensure that the customer experience is seamless across all client types, regardless of how much robo-advisory they consume.

E*Trade’s Adaptive Portfolio works in this way, providing human intervention to augment the heavy lifting of the robo-advisor. This approach typically ends up costing more and accounts may underperform against a robo baseline if the human managers don’t routinely make the right picks. But the pay-off in terms of securing early adopter investors is likely to be high.


Another approach is to make artificial intelligence ubiquitous in our collective consciousness. Microsoft Cortana, Amazon Echo and Apple Siri are all examples of AI in common usage and banks will ultimately succeed if they can become as attractive a channel for AI consumption.

At this year’s Money2020 conference, Bank of America launched Erica - their own virtual assistant bot. Think of a ‘personal advocate’ that can examine your spending and saving habits and provide guidance on more beneficial behaviors.

Michelle Moore, Head of Digital Banking, Bank of America: “We’re merging mobile and digital technologies together, transforming what used to be just an ATM into a personal concierge to make our customers’ lives easier.”

Uniting the Experience and the Intelligence

Our own experience with the digitization of the Wealth Management industry tells us that success becomes more likely along two vectors. (1) How well the user experience seamlessly aligns the robo features with the human interactions across a technology solution that unites all manner of customers and the traditional human advisors; and (2) How deeply managers can embed robo-advisory technology within their portfolios to reduce cost and time to serve. Effectively, get robo-advisory in there and make it easy for the client to accept it.

The journey has started and it will be an interesting ride to see how we navigate the AI paradigm; so long as the robots don’t take over.

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