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Bionics the future of money making on Dalal Street

Let’s say you are ordering tickets on IRCTC and just as you are about to finish, there appears a mysterious array of alphabets and numbers in a fuzzy cage, and you are instructed to type.

The reason for this, which became clearer to me later, is this: that you are a human being and not some arcane programme devised to gobble up the tickets.

What makes this “captcha” so difficult for a machine that a normal human being can handle?

Remember, that a machine is capable of processing complex calculations at a much greater speed than the most intelligent of human beings. If this is so, can we trust a box of metal and plastic to understand complex human needs, work out the numbers and ensure the money is invested in the proper combination in various assets.

According to Tim Urban, author of the blog “Wait but Why”, we may be hurtling towards developing extremely intelligent technology. Urban asserts the rapid progress of technology especially after the arrival of internet seems to suggest that we are not in normal times and the pace of change is much more rapid than at any time in past.

Much of the rapid change is being driven by Artificial Intelligence or AI. According to Computerworld, the installation of AI in cars is slated to go up from 8% in 2015 to 100% in 2025. Hiring a driverless taxi is a reality in cities like Pittsburgh.

So how does all this affect the wealth-management industry? In the last few years, Big Data, AI and Robo Advisory have dominated the headlines. James Baratt, a documentary film maker and author focused on AI, says “Financial Advisors give advice based on market and long term trends and that’s exactly what machines are good at”.

However, it is simplistic to club AI into a single label since there are different forms of AI: Weak AI performs a specific task while a strong AI can match human capabilities including cognitive skills and super strong AI can surpass human abilities.

While Robo Advisory is a buzz word that has gained ground in 2016, in an interesting turnaround Betterment has started recruiting human financial advisors in the last 6 months. This, from a pure play Robo Advisory it is evolving into Bionics Advisory which involves using both robos and humans for advice. What it tells us is that while robos can perform well as a dispenser of cold, calculated and reasoned advice, there is still a requirement of empathy and handholding that only a human being with strong social skill sets can provide.

To my mind, the increased use of Robos or AI in wealth management industry will be driven by the following:

The shrinking of alpha: In US, despite the continued rise in stock prices for the eighth year running, active funds are losing money and the passive funds including exchange traded funds (ETFs) are seeing strong inflows. As the popularity of ETFs increase so would the rise in usage of computer programmes to devise solutions.

Both pure and synthetic ETFs are required processing abilities and are less reliant on human beings. As per an October 16 article in Financial Times, in a study conducted by Dow Jones / S&P, only two out of 100 global funds outperformed the S&P Global 1200 and 97% of emerging market funds have underperformed since 2006.

Already large pension funds like Calpers have moved away from complex products like hedge funds etc and increasing their allocation to low-cost beta products like ETFs.

The rise of millenials: Perhaps the greatest transfer of wealth in history is already underway and is estimated to be about $30 trillion, according to Cap Gemini’s World Wealth Report 2016. As baby boomers age, much of this wealth is being inherited by the millenials who are much different in their attitude to money than the earlier generation.

The shift of wealth towards millenials is also happening at a time when individual advisors are retiring from the industry. Millenials typically are more savvy with computers, less trusting of individuals and authority and prone to having more than one advisor. All this implies that they would be more accepting of a robo than the baby boomers.

The sharp fall in brokerage / advisory fees: Legacy business models with high-cost structures and face to face selling is increasingly coming under threat as competition, technology and regulations are forcing down brokerage and advisory fees. The new advisory models with rich user interface and experience through technology not only charge less but need much less capital to run the business.

Further, most of the advisory, operations and compliance functions are machine led. While the future looks to be technologically led, there still is hope for people to succeed in the industry. In a report by World Economic Forum titled “Future of Jobs”, people with high social and numeracy skills would still be in demand and wealth management industry is an ideal arena for such kind of talent.

The writer is CFA charterholder and direct & CEO, TrustPlutus Wealth Managers (India) Private Ltd.