We have come a long way since the launch of the ZX Spectrum, the 8-bit personal home computer released in 1982. Today, the computer chip in a modern phone has more processing power than all the computers combined in 1945.
Technology surrounds and drives our daily lives, while media coverage on ‘futuristic’ developments such as driverless cars, the internet of things and robot workers give us a window into tomorrow’s world. Most recently, we have seen a lot of coverage looking at the jobs that robots will ‘steal’ first. A recent report from A.T. Kearney predicted that by 2020 robo-advisors will manage about $2.2 trillion in assets, while a Boston Consulting Group predicted that up to 25 per cent of (industrial) jobs could be replaced by robots or software by 2025, but is this a sign of the future or are we there already?
Artificial intelligence algorithms are already commonplace on Wall Street, particularly in the institutional space, but are now being used as the basis to develop the next generation of robo-advisor retail investment solutions in the US. Companies such as Digit and Acorns, which automatically invest spare cash in to savings and investment accounts, have already made strong inroads into this area, but it is not just at the start-up level.
These companies are being joined by powerhouses such as IBM that are specifically targeting the financial advice segment with their powerful super computer Watson, which famously beat the champion human competitors at a gameshow called Jeopardy. Other technology leviathans, meanwhile, such as Facebook, Google, Amazon, Microsoft, Apple and Baidu in China are outspending all others on artificial intelligence for the next generation of products for their massive customer bases. Interestingly, the majority of these firms are already in the financial services space, mostly in FX or payments but it’s almost inevitable that they will move further up the food chain from here.
One of the key concerns however is just how many of the new start-up companies/technologies will still be around in a few years’ time. Regulation, the pace of innovation and the capital requirements involved with staying at the forefront of development, all suggest that the best start-ups will almost inevitably need to grow very quickly or secure the backing of a BlackRock (which recently announced the acquisition of FutureAdvisor that creates automated portfolios for investors), an IBM or similar to stay ahead of the game.
To this end we expect to see further significant consolidation similar to the technology hungry companies such as Facebook, which acquired Whatsapp and more than 40 companies in the past few years, and Apple, which has announced more than 70 acquisitions to keep its propositions ahead of the competition. Like with internet banking however, the challenge will be keeping the pace of technological change at a level where consumers can keep up.
Change is coming rapidly and we expect to see the next generation of automated robo-advisors coming online in the retail fund space in the next 12 months. These will have improved algorithms not just based on self-disclosed risk profiles and objectives but also leverage behavioural data such as spending patterns and investment habits to help validate assumptions and make more tailored investment decisions. For instance suggesting or moving surplus money from low yielding accounts to better performing or more tax efficient vehicles.
These robo-advisers will start to provide personalised advice based on large data sets that would be inefficient or costly for human advisors to do. As with all rapidly developing technology, the important thing to remember is that what we have now is the worst that we’ll ever have, what will come next will only continue to improve.
An article from Jet Lali, head of digital at Alpha Financial Markets Consulting.