Can a robot compete with a human in the field of wealth management?

Advanced technologies, especially the development of AI, are significantly modernising wealth management services, write Maksym Koretskiy and Illia Kyslytskyi.

Maksym Koretskiy is a financial expert Blackshield Capital Group, and Illia Kyslytskyi is the group’s head of the analytics department..

Thanks to innovations in the 2000s, robo-advisors emerged in the field of wealth management – platforms with an automated investment portfolio management process requiring minimal human intervention and taking into consideration individual client requests.

Today, about 50% of millennials are interested in robo-advisor services, and this figure is almost twice as high as the level of interest of the previous generation.

Besides, the segment of companies that use robo-advisors is growing quite rapidly. According to Grand View Research, the average annual growth rate of the industry is around 14%.

It is expected that by the end of this year, artificial intelligence will have $1.4 trillion under management, and the market value of companies in this business is already estimated at around $50 billion.

This raises the question: does this mean that a robot will soon replace a traditional investment advisor? Let’s try to compare the respective strengths and weaknesses of humans and AI in the context of Wealth Management services.

Efficiency and accuracy

Thanks to AI algorithms, robo-advisors analyse the market situation with exceptional accuracy and maximum speed and recommend optimal investment strategies. There is no “human factor” and no emotional component in its negative manifestation (fatigue, stress, hesitation, uncertainty). Therefore, the possibility of mistakes is minimised.

Wide coverage

We have to admit that most client requests are profiled and standardised. Therefore, creating solutions and products that cover most of the client’s tasks is not an issue.

AI does this by taking into account such important factors as the client’s risk tolerance, target return, structure, and quality of assets in the investment portfolio.

Adaptability

Robo-advising has developed so rapidly in recent years that modern robo-advisors have begun to assess client needs in a non-linear manner. Algorithms are able to show fairly high adaptability and even flexibility to user requests if necessary.

Lower costs

Process automation allows robo-advisors to offer their services at significantly lower costs compared to traditional advisors. This creates cost-effectiveness for investors.

Democratisation of the industry

Since automated solutions are cheaper, robo-advisors lower the entry threshold into the wealth management industry and make it accessible to a wider range of investors. The trend toward democratisation of the Wealth Management industry seems particularly inspiring to many market participants. In particular, in 2022 Swiss bank UBS was going to acquire one of the leaders in the robo-advisory market, Wealthfront, for $1.4 billion.

What can a human in the wealth management industry possibly offer to such a seemingly perfect competitor as artificial intelligence? Currently, the advantages of traditional advisors are:

Personal live communication 

Wealth managers study the psychological and emotional subtleties of their clients, so they can build a more trusting communication with them – unlike robots. Live communication, in a sense, contributes to better customer service and leaves a pleasant impression of cooperation.

Even in conventional brokerage services, electronic standardised procedures do not completely replace human communication. The largest banks continue to execute orders in two formats: low touch (automated processing of requests) and high touch (when requests are processed manually).

Moreover, not every client will be satisfied with standardised offers, so individual solutions have to be developed through live communication.

Non-standard tasks 

Frequently, clients seek solutions to non-standard tasks that AI may not be able to offer. For example, they need advice and an effective solution for tax optimisation or regulatory restrictions.

Some clients ask to create a mixed portfolio of assets, which would also include non-public companies, whereas robo-advising mainly specialises in liquid assets which are traded publicly.

Flexibility

The parameters of a particular investment behaviour sometimes need to be quickly reformatted in line with global changes. Traditional advisors can adapt more quickly to new circumstances and take into account unforeseen aspects, which makes them more flexible in dealing with difficult situations.

Advice based on experience

Not all events can be fitted into strict lines of mathematical equations. Therefore, the accumulated experience and in-depth understanding of market trends allow professional advisors not only to adjust robo-advisors’ proposals, but also to provide advice that is not limited to statistics, but also considers additional context and personal circumstances.

So who has a better chance of winning in the long run: a robot or a human?  There is no definite answer, as the dynamic development of technology is rewriting the usual scenarios on the go, and the investment market is no exception.

According to Reuters, the percentage of companies mentioning AI in their quarterly reports has doubled in the last year alone. Among S&P 500 companies, the number is over a third (36%). Among them are the undisputed market leaders – Google, Meta Platforms, Amazon, Nvidia, and IBM.

Although technology provides tremendous opportunities for automation, ambitious goals and personal choices remain exclusively within the domain of people. After all, big money is associated with major decisions, non-standard multi-level moves, and risk. Those are games that can be effectively played by humans and are unlikely to be played by robots -at least not yet.

Therefore, in an ideal world, robo-advisors and humans can and should complement each other. No purely digital product can become a “magic pill” that will work for everyone without exception. Developing the synergy between AI and human potential could indeed contribute to the creation of effective and flexible strategies, allowing to efficiently satisfy investors’ needs.