The biggest of businesses and wealthiest of individuals seek the services of trained advisors to manage their money. However, financial advisors, despite their experience, expertise or loyalty, are human at the end of the day. And human error is something you never want in the handling of your money or other assets. What's more, relying too much on your financial advisor may also leave you vulnerable to potential fraud. Your advisor has all your confidential financial information, after all.
AI is not exactly a novelty in the financial sector and has several applications in areas like fraud detection and auditing. AI-based applications can either augment human expertise by handling low-value tasks or proactively take on more strategic roles for businesses. Either way, AI in asset management guarantees a significant level of accuracy in forecasts by analyzing billions of different scenarios and data points.
AI and Asset Management
In regular speak, your assets include all of your financial holdings. Asset management generally deals with the handling of specific investments, such as your bonds, derivatives, mutual funds and other similar assets in your portfolio. The most common applications of AI in asset management include portfolio-related decision making, compliance management and financial advice.
a) Portfolio Management
The pattern recognition abilities of AI and machine learning are put to good use to evaluate which stocks must remain in your portfolio and which ones shouldn’t. Machine learning determines the relationship between risks and returns associated with each stock after assessing thousands of factors such as the financial health of the company, your risk tolerance and the historical or seasonal performance of stocks of a certain class. The suggestions keep improving in effectiveness by continuous learning and evaluation of stock market trends.
Apart from quantitative trends, AI-based asset management tools also use qualitative data from the internet, such as financial forecasts, news reports and social media posts. Keeping the risk variables—such as losing mortgaged property, bankruptcy—and the qualitative aspects in consideration, AI in asset management evaluates the kinds of stocks that can fall drastically without any likeliness of rising again. For example, a stock belonging to a company that is in the news for the wrong reasons—as perceived by the majority— will crash in the stock market, a fact AI determines beforehand with the help of predictive analysis.
b) Compliance Management
AI enables your business to manage risks in a way that regulatory compliance is achieved. AI algorithms can be trained to identify regulatory information from public notices and prepare a report with the information. Additionally, businesses can use AI to detect changes in investment guidelines from official source documents present online such as investment policy statements, IMAs, exemptive orders and similar others.
One of the main uses of AI in asset management, from a compliance standpoint, is the reduction of false alerts that are generated by standard, rule-based compliance alert systems. As recently as 2018, the “false positive” alerts were approximately 90% of all alerts for legacy compliance alert systems in several banks.
AI and machine learning capture, clean and analyze multiple data elements to streamline compliance alert systems. In this way, your business can save the needless time and money spent on investigating large alert queues in order to find details about an alert. Costs are saved in other ways too, such as the automation of complex governance processes that still rely on manual work and paper-based documentation in several organizations. According to a study, businesses spend about 15-20% of their daily expenses on governance and compliance costs.
Apart from these, AI in asset management typically enables organizations to channelize their human resources for the tasks that need a “human” touch, effectively manage assets and investments and automate change management whenever there are regulatory changes (thereby saving hefty non-compliance fines) and human error mitigation in asset management.
Using AI in asset management works exactly like how you’d expect it to work within a financial setting.
c) Robo-advisory
Robotics, one of the main subset fields of AI, shows promise in the field of wealth management. There are almost a total of nearly 100 robot financial advisors in 15 countries currently. Financial forecasts predict that the number of assets being managed by robo-advisors will be approximately US$16 trillion. Robo-advisors use client input and consider factors such as risk appetite, liquidity and others before highlighting the best financial options that are there before making an investment in shares, bonds or other financial assets.
Robo-advisors have gone through four main evolutions. The first phase involved client-investors receiving single-product proposals on the basis of an online questionnaire that clients would fill to feed information about their investment preferences. No broker API was involved. The second evolution included the use of risk-based portfolio allocation and the concept of funds. The third evolution brought about the use of algorithms for rebalancing proposals. The final evolution automates financial investments with self-learning and uses AI and robotics to automate asset shifts. AI will continue to be heavily involved in robot financial advisors.
AI and Wealth Management
Unlike asset management, which includes a finite number of things, wealth management is a much broader term. It looks at multiple factors that affect an individual or family’s overall finances before providing recommendations to maximize their wealth. Certain qualities of AI in asset management, such as cost reduction and better decision-making are used to optimize wealth management too.
Here are some of the main application areas of AI in the world of business and personal wealth management:
a) Tax Planning
An example of AI-based automated tax planning is a tax planning assistant named Odele. The tool can be a valuable resource for businesses, entrepreneurs, high-net-worth families and similar other clients.
An AI-based tax planner like Odele autonomously compares tax assumptions, projections and configurations. Additionally, such a system analyzes data from past records and other financial sources to calculate amounts such as lost income due to tax and other similar figures. Based on the analysis of previous years, the tool recommends optimal tax planning and configuration for clients. Factors such as personal lifestyle may also be considered. And finally, the system learns and updates itself with information from bodies such as the IRS to create and modify your taxation policy.
Managing wealth efficiently depends heavily on how you manage your taxes. Generally, taxation in any country comes with ways to exempt yourself from paying it in different ways. Having an AI-based tax management tool allows you to know all the information about such ways in which money can be saved.
b) Estate Planning
Like most traditional concepts that come under wealth management, estate planning also has been generally carried out with the paperwork. Documentation would include the physical copies of ID proof documents. That way of estate planning slows down the entire process. Instead, AI can be easily leveraged to simplify estate planning. The technology can provide insights into planning your estate while staying on the right side of federal or state laws.
AI is advanced enough to analyze a person's complex situation and provide an optimal outcome regarding their estate. Additionally, AI can even create legal documents for such persons. Factors such as decision-making regarding the transfer of estate can be automated with machine learning and AI.
Apart from these, wealth management has several other areas that can be optimized with the help of AI. One such area is providing personalized engagement and customer service to clients. Already, tools such as chatbots are being used for improving the customer-service executive interface. Chatbots facilitate the autonomously resolve customer queries regarding personal wealth management.
AI in asset management analyzes various factors so that businesses get to select the best stocks or other assets in the financial market. Wealth management has a wider scope of application, finance-wise, with topics such as tax planning, estate planning and other factors. AI may be expensive to implement and run, but the level of ease that it brings to the financial market is unparalleled.