You’ve probably heard about robo advisors, big data, algorithms and the fintech revolution. But a trend we can expect to see more of in the future is financial firms, and even family offices, looking to duplicate the success of the big tech companies in using machine learning and artificial intelligence to tailor recommendations and predictions.
In fact, predictive technology and the much-vaunted potential of robo advice could disrupt the wealth sector in the coming years and transform the whole world of wealth management, from mass affluent all the way up to the management of billionaire wealth.
Pretty much all of us are already experiencing predictive technology in our buying decisions. When consumers buy a product on Amazon, for example, predictive marketing technology will inform them what other people who bought this product have also bought in the past. This stuff works really well for big platform e-commerce operations. There are privacy issues of course, but overall we tend to expect recommendations based on our spending habits.
Where this sort of stuff has not really been explored yet is by banks and investment products. The sort of thing to expect - for starters - will be mass wealth management. It could work through push messages saying, for example, that you may have some extra money in a given account – what about investing in such and such a vehicle which people like you found to be positive and worthwhile?
Obviously, we have a different relationship with our financial adviser than we do with Google. But we should probably be taking lessons from China, where the first banking licences to be handed out after the government opened up the regulations went to companies like Alibaba and WeChat. Today Alibaba offers a bewildering array of investment products directly to your phone, including a range of wealth management products.
When this happens we will probably see a cross-fertilisation with robo advice dashboards. And there is no reason why sophisticated versions of the technology can’t move up the wealth chain and even be used eventually by single-family offices. More powerful, for example, is the potential application of predictive technology in bringing like-minded investors together across geographical regions to help promote co-investment cooperation.
In fact, predictive technology could become a sort of automated club-deal like service for family offices, which would help to remove some of the risk associated with such deals by better matching investors given their past investment decisions. That all may sound a bit like the computer HAL 9000 in the film 2001: A Space Odyssey, but the implications are potentially huge for the advice side of investing.
Equally futuristic (but being built) are blockchain-based protocols for actually setting up a hedge fund. Because blockchains are transparent and immutable, the legal prospectus for a fund can be set inside a smart contract and put on the shared “world’s computer” network, Ethereum (see MelonPort for more details on this), which contains as its core protocol with all the rules attached to how or what the portfolio can be invested in. This scythes through fixed and variable costs and barriers to entry, and also allows the PM to have an audited record of their investing track record – which many hedge funds will not relinquish.
Of course, the advent of such technology inevitably leads to the question - does this mean the beginning of the end of the wealth adviser? Well, chief investment officers at family offices probably have a few more years of unrivalled authority ahead of them. AI is no longer as “black box” as it once was, and there will still always have to be investment managers to oversee what algorithms are doing
But perhaps family offices, like hedge funds, should look to hire a data scientist in the future to better help them interpret all the information that predictive technology will give rise to. Or perhaps wait for a yet to be developed algorithm to do that job perfectly well in the future...