Is robo-advising the future of investment banking?

Brian Pedersen//January 31, 2020

Is robo-advising the future of investment banking?

Brian Pedersen//January 31, 2020

Artificial intelligence speeds data crunching but the personal touch is still important

In investment banking, elements of artificial intelligence have started infiltrating the world of money management, changing the nature of the industry.

For people in financial management, AI saves time and money.

The full use of artificial intelligence, also known as machine intelligence, is much further into the future for most companies, since it allows machines to automatically respond to their environment without human involvement and could allow software to make decisions.

AI is the technology that allows a computer to think for itself. The first ripples of that have been coming the past few years with the use of algorithms to speed the flow of data. It has started picking up in the areas of wealth management and financial advising and banking professionals and other money managers have taken notice.

“It’s accelerated a lot in the last few years,” said Connor Darrell, assistant vice president and head of investments at Valley National Financial Advisors in Hanover Township, Northampton County. “Through the technology enhancements, you see more creative ways of building portfolios. A lot of times, it drives down costs as well because all that information is aggregated as well.”

What had been a historically complex method of building a portfolio is now less labor intensive since the computer does that work for you, he added. For example, a company that wants to issue a report on where its revenues are going could collect the data it needs using computer software rather than several people.

It’s changing the role that an analyst or portfolio manager might have and takes away what might have been a time-consuming task, Darrell said. “I think it augments the process, just having more information at your fingertips. It gives us more tools to choose from.”


Keith Aleardi

Keith Aleardi, executive vice president and chief investment officer at Fulton Financial Advisors in Lancaster, said his firm looks at the issue through two lenses. One is through the direct involvement from investors, and the most common platform is robo-advising, he said. Robo-advising is where a person uses a computer rather than a human adviser to give financial advice.

The other lens is from a practitioner and adviser perspective, in looking at how an adviser uses technology to help clients to reach their financial objectives, Aleardi said.

“Robo advisers have gained some traction in the investment world,” Aleardi said. “The client interacts primarily with a technology platform. We see that at certain segments, primarily more the savers and retirees.”

Where Fulton really sees an opportunity for financial technology is as a way for an adviser to do a better job, Aleardi said.

“Technology can help drive and analyze data and models so advisers are more informed when planning a portfolio through analytics and data and stress-testing a portfolio,” he said. “An adviser can better predict what risks in the portfolio can be prepared for.”

With robo advisers, there’s always going to be a segment where technology will replace a human, but some types of relationships are above technology.

Fulton does not have any robo advisers, Aleardi said.

“We have put a premium on relationships and interaction and understanding of those relationships,” he said.

The use of robo advisers appears to have plateaued, according to Aleardi. “I get less questions from clients about it than we have in the past. We will always see changes in the industry and technology continues to play a part in financial services.”

Still in infancy

Tom Cassidy

On the other hand, true artificial intelligence in the investment world is still in its infancy, according to Tom Cassidy, chief investment officer at the wealth management group for Peoples Security Bank & Trust Co.

Cassidy, who works in both the Scranton and Bethlehem offices, said AI will change the industry but much of what’s happening in wealth management or financial services wouldn’t be considered AI, with a computer actually learning something.

“It will never take over human contacts,” he said. “Ultimately, that’s what our business comes down to, at least from being in this business for as long as I have. The wealthy individuals prefer to deal with somebody face to face. A lot of what trips up humans when it comes to investing is emotions.”

When something is happening in the marketplace, clients need to talk to someone who can ensure that their portfolio will be sound and essentially, ‘talk them off the ledge,’ he added.

Investors get nervous and jump in and out of their investments at the wrong time, which can take the form of abandoning their financial plan, he said.

“That is the biggest advantage to working with an adviser,” Cassidy said. “They can help keep you on track. It’s very easy to be emotional and jump in and out of things.”

Cassidy believes that AI is going to work in tandem with advisers and help them enhance personal connections.

“I think it will help them be more efficient,” Cassidy said.

One expert sees the use of robo advisers and AI as a way to achieve a maximum return for a general level of risk.

Mark Gruskin

“If you are managing someone’s portfolio, they have a certain level of risk,” said Mark Gruskin, associate professor of finance and accounting for Penn State Lehigh Valley. “If you are a financial manager or adviser, this is a tool to assist them.”

Gruskin views robo advisors and AI as two different things, with robo advisers responding to the individual on what the specific risks of an investment are and AI used by a funds manager who is managing a large number of assets and trying to achieve the goal of the fund.

“I expect these things to continue to exist and they will get better,” Gruskin said.

For the fund manager, the goal is more clearly defined, and generally, if you have a clearly defined objective, it lends itself better for creating software so you can use AI, he said.

“I think, as computing power has improved, most financial research seems kind of old, generally, a lot of studies on this go back in time,” Gruskin said. “I don’t see this as something that’s dominating the world. It’s just a tool to achieve an objective. It’s going to be more a tool for the practitioner to evaluate some investment objective.”