Who Should Worry About AI More? Active Managers or Advisers?

On
other
occasions,
the
task
is
perilous.
Early outlooks for
the
internet’s
prospects
consisted,
in
essence,
of
monkeys
tossing
darts.

For
example,
the
consensus
view
entering
the
new
millennium
was
that
the
best
prospects
for
recording
internet-related
profits
lay
with
business-to-business
applications.
Wrong!

Today,
four
internet-related
firms
are
among
the
nation’s
10
largest
companies: Microsoft, Amazon.com, Alphabet,
and Meta
Platforms.
The
first
derives
half
its
revenue
from
businesses,
and
the
latter
three
hardly
any
at
all.

Enter
AI

Predicting
how
artificial
intelligence
will
affect
the
investment
industry
falls
between
those
two
extremes.
The
internet
was
so
difficult
to
foresee
because
it
broke
radical
new
ground.

Cellphone
conversations
resembled
those
from
landlines,
but
the
internet
experience
was
unlike
anything
that
came
before.
Predictions
were
made
from
a
foundation
of
sand.

In
contrast,
AI
has
at
least
something
of
a
predecessor,
with
computers.

Before
AI
was
developed,
microprocessors
were
the
great
investment
innovation,
providing
1)
portfolio
managers
with
more
information;
2)
financial
advisors
with
software;
and
3)
researchers
with
improved
analytics.
The
new
technology
permitted
the
previously
impossible.
(Morningstar owes
its
existence
to
the
availability
of
personal
computers
and
desktop
publishing!)

Using
the
computer
revolution
as
a
backdrop,
let’s
consider
how
artificial
intelligence
might
affect
each
of
those
three
investment-industry
segments.

Portfolio
Managers

Artificial
intelligence
is
unlikely
to
change
professional
money
management.

Here,
the
computer
analogy
fully
holds.
When
super
computers
arrived
in
the
1980s,
several
“quantitative”
investment
firms
boomed.
They
profited
by
mining
knowledge
from
huge
databases
that
had
not
yet
been
exploited.
Their
victory
was
brief.
Within
a
few
years,
their
funds
had
reverted
to
the
mean.

You
know
why.
Any
reasonably-sized
money
management
business
could
buy
its
own
computers
and
investment
databases,
thereby
emulating
the
quants.
And
that
is
exactly
what
happened.
The
competitive
advantage
quickly
became
mimicking
the
Joneses.
Technologically
assisted
discoveries
no
longer
mattered
because
the
marketplace
had
fully
incorporated
them
into
equity
prices.

The
same
process
will
occur
with
artificial
intelligence.
Any
portfolio
management
boons
from
employing
AI
will
soon
be
erased
by
imitation.
The
status
quo
will
therefore
persist.
Most
actively
managed
funds
will
trail
their
benchmarks
because
of
their
costs,
and
identifying
the
happy
exceptions
will
remain
a
difficult
task.

Prediction:
Given
the
dominance
of
indexing,
active
portfolio
managers
have
little
to
lose.
The
good
news
for
them
is
that
artificial
intelligence
will
not
hurt
them.
Unfortunately,
neither
will
it
help
them.

Financial
Advisers

Here,
the
computer
analogy
partially
fails.
It
works
in
that
both
computers
and
artificial
intelligence
can
process
data
and
arrive
at
conclusions
far
more
rapidly
than
humans.

However,
it
is
incomplete
because,
unlike
AI,
computers
do
solely
what
they
are
told.
Assigning
responsibility
for
their
output
is
straightforward.
A
computer
is
no
more
to
blame
for
providing
flawed
advice
than
is
a
hammer
for
striking
a
nail.
The
fault
lies
with
those
who
gave
the
instructions.

One
cannot
similarly
trace
artificial
intelligence’s
steps.
That
presents
a
major
obstacle
when
adapting
AI
for
financial
advice.
On
the
one
hand,
AI
is
well
positioned
to
create
customised
recommendations,
given
its
flexibility.
On
the
other
hand,
AI
operates
outside
of
human
control.
Perhaps
AI
presentations
will
become
so
adept
at
explaining
their
“reasoning”
(to
use
the
term
loosely)
that
customers
will
grow
accustomed
to
accepting
its
counsel,
without
hesitation.

Perhaps.
However,
at
least
for
the
foreseeable
future,
I
suspect
that
AI
will
supplement
current
financial-advisory
practices
rather
than
supplant
them.
Conventional
software
will
suffice
for
most
financial-advisory
clients.
For
those
with
special
conditions,
AI
will
serve
as
a
research
assistant,
offering
potential
but
discretionary
suggestions.

Prediction:
unlike
active
portfolio
managers,
financial
advisers
were
unharmed
by
the
index-fund
revolution.
Like
active
portfolio
managers,
they
face
little
threat
from
artificial
intelligence –
and
possibly
great
benefit,
if
they
harness
its
powers.

Investment
Researchers

The
prognosis
is
most
challenging
within
my
own
field
of
investment
research.
Financial
advisers
earn
their
keep
from
their
recommendations.

We
researchers,
on
the
other
hand,
are
paid
to
attract
attention.
That
makes
artificial
intelligence
a
true
rival.
Those
who
care
about
investing
have
only
so
many
hours
to
devote
to
the
subject.
They
can
spend
them
on
work
published
by
either
people
or
AI.

My
hope,
naturally,
is
that
artificial
intelligence
never
becomes
sufficiently
convincing.
It
provides
valuable
basic
information
and
fact-checking,
as
with
Google
searches,
but
its
insights
are
judged
to
be
shallow.
The
material
published
by
artificial
intelligence
has
already
surfaced
elsewhere,
by
an
author
who
truly
understands
the
subject,
rather
than
simulating
that
knowledge.

Whether
my
hope
will
be
realised
remains
to
be
seen.
Outdoing
computer
programs
is
simple.
Even
the
cleverest
programmers
struggle
to
devise
output
that
does
not
sound
witlessly
mechanical.
Artificial
intelligence
is
quite
another
matter.
AI
articles
are
skillfully
written.
The
content
is
less
sophisticated,
but
it
will
surely
improve
with
time.

Prediction:
there
will
always
be
a
place
for
original
research,
which
AI
cannot
produce.

However,
most
published
investment
research
is
not
truly
new
but
is
instead
commentary
that
popularises
existing
ideas.
Very
soon,
such
work
will
face
stern
competition.

The
views
expressed
here
are
the
author’s

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