AI and real-time risk decisions in wealth management


as published in Hawke's Bay Today. Canny View by Rory O'Neill, Head of Operations & Finance.

This promises to be the year we see the culmination of some key technologies — from blockchain and artificial intelligence (AI), to design thinking and the cloud.

We are living during a surge of interest and research into AI. It can seem like every week there is a new breakthrough in the field and a record set in some task previously done by humans.

In this week's column, I'm talking about AI in wealth management.

AI is the power of a machine to copy intelligent human behaviour. The technology has made substantial progress over the decades, as evidenced by the continuous increase in the number of vendors of AI solutions.

The financial services industry has also begun to see AI vendors with solutions focused on wealth management, a sector that traditionally relies heavily on the relationship of the client with their human advisers.

But, the industry doesn't anticipate a gloomy future where person-less organisations make all decisions with machines.

However, the industry players cannot ignore the AI solutions entering the wealth management market and should consider some of the solutions and how they impact advisers, advice itself and clients.

With the current Financial Advisers Act 2008 reform aimed to improve access to quality financial advice, to the Financial Markets Authority (FMA) allowing personalised robo-advice in New Zealand, we are facing a culture shift in a traditional business such as wealth management.

Other service sectors facing similar changes are lawyers, accountants and valuers.

Here, I'm particularly interested in discussing AI's potential impact on three of the wealth management pillars; risk, front office and data security.

1. RISK: In the past decade, the financial services industry has seen a whole new level of emphasis on risk, both from a regulatory perspective and a reputational standpoint.

As several well-established financial institutions tarnished their image during the 2008 financial crisis, Know Your Client (KYC), and Anti-Money Laundering (AML) have become more important, as reducing reputational damage and risks have become more important.

After the crisis, increasing regulatory and AML pressures caused banks and wealth management firms to hire many compliance officers.

Minimising risk on all fronts and complying with regulatory initiatives was, and remains, a priority for every financial institution.

The amount of data firms must collect and process to execute required risk assessments is only getting larger in today's global economy.

Therefore, organisations should become more efficient in identifying and mitigating risks earlier in the process.

Human error and oversight can be detrimental to organisations' success in managing risk and maintaining regulatory compliance. AI could help not only with monitoring the risks but with mitigating them in earlier stages of risk maturation.

However, technology and big data are enabling increasingly sophisticated techniques for all sorts of fraud, and with that concern, AI in wealth management is causing some raised eyebrows.

Wealth management firms must have tools to protect not only their entities and monetary assets but also their most important asset: clients and their information.

As some of the AI solutions start to play a bigger role in wealth management, the importance of proper operational and risk controls will be amplified by the need to protect customer data.

2. FRONT OFFICE: We envisage numerous changes to the front office. Advisers will focus on asset gathering than ever before – because AI will allow them to run many client-related functions, freeing the advisers to perform more asset gathering and monitor portfolios.

AI will track each of the portfolio segments against the respective benchmarks while risk metrics will show the client that their respective portfolio segments sit within the client's desired risk tolerance and send clients their personalised analysis and performance reports in line with appropriate regulatory guidelines.

However, if AI gets to this point, the pressure on the advisers to gather more assets will intensify. By crunching vast amounts of data, AI will send alerts to the advisers to undertake appropriate trading moves to adjust positions and exposures in their clients' portfolios.

3. DATA SECURITY: We also foresee clients' personal data playing a more integral part in wealth managers' AI-driven decision-making.

While this personal data is not used by wealth managers today, institutions could create portals for collecting personal data, should clients be open to sharing their personal data with financial institutions. 

This brings risks for the firms as well: Firms must be on extreme guard protecting their clients' data.

As AI models become more refined, they will utilise personal data along with financial data to make better decisions.

With all that said, while the adviser-client relationship will remain the foundation in the wealth management industry of the future, we do, foresee a decrease in the frequency of touch points between advisers and clients.

We are curious to see how the wider implementation of AI will impact the human aspect of wealth: relationships and decision-making.

• Rory O'Neill is head of operations and finance at Stewart Financial Group, a Hawke's Bay-owned and operated independent financial planning firm based in Hastings. 
This article represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to consider your investment objectives, financial situation, and individual needs. A disclosure statement can be obtained free by calling 0800 878 961.