Robocap: Why young investors are going to AI for advice

Skills: Writing

Originally published in UAlberta Business Magazine
Spring 2017 Issue

Would you let R2-D2 balance your portfolio? That’s the question you should ask yourself as a new crop of financial advising services bank on “robo-advising.” Relying on Artificial Intelligence (AI), they hope to attract a new type of investor —an inexperienced person who likes the ease of use and is too busy for one-on-one advice. The success of these platforms could redefine how your money is handled.

Robo-advising services like Wealthsimple, Questrade’s Portfolio and Nest Wealth IQ balance portfolios with algorithms managed, of course, by qualified, carbon-form experts. Analyzing users’ risk scores, the services try to rebalance portfolios according to users’ financial goals with real-time market data that is supposed to continually improve and optimize portfolios. So far, small start-ups lead the charge in Canada, with Bank of Montreal and Alberta Treasury Branch as the only major banks to launch robo-advising services, dubbed SmartFolio and ATB Prosper. But, in January, Royal Bank of Canada announced hiring UAlberta professor Richard Sutton, a veteran in AI research, for its new machine-learning lab.

Kory Mathewson, a UAlberta PhD student in computing science who specializes in human-AI interactions, says success of the services is driven by demand from younger people trying to crack the traditionally impenetrable world of investing. The simple and low-maintenance programs appeal to these tech-savvy (but not necessarily financially savvy) under-35-year-olds. “The barrier to entry is so low that it allows us curious, early investors to jump in without assuming much risk,” says the AI expert, himself a Millennial.

“In principle, robo-advising is supposed to reduce costs, because you don’t have a human being wasting time talking to you—it’s all automated,” explains Aditya Kaul, Associate Professor of Finance at the School of Business. However, he warns that the perks of putting your banking on autopilot will bear hidden costs. “Sometimes you do want some input on where the market’s going to go. You’re not going to get that when you direct some money at a black box.”

The robo-advisors’ ability to skillfully

predict markets will improve, says Mathewson, but he wonders if investors will ever have full faith in it—not in spite of systems becoming more automated, but because of it. It’s the same question central to smart home technology and autonomous cars. Having the agency to disagree with AI decisions could determine the success of automation and build trust in the long run. Such rights are already in place; the Canadian Investor Protection Fund regulates robo-advising. “If a company goes bankrupt or the algorithm suddenly sells everything and the company freaks out,” says Mathewson, “there are federal protections in place for your money. That’s critical.”