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Money management

Robo-advisers aren’t taking over ... yet

Automated advice technology seen to make inroads gradually

Jody Kochansky
Jody Kochansky believes more users will eventually embrace the technology.

Updated with correction

The spate of money managers either launching or buying stakes in robo-advisers over the past few years — BlackRock (BLK) buying FutureAdvisor; Vanguard Group Inc. launching Personal Advisor Services; Fidelity Investments unveiling Fidelity Go; and WisdomTree investing in AdvisorEngine, to name just a few — is a sign that the retail and wealth management industry is becoming more automated and reliant on artificial intelligence.

Sources that Pensions & Investments spoke with noted large asset managers investing in robo-advisers doesn't mean managers are moving away from institutional assets. Rather, the trend indicates managers are looking to ensure they're as up-to-date as possible with the current technology and service models that have entered the marketplace for both their retail and institutional platforms.

Industry experts also say they expect to see the institutional asset management sector adopt automated advising technology, but not quickly.

“It's really, really early days,” said Jeffrey Levi, principal at money management consultant Casey Quirk, a practice of Deloitte Consulting LLP, Darien, Conn., on institutional investors adopting similar automated technology.

Mr. Levi predicted investment automation technology will eventually play an increasing role in the outsourced CIO business as a means of reducing the overall cost of managing a portfolio.

The Casey Quirk executive said most robo-advisers are focused on highly liquid asset classes where good beta exposure exists, such as long-only equities, long-only fixed income and cash. So, for institutional investors that only want to invest in those securities, Mr. Levi believes this automated advising technology would a good fit.

What will drive this appetite from institutional investors is the increased desire for transparency, the desire to reduce costs and skepticism about active management's ability to deliver outperformance.

“As these robo-advisers advance their capabilities, they'll be able to provide an interesting set of real-time data analytics that will rival any player today,” he said.

Ultimately, Mr. Levi speculated that with some small pension plans already using some form of automated advising technology, widespread adoption of the technology from institutions could be three to five years away.

Digitizing investment process

From a consultant's perspective, digitizing the investment process — both for retail and institutional investors — is where the money management industry is going. And managers need to be ready.

“Firms need to think about the broad market availability of the digital experience about how to tackle that going forward,” said David Hyman, Mercer LLC's U.S. head of wealth management. “That's not a threat, but they need to think about how it affects their business in the long term.”

Added Mr. Hyman: “New technology is disruptive, but can also be sustaining.”

Although investment management firms realize the importance of the individual investor going forward, Mr. Hyman said he does not believe managers are moving away from partnering with institutional investors.

Jody Kochansky, managing director and head of the Aladdin product group at BlackRock (BLK) Inc. (BLK), also thinks “it's very early days” for the institutional investment industry — managers and sponsors alike — to fully adopt machine learning and artificial technology.

“While most participants have started to use machine learning and AI, the number of (users) going forward will only increase as the industry grows more familiar with the opportunities these technologies offer and how to apply them,” he said.

BlackRock is currently investing a considerable amount of time, money and attention to accommodate both its retail and institutional clients' growing appetite for automating the investment process.

In addition to acquiring FutureAdvisor a little over a year ago, the New York-based money management giant recently launched Aladdin Risk Monitor, which helps distributors and financial advisers better see the risk embedded in the portfolio.

And BlackRock also launched iRetire, which shows individual investors where their retirement savings currently stand and how they could potentially get to the account balances they want to have at retirement.

Mr. Kochansky was quick to point out that investing in FutureAdvisor in no way means BlackRock is shifting its focus away from institutional investing. Since BlackRock's clients, both institutional and individual, expect more automation and AI from their asset managers, the company is investing in technology across the board.

“We see a broad range of investment styles that need automation,” Mr. Kochansky said.


Meanwhile, WisdomTree Investments Inc. in November acquired a minority stake in AdvisorEngine, an automated wealth management technology platform that provides financial advisers with new client prospecting tools, online client onboarding, institutional-grade analytics, trading, performance reporting and billing.

Kurt MacAlpine, executive vice president and head of global distribution at WisdomTree, said “there's potential” and “a lot of flexibility” in taking these capabilities and bringing them over to the institutional money management space.

“Automating select components would be applicable to institutional investors,” Mr. MacAlpine said. He pointed out that AdvisorEngine's asset allocation and trading capabilities could be delivered to OCIOs.

Mr. MacAlpine added he sees robo-advisers as being the first wave of automation taking over the industry and the second wave being technology service providers like AdvisorEngine offering automated tools to financial advisers.

“The third wave would be taking select components and delivering them to institutional space,” he said.

Other industry insiders believe such automated AI technology should be used sparingly when applied to institutional investing.

Guarav Mallik, a managing director and portfolio strategist at State Street Global Advisors, noted he likes the use of AI with unstructured data or where the relationships between the data and the stocks are so voluminous that automation makes the work much faster.

However, Mr. Mallik, who focuses on quantitative investing at SSGA, said he's “still a little bit guarded about how to apply” such technology.

“You should be careful of how to apply (AI technology) on the quant-equity side of the house,” Mr. Mallik said. “It's a delicate balance.”

Mr. Mallik pointed out the industry is beginning to have access to peoples' spending patterns in a real-time basis, which can provide “an edge on what the end revenue of a company will be.”

“Accessibility of this data right now is changing dynamically and will accelerate many-fold,” he added.

Stephen Lawrence, head of quantextual research at State Street Global Exchange, explained that expectations of market knowledge are different for institutional investors than for individuals — in other words, a CIO should “hopefully do what a robo-adviser would be able to do.”

That said, Mr. Lawrence said where machine learning technology could come in handy is in getting the most out of a pension plan's skeleton crew staff.

“You have the public pension plans whose investment staffs are intentionally constrained by state legislatures, so every member of the staff is critical,” Mr. Lawrence said.

He explained that machine learning technology can help a pension fund's investment staff do twice the work for far less money. This can include managing information overload, identifying risk, refining data, “even basic automation of tasks previously done by hand.”

Active investments

In terms of specific applications robo-advice technology can be used in the future, he noted while robo-advice has been mostly for passive investing, it could also be used for active investments.

Not everyone that P&I spoke with said automated advising technology is years from moving to the institutional investment arena. John Thompson, partner and head of investment solutions at Aon Hewitt Investment Consulting, Inc., said it's already here — it's just being used by the consultants.

“In many ways, institutional consultants have been using tech to provide customized advice. So, it's already been there,” Mr. Thompson said. “Intuitional consultants usually build in-house tools to help build customizable solutions.”

He added that consultants have been using forecasting tools and portfolio construction tools to help with asset-liability management for years.

Mr. Thompson also noted he doesn't believe asset managers are reducing their focus on institutional investing. Instead, “they are simply expanding their market opportunities with additional service models and means to gather more assets to manage.”

Still, Mr. Thompson pointed out that “a machine still cannot take the place of a financial adviser.”

This article originally appeared in the February 20, 2017 print issue as, "Robo-advisers aren't taking over ... yet".