Sundar Pichai stunned audience at the latest Google I/O with a demo of artificial intelligence (AI) based ‘Assistant’. AI and machine learning (ML) market is expected to grow to $5 billion by 2020. Cut to aggressive ad campaigns in India, by brokerage firms where holographic characters project from phone screens to remind the customer, to buy mutual funds! That customer, just clicks and invests. Easy-peasy! Welcome to the world of robo-advisors!
Robo-advisors based on AI and ML algorithms, work on a number of inputs. The user inputs the financial goals like ‘save for car worth Rs 5 lakhs in 3 years’ time’. Factoring in the time horizon, the algorithm reverse calculates the required monthly investment, selects the best performing funds from its database and presents the customer a “click-to-buy” option. A US app, Grifin, even changes investment portfolios automatically, based on changing lifestyles of its user. Investing made simple & snappy.
Robo-advisors are not new. Wealthfront, started in 2008, is managing more than $10 billion. And, numbers are growing with AI and ML tools becoming increasingly affordable and available.
Benefits of such robo-advisors based on ML algorithms are many. First, they are cheaper as overheads are non-existent. Since the algorithm “knows” you (Gartner projects that by 2020, the data gleaned from users in cloud-based neural networks will power 40% of mobile interactions between virtual personal assistants and users.), the recommendations would be tailor-made. Robo-advisors would make it easier for non-tech-savvy customers like older or, illiterate citizens through voice-guidance, to benefit from wider array of investment options.
Caveats apply though. In that Angel Broking ad, when that Judge Dredd-like hologram pops-out and presents the options, the customer queries if options were based on past performance. He gets admonished by the robo-advisor who replies “buying is based on the future potential” identified using ML on a billion data points. Who on this Earth, man or, machine can predict the future potential? But, that’s the ad’s claim, their robo-advisor ARQ can predict future! AI works on a large data set. Naturally the brokerage, includes only those mutual funds that give them highest commission. Assume you have a query on the recommendation, who would you ask? FSB, Switzerland warned that AI and ML solutions can be “black boxes” and incomprehensible to human users at financial institutions. Perhaps the biggest risk to users regarding robo-advisors is posed by users themselves. In times of extremes like market crash or, market scaling new peaks daily, probably the AI- algorithm would do a good job, if left alone. But the ‘human’ in the user as his natural wont, may feel compelled to, act, override the algorithm, loose and blame it all on … the robo-advisor!
One needs to understand the risks that accompany any new tech. Robo-advisors have not taken over our lives … yet! The best interface for your money as of today is still the one with a ‘human’ face.
The author writes commentaries on contemporary financial, business, taxation and political issues