By Dr Yannis Kalfoglou

AI Strategist, Samsung Electronics

and and Dave Dowsett

Global Head of Strategy, Innovation and Emerging Technology, Invesco¹

Digitally transforming your company is no longer a debate – it’s a necessity. What is a debate is how to execute a digital transformation and what to focus on. Without a doubt, these transformations are most successful when driven from the board to break through the “frozen” middle who are more worried about job security and fear of change over organizational advancement. There are many factors driving technological change, but some of the more pressing catalysts include: customer satisfaction driven by the FinTech generation, social media, competitors becoming technology-driven and using technology to provide an advantage, rate of change, demographic expectations, constant geopolitical landscape volatility and, for regulated institutions, the ever-changing regulatory landscape.

Human beings are comfortable at status quo; change makes us uncomfortable, but as the world around us changes, so must we. When times get tough due to lack of innovation, a default reaction is: “It works today, so why change it?” and this attitude leads to cutting the innovation and transformation arms to focus on the current cash cows, albeit shortsightedly. As much of the financial industry has been disrupted, the asset management sector is starting to experience the changing tides of technology too. This type of disruption is different from what we’ve seen in the past, as it is now more about FinTech partnerships or indirect threats such as RegTech. Let us unpack three core disruptive trends which hold the promise of the most impact, however, which we believe won’t succeed in isolation.

Online, automated investment advice (a.k.a. robo-advisors). Not long ago, the first robo-advisors of a new generation made their entry into the market and quickly brought to the table some irresistible benefits: low entry barrier, rapid enrolment process, modern user experience akin to the societal norms of a younger generation, 24/7/365 always-on access and availability, and most importantly some decent returns for the investors. It’s not a surprise then that in their short 10 years or so of history, robo-advisors today handle billions of dollars in investable assets (assets under management, AUM), with future estimates pointing to AUM in excess of US$2 trillion by 2020 and some probability of the upside being as much as 10% of all investable assets by 2025. That’s a staggering figure of US$14 trillion with today’s estimates. But what’s fascinating is the fact that robo-advisors themselves are changing too.

The early incarnations featured mostly fully autonomous, passive asset management robo-advisors (the likes of Wealthfront, Betterment, etc.). However, as the first wave of robo-advisors hit growth obstacles and faced the reality of customer acquisition costs at scale, it quickly became apparent that the underlying business model – low fees based on passive investments, mostly in index trackers with limited, segregated baskets of exchange traded funds (ETFs) to choose from – can’t justify the high cost of customer acquisition and attrition. We then saw the emergence and establishment of another type of robo-advisor, one that caters for segments of the distribution channel – direct to business and intermediaries. Also, incumbents repackaged their products and began offering types of robo-advisor services as part of their portfolios.

Today, we witness one more change in the trajectory of modern robo-advisors: the emergence of hybrids, where the best elements of passive and active investment advice are packaged together to offer maximum value for the eager investor. So, robo-advisors have made a huge impact in the asset management industry, allowing new entrants to emerge, new services to be developed and rolled out for the public to use, and incumbents to digitally transform their products and offerings. All that is music to the ears of consumers as today, investments and long-term financial planning are no longer the privilege of the few who can afford it, but the habit of the many who have a little to invest, are short on time and prefer easy, online enrolment. It’s a great example of how emerging technology enables new business models, serves the consumer better and works for both incumbents and new entrants.

Blockchain: the underlying fabric of the future financial ecosystem. Another area which we see driving change and impacting core processes is that of blockchain. From the early days of bitcoin’s emergence (the peer-to-peer digital currency that spans millions of nodes globally and whose current trading value in USD is significantly higher than gold) the underlying technology, blockchain, captured the attention of financial services institutions. Blockchains have some intriguing features: immutability of records, a massively distributed database shareable across countries and regions, built-in cryptography for secure transactions and tamper-proof transfer of value, and automation (e.g. smart contracts) that enable programmable money scenarios.

The business benefits of blockchain technology are too many to list in a short chapter, but suffice to say that the cost savings from efficient and lean post-trading processes, sharing and auto-validating (digital) assets and value on blockchain(s), and the enablement of new business models are the most interesting. In fact, in the post-trading processes area alone, reports indicate that cost savings could be achieved to the tune of US$20 billion annually, with potential to exceed US$100 billion.

Blockchain is the technology trigger for the disintermediation of financial services, and its value increases as more users and participants use blockchain networks. For example, in the asset management industry, value-added blockchain solutions range from post-trading operations (settlement and reconciliation of securities) efficiency and cost savings and securities’ lending process digitization as redeemable tokens to handle collateral risk, to funds’ flow real-time tracking to calculate performance and risk positions, to repurposing financial auditing and anti-money laundering (AML)/know your customer (KYC) data pipelines in order to achieve greater efficiencies and collaboration with ecosystem partners (including regulators). Clearly, the benefits of blockchain technology drive faster adoption and interest from financial services institutions and FinTechs. But ultimately, the greater beneficiary will be the consumer: leaner, more efficient processes and new products will provide more choices and better investment products.

Artificial intelligence: a catalyst for change. We also look at the impact of the ever-so-popular artificial intelligence (AI), especially the much-referenced machine learning sub-field of AI. The huge leaps in performance and accuracy of machine learning algorithms (five years ago the error rate of identifying images correctly was roughly 36% for a typical machine learning engine, today it is less than 3%, matching and even exceeding human performance) and the abundance of cheap computing power and storage makes these technologies easier to apply and achieve return-on-investment quickly.

AI’s tremendous leaps in performance were not an accident. At times, technology takes time to mature as other critical pieces need to be in place. The emergence of deep learning algorithms – a machine learning technique that tries to mimic the way the human brain works, with thousands of neurons processing information at speed to come up with plausible answers – certainly helped. As did the availability and computational capacity to access and process huge data sets for training our AI programs. The vicious cycle here appears to be: more data → better algorithms → better user experience (UX) → more data. As we now have available huge amounts of data that we can use to train machines, and that we can access and process efficiently, we are also able to fine-tune our machine learning apparatus, algorithms can get better and better with more data and iterations; that results in better user experiences, providing more accurate answers which in turn encourages the production of even more data and the cycle starts again.

In the asset management industry, we see – and at Invesco, work on – advanced AI technology that helps us automate existing processes and realize new revenue streams and business models. For example, robotic process automation (RPA) tools help us automate mundane, repetitive, manual and error-prone processes and improve the return on investment for back-office processes. In the distributions space, we use AI technology to help us predict customer journeys throughout the life cycle of their engagement with the company – from onboarding to redemption – and explore ways we can better serve and exceed their needs by offering products better suited to their investment style at certain stages in their journey.

On the product management front, we use AI technology to help our portfolio managers make the smartest possible investment decisions at a given point in time using sophisticated analytics and recommendation engines that consider historical and projected data. While all these functions are directly impacting our professionals, we are using AI technology as a smart aid, not a replacement tool. There is a huge opportunity here, we believe, to use this fascinating technology in a symbiotic manner, working alongside our experienced professionals to improve our performance, which in turn impacts and benefits our end-customers who trust their investments with us.

Other emerging technologies and approaches to be adopted in the financial space – such as virtual reality (VR), the Internet of Things (IoT) and crowd-funding, to name but a few – will come together to create holistic solutions. VR, for example, will be used to visualize the large volumes of data being created or for clients to be in contact with financial advisors. It is a fact that IoT in voice format will supersede at least half of all keyboard interactions in the next few years, and can be used to query and interact with your account via VR, for example.

The future is bright! We are excited about the recent advancements in emerging technology and look forward to a symbiotic relationship for the benefit of our customers.