Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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THE ROBO ADVISER

50 years ago, this year, “2001: A Space Odyssey” was released. In the film, HAL the on-board “9000 series” sentient computer declares “the 9000 series is the most reliable computer ever made. No 9000 computer has ever made a mistake or distorted information. We are all, by any practical definition of the words, foolproof and incapable of error.”

HAL was a manifestation of what Raymond Kurzwell in 1965 described as “the singularity” (or artificial intelligence – “AI”). The concept of “the singularity” is based on a theory that as the speed of computers becomes exponentially faster, there might conceivably come a time when a micro-processor is capable of something comparable to human intelligence.

In the competitive world of investment advice, a sentient computer which delivered such an outcome would no doubt be highly prized. After all, if financial markets are simply constructed on raw data, a computer with AI couldn’t possibly be responsible for making a poor investment recommendation?

Mark Twain once remarked that “truth is stranger than fiction”. Today, companies such as US based “Wealthfront” are offering computer-based investment management services for a slim 0.25% per annum fee, “using sophisticated algorithms that measure risk tolerance and build a diversified portfolio”. Wealthfront asks prospective clients – “why trust your money to a Wall Street Money Manager, when well-designed software can do a better job, for less?”

So-called “robo-advisers” are tapping into a social phenomenon where the distinction between information and knowledge has become blurred and the trust in professional money managers has been weakened.

The metaphor which best captures the current mood is that “we’re drowning in information, but thirsting for knowledge”; a by-product of which can be a false intelligence, where an excess of information leads to erroneous conclusions. Back in 2014, on 6 April, the New York Times reported that there are many problems associated with analysing “big data”, as it is known. “If you look 100 times for correlations between two variables, you risk finding, purely by chance, about five bogus correlations that appear statistically significant – even though there is no actual meaningful connection between them.”

Nowadays, there are innumerable investment models (algorithmic or otherwise) using “big data”, which are marketed to investors as comparable (if not better) than the comparative frailties and limitations of the human mind.

In a recent survey, a third of respondents who don’t have an investment adviser felt that managing their investments on their own would yield better outcomes. After all, there is more than enough accessible information on the internet, on which to base their decisions. But, perhaps in fact it’s the human mind which makes the biggest difference in transforming “big data” into meaningful and useful knowledge. When it comes to investing, unlike the home handy-man market, “big” is not always “good”.

What about the benefits of low fees? Consumers can sometimes confuse the difference between price and value. According to a recent study , the top reason why people don’t use a financial professional is that they don’t want to pay a fee. With the explosion of new technologies and supply of related products, it’s no wonder that consumers are led to believe that it’s quite reasonable to expect higher value for lower cost. After all, the price of computers continues to fall, while their processing power and capability continues to rise.

When it comes to personalised investment advice however, a key focus of an investment advice professional is to discover the true attitudes to money that a prospective investor may have. What a computer cannot do is assess and allow for the cognitive biases that influence nearly all personal investment decisions and ultimately the day-to-day fluctuations in global financial markets. While robo-advisers can point to decades of data in support of their future forecasts, the reality is that most investors in pre-retirement or retirement have shorter-term investment expectations, in which their daily needs must be carefully managed relative to changing lifestyle circumstances. Moreover, computers won’t provide emotional counsel when a market shock temporarily knocks asset values.

Hollywood’s fascination with “AI” is alive and well. In the movie “Transcendence”, the lead character observes that “once on-line, a sentient machine will quickly overcome the limits of biology. And in a short time, its analytic power will become greater than the collective intelligence of every person born in the history of the world.”

At which time, one suspects, we must surely become robo-investors.

John Owen

John Owen
Head of Advisery, Forsyth Barr 

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