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December 2023 - January 2024
AAM Magazine
Dec 2023 - Jan 2024
Back to August 2023

Robo advisers in a bind

  • Asia
  • Global
  • USA

There is serious money being thrown into artificial intelligence. According to the Nasdaq market’s intelligence service, JPMorgan Chase, the largest US bank by assets, has just applied to trademark an AI tool called IndexGPT, designed to select investments for users. And Bloomberg has published a research paper on BloombergGPT, another generative AI platform. 

Meanwhile, Morningstar’s Chief Analytics Officer Lee Davidson has gone public with a reassurance that robo advisers and AI will not be replacing human investment advisers anytime soon, though it’s not clear if anyone was still seriously worried about this proposition. After all, with investors and asset managers everywhere relying on software tools and algorithms of all kinds, the distinction is becoming pretty blurred. 

There are probably more immediate concerns that the robo-advisory industry should be looking at rather than these Matrix scare stories – to whit, whether the performance of robo advisers may look very different in a more volatile inflationary environment. The closer robo advisers follow passive management techniques, the more likely it will impact their performance, as investment strategists increasingly recommend active management styles to cope with the new environment. 

It’s not impossible for robo advisers to pursue this avenue, but it almost certainly would require more resources and higher fees. AI could turn out to be a lifesaver in this context. If it can generate intelligent sounding text, it should be able to generate automatic but intelligent active investment strategies. But it's still early days on that.

One related issue is the whole question of value for money. Paying more to get more has not apparently attracted institutional or retail investors for a long time now, thanks to the relatively stable conditions of the cheap money era. Now that that era is over and governments and investors everywhere are busy picking up the inflationary tab, paying higher fees for higher returns becomes a real argument.

Passive index-tracking will be the cheapest solution, but will it deliver the kind of returns that anyone is prepared to pay even bottom dollar for? Institutions didn’t seem to have much problem accepting this argument regarding private markets. Perhaps both they and retail investors should consider it for robo advisers. If an investment proposition really can demonstrably outperform, then perhaps it should be looked at apart from the general race to the bottom for fees.