InvestmentsJun 14 2018

Robo-investing 'risks creating financial instability'

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Robo-investing 'risks creating financial instability'

Fund management using artificial intelligence risks financial stability, the chief executive of Oxford Asset Management has claimed.

Andre Stern - whose firm describes itself as 'an investment manager with a quantitative focus and a multi-strategy and technology driven approach' - said he is very sceptical about the potential for machine learning and artificial intelligence to disrupt the financial services industry.

"The gap between the hype about what machine learning will be able to do, and the reality of what it can do now is enormous," he told delegates at the Financial Conduct Authority' asset management conference in London this week.

"If you ask any honest person who knows about this area, that is what they will tell you."

Mr Stern said a university he is associated with has five departments for machine learning.

"Five! Imagine if they had five departments for physics? But when I asked them why there are five departments for machine learning, they say its because it is the only way to get funding.”

He said: “I hardly ever meet a client now, or a person in the industry, without them asking me about machine learning. But the thing is, even if it is just a pimple on a body part of what of what you do, you can say you are using it, and that satisfies people.”

In terms of what it means for financial markets Mr Stern issued a note of caution.

"The problem is if the machines are making the decisions, it is likely to lead to crowding - all of the money going into a small number of assets - and whenever crowding happens in financial markets it always ends in the same outcome.”

Crowding is a another name for a bubble developing in financial markets, as the momentum from today’s buyers pushes valuations upwards, drawing in the next lot of buyers, who buy regardless of the fundamentals of the investment, creating a bubble.

The FCA was represented in the discussion on artificial intelligence by Nick Miller, the regulator's head of asset management, who said companies will not be able to blame the robots if things go wrong with their systems.

Mr Miller said: “From a regulators point of view, there will always be a responsible human. Companies cannot say to us when something happens that the algorithm did it, it will not work like that.”

Andrew Herberts, head of private client investment management at Thomas Miller Investments said financial services should be looking at the impact artificial intelligence will have on client service.

"AI is here to stay, and may well be to the professions in the current era what the introduction of robots was to the manufacturing industry in the latter part of the 20th century.

"However, as was the case with robotics in the industrial evolution, we are far from displacing all human input. 

"AI will be, and is, able to process large amounts of data far better than humans. It takes emotion out of decisions and is therefore, subject to programming parameters, consistent.

"However, as currently configured, AI will fall short in reacting to new information, proposing novel solutions and be unable to deliver the empathy and understanding that some complex client interactions require."

He said the wealth and investment management industry is already seeing the inroads of robo-advice into financial planning and, to a smaller extent, investment management. 

"My contention is that we should embrace rather than fear it," he said.

"Our profession needs to understand what AI can deliver, where it can add value and then use it as something with which we can deliver better outcomes to clients at lower cost.""