AI won’t replace investment managers, but it could improve returns

(Credit: Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Stefan Dunatov, Executive Vice-President, Investment Strategy and Risk, British Columbia Investment Management Corporation


  • AI is set to revolutionize the pensions and savings industry with the size of the global AI asset management market expected to be worth $13.5 billion within the next six years.
  • The role of AI in index investing will have the knock-on effect of improving asset owner and manager decisions by focusing on working with assets over longer time horizons.
  • To allow for positive developments, we need to identify the key stakeholders to manage and encourage positive AI development in the investment management process.

It shouldn’t be news to anyone that artificial intelligence (AI) is developing rapidly and drastically reshaping our future. Yet what the average pension-contributing individual might not have thought about is how this development will affect the management of his or her pensions and savings in the years ahead.

Here are some questions we should be asking ourselves now:

How might AI affect pensions and savings?

Asset and wealth management firms are working on ways to use AI to improve their investment decisions and to extract insights from historical data, which should increase efficiency, accuracy and compliance. Other services, like robo-advisory, are also taking off. With the global AI asset management market size expected to be worth almost $13.5 billion within the next six years, it’s clearly a booming part of the business.

The development of technology in finance and computer-aided algorithms has also contributed to rising interest in low-cost, rules-based, quantitatively-oriented passive investment strategies. Over the last five years, such strategies have grown by about $2 trillion while traditional active management strategies declined by roughly the same amount.

Traditional market capitalization-weighted indices – like mutual funds or exchange-traded funds (ETF) – have also grown over the last five years. This has been aided by minimal costs and strong performance due to the extended bull market. However, these indices are now being rivalled by other weighting systems that deploy technology to deliver better outcomes and mitigate risks. For example, as stakeholders increasingly focus on the harmful role of carbon in global warming and the importance of other ESG-related issues in mitigating portfolio and social risks, asset owners are using technology to adjust market capitalization-weighted benchmarks.

In this way, we expect the role of AI in index investing will have a knock-on effect of improving asset owner and asset manager decisions, focusing them on working with portfolio companies over longer time horizons and supporting companies that, for instance, need to transition away from poor carbon outcomes. We further expect that this will lead asset owners to engage more transparently with their constituents (for example, pensioners or retail clients) to explain why such decisions are optimal.

Asset classes of pension funds in Switzerland, 2018

How does AI compare with human judgement?

AI will gradually play a greater role in critically assessing human judgements in investment decision-making frameworks, to moderate or counter short-term behavioural biases or even to make judgements without human input. This will mean a streamlined ability to predict what will happen and the best course of action for financial forecasting. This is an improvement on a currently very manual process that suffers from inherent human biases.

Could AI displace investment managers? We don’t think so. For AI to be successful in any of this, AI still needs humans. Firms will need to invest in experts to monitor the AI and ensure it functions and make adjustments when needed. This means that investment decisions will still be largely reliant on individual judgement and common patterns of biases, much like they have for the past 20 years.

What are some of the ethical considerations?

Using AI in investment management also creates new risks and challenges. A model is only as good as the data you put into it – so model opacity and data integrity matter. And questions about the ethics in justifying or bounding AI investment decisions will also need to be answered, as well as issues surrounding the regulation of AI systems, the risks of heightened pro-cyclical investment activity and the current lack of a monitoring framework, as AI plays an ever-increasing role in the investment decision-making process.

These questions matter because of the need to maintain and improve the level of trust and confidence in investment management and the broader financial system in general. This is partially achieved by explaining transparently how ethical and social responsibility factors can be included in the investment decision-making process at the portfolio, strategic and regulatory levels, so that AI can be developed with proper balance.

At the same time, trust and confidence can only be gained if frameworks are developed to control pro-cyclical investment activity, monitor AI decision-making impacts in financial markets, and enforce the role of human interaction in the investment-management process to oversee and communicate decisions (whether by human or AI). AI, machine learning, technology

How is the Forum helping governments to responsibly adopt AI technology?

The World Economic Forum’s Centre for the Fourth Industrial Revolution, in partnership with the UK government, has developed guidelines for more ethical and efficient government procurement of artificial intelligence (AI) technology. Governments across Europe, Latin America and the Middle East are piloting these guidelines to improve their AI procurement processes.

Our guidelines not only serve as a handy reference tool for governments looking to adopt AI technology, but also set baseline standards for effective, responsible public procurement and deployment of AI – standards that can be eventually adopted by industries.

We invite organizations that are interested in the future of AI and machine learning to get involved in this initiative. Read more about our impact.

What should we be doing about these questions?

In order to allow for these positive developments, we need to identify the key stakeholders to manage and encourage positive AI development in the investment management process. These include regulators, asset owners, asset managers, custodians, investment consultants, legal experts and representatives of retail investors. We also need to identify methods to increase awareness of the AI challenge in the investment management industry.

We need to bring stakeholders together to agree upon an appropriate framework of ethical inputs, regulation and monitoring systems for AI.

Regardless of regulation and monitoring systems, asset managers also need to take it on themselves to address some of these issues in their existing investment process.

We are ultimately optimistic that properly managed AI will support human judgement in managing pensions and savings – and maybe even improve your returns! – by reinforcing best practices and mitigating known biases.

This is part of a series authored by current and former members of the Global Future Council on Investing. Views expressed are those of the author alone.

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

European Commission increases support for the EU’s beekeeping sector

More protection for our seas and oceans is needed, report finds

Which country offers the cheapest mobile data?

INTERVIEW: ‘Defend the people, not the States’, says outgoing UN human rights chief

10 ways central banks are experimenting with blockchain

Can the US-Iran rapprochement change the world?

DR Congo elections: ‘historic opportunity’ for ‘peaceful transfer of power’ says Security Council

What can be done to avoid the risk of being among the 7 million that will be killed by air pollution in 2020?

Is there a de facto impossibility for the Brexit to kick-start?

How trust and collaboration are key in India’s last mile response to the COVID-19 crisis

Investors must travel a winding road to net-zero. Here’s a map

Engaging women and girls in science ‘vital’ for Sustainable Development Goals

‘No steps taken’ so far to end Israel’s illegal settlement activity on Palestinian land – UN envoy

In visit to hurricane-ravaged Bahamas, UN chief calls for greater action to address climate change

Illegal fishing plagues the Pacific Ocean. Here’s how to end it

How AI and machine learning are helping to fight COVID-19

EU tells Britain stay in as long as you wish

Financing fossil fuels risks a repeat of the 2008 crash. Here’s why

Here are 4 tips for governing by design in the Fourth Industrial Revolution

How curiosity and globalization are driving a new approach to travel

Coronavirus (COVID-19): truth and myth on personal risk perception

The battle for the 2016 EU Budget to shake the Union; Commission and Parliament vs. Germany

Innovation can transform the way we solve the world’s water challenges

#WorldBicycleDay: 5 benefits of cycling

Missile strike kills at least 12 civilians, including children, in Syria’s Idlib: UN humanitarians

4 steps to developing responsible AI

Mental health and suicide prevention – What can be done to increase access to mental health services in my region?

UN chief outlines ‘intertwined challenges’ of climate change, ocean health facing Pacific nations on the ‘frontline’

New US President: MEPs hope for a new dawn in transatlantic ties

Desires for national independence in Europe bound by economic realities

European Union and African Union sign partnership to scale up preparedness for health emergencies

Yemen war: UN chief urges good faith as ‘milestone’ talks get underway in Sweden

Spring 2019 Standard Eurobarometer: Europeans upbeat about the state of the European Union – best results in 5 years

Coronavirus: Commission approves contract with CureVac to ensure access to a potential vaccine

Outbreak of COVID-19: The third wave and the people

A day in the life of a Venezuelan migrant in Boa Vista, Brazil

EU Copyright Directive: Google News threatens to leave Europe while media startups increasingly worry

3 ways to fight short-termism and relaunch Europe

Accountability in Sudan ‘crucial’ to avoid ‘further bloodshed’, says UN rights office

UN committed ‘to support the Libyan people’ as Guterres departs ‘with deep concern and a heavy heart’

Antarctica: the final coronavirus-free frontier. But will it stay that way?

Mario Draghi didn’t do it but Kim Jong-un did

UN chief welcomes G20 commitment to fight climate change

MEPs: Access to adequate housing should be a fundamental European right

More countries are making progress on corruption – but there’s much to be done, says a new report

Mountains matter, especially if you’re young, UN declares

EU food watchdog: more transparency, better risk prevention

Young activists share four ways to create a more inclusive world

The European Sting @ the European Business Summit 2014 – Where European Business and Politics shape the future

More than one million sexually transmitted infections occur every day: WHO

These countries spend the most on education

How a new approach to meat can help end hunger

MEPs cap prices of calls within EU and approve emergency alert system

Electronic cigarettes: is it really a safe alternative to smoking?

China confirms anti-state-subsidy investigation on EU wine imports

Century challenge: inclusion of immigrants in the health system

Here’s how we reboot digital trade for the 21st century

Britain and Germany change attitude towards the European Union

UN, global health agencies sound alarm on drug-resistant infections; new recommendations to reduce ‘staggering number’ of future deaths

Ten new migratory species protected under global wildlife agreement

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s