Personal Finance

Executive forum focuses on impact of automated services and strategies.
By Jade Hemeon | 20/02/18

Technical innovation in the financial industry is evolving at breakneck speed, creating more efficient and cost-effective ways to manage investment assets, a Morningstar Canada-sponsored forum on fintech was told by two industry leaders.

About the Author
Jade Hemeon is a Toronto-based freelance financial journalist with more than 20 years experience. She has previously been a staff reporter for the Financial Post and Toronto Star, and has also held positions in the mutual funds and financial planning industries.

The Feb. 14 Morningstar Executive Forum in Toronto, one of three being held across Canada on the fintech theme, focused on the potential of the new breed of investment managers known as robo-advisors, as well as cutting-edge investment strategies spawned by artificial intelligence (AI) and used to manage such products as exchange-traded funds.

The two panelists who spoke at the forum -- Steve Hawkins, president and co-CEO of Toronto-based Horizons ETFs Management (Canada) Inc., and David Nugent, co-founder and chief investment officer of Wealthsimple Financial Inc., also of Toronto -- are examples of Canadian fintech pioneers exploring this new territory. It's an area where highly efficient automated technologies are usurping a growing number of tasks from human beings limited by time, mental and physical capacity, and their emotions.

"AI will significantly change the investment world with new strategies and new ways of interpreting data," said Hawkins. "Traditional investment analysts will go the way of the dodo bird. A mechanized system can do the work in a fraction of the time, without having to sleep and with no emotional bias. It can analyze all the data that's available and learn from it, as well as continue to incorporate new data and come to better conclusions every day."

The roughly 90 industry attendees at the Toronto forum, which was moderated by Michael Keaveney, head of investment management at Morningstar Canada, heard that new financial technologies are creating faster and more cost-efficient business processes across a variety of fronts. Automation is rapidly infiltrating areas that involve complex decision-making, ranging from securities selection within fund portfolios to determining a client's risk-return profile at an advisory firm.

Horizons was the first product provider in Canada to bring artificial intelligence into the world of Canadian investment products with the launch of Horizons Active A.I. Global Equity (MIND) last November. The ETF employs an investment strategy run by a proprietary and adaptive AI system that makes investment decisions based on patterns discerned from continuous split-second analysis of a massive universe of data. The portfolio, consisting mostly of U.S.-listed ETFs, is adjusted monthly.

The computerized AI system is like a learning machine that constructs artificial neural networks. It can recognize patterns and make decisions within preset parameters, similar to the way in which the human brain operates but at rapid-fire speed.

"First we had to teach the AI system the difference between a dog and a cat, and then we moved on to how to manage an investment portfolio," Hawkins said. "You start at the bottom and keep feeding it data. The world is full of data, and there's no way a human portfolio manager can digest it fast enough or fully enough, and without emotion. The AI system then takes all the data available to it, and makes decisions on how to allocate portfolios."

AI adds to its knowledge base continuously, adapting and learning from the past, Hawkins said. It is a far more sophisticated process than that employed by ETFs based on automated factor-based methodologies for their securities selection, he said. Factor-based ETFs, also known as smart-beta or strategic-beta ETFs, abide by a set of established parameters in buying or selling portfolio holdings, but that consistency makes their approach somewhat rigid.

"A factor-based ETF will always make the same decisions if it's working with the same data," Hawkins said. "But AI learns from the past and makes changes. It accumulates more live data every day, and learns to make better decisions."

On the robo-advisor side, Nugent says fintech has enabled robo-advisory firms to automate the entire account-opening process, completing "all the pieces" from identity verification to asset allocation, without the oversight of compliance staff.

His expectation is that the financial industry will continue to see an evolution of the services being provided by robo-advisors, and that soon they will be able to offer mortgages and insurance.

"Robo platforms are becoming more holistic," he says. "There's no question it has been painful in the past for clients to buy those products (insurance and mortgages). We provide the tooling to streamline the experience."

However, he also sees room for robo firms to add more high-touch, personalized services on the financial-planning side, bringing them a step closer to full-service firms. He also envisions blockchain technology being put to use in the robos' back offices.

Both Nugent and Hawkins predicted that more providers will be jumping into the fray and escalating the competition in their respective fields. Nugent said all of the big banks and securities dealers will soon have their own robo platform, either by establishing one in-house or by forging a relationship with an outside robo-advisory firm that allows their advisors to offer barebones robo services to clients who don't need the full range of wealth-management services.

Cultivating relationships with advisory firms has become a "big focus" for many robo firms, Nugent said. In some cases, robos have pivoted away from their focus on building business with retail consumers to concentrate on winning over advisors who want to delegate aspects of their practice.

"In reality we're taking over the operations and administration side of the business," Nugent said. "We're taking the small accounts away from the advisor and putting them on a salaried desk."

With retail clients, the focus of robo-advisors has been primarily on acquiring young millennial clients who may not have much money at first, but could grow to bigger and more profitable accounts. Nugent said Wealthsimple is also seeing the parents of millennials become clients. In some cases, these older clients may already be getting advice from an independent fee-for-service advisor and don't need a full-service firm.

"The most interesting trend of the last six months is that the parents of the millennials are joining us because of their kids," Nugent said. "Many have been underserved by their previous advisors."

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