Artificial Intelligence: Opportunities and challenges in finance

Fintech is having a huge impact on the finance industry, with artificial intelligence (AI), machine learning, data analytics and blockchain, all changing the way the industry works. The rapid pace of development and expected adoption of fintech technologies has led many industry experts to believe that the finance profession has peaked and that there will be the need for fewer finance professionals going forward. Although this is a very bold statement, there are varieties of reasons that point to this being the case.

The foremost factor is blockchain technology (also known as Distributed Ledger Technology) and its potential seismic impact on financial transactions across the globe. Blockchain technology has started sweeping the different areas of transactional finance, such as clearing, settlement, payments and execution. Slowly, many market leaders and exchanges are investing in this technology because it is secure, extremely efficient and saves costs by eliminating a lot of back office and operations staff who manually reconcile transactions and conduct investigations. But it is not only blockchain being adopted by organisations, AI has started being employed in current processes to learn about all the reasons for mismatched transactions and then provide solutions to eliminate such errors. Therefore removing manual tasks and eliminating the need for many back office professionals.

Secondly, although it is still in its infancy, we know that there are many algorithmic trading systems used around the world in different streams of asset management. Although some of them have proved to be highly successful, the rapidly changing market environment means that one strategy cannot always be successful. With AI, data scientists are able to create smart machines that keep refining (learning) from the new additional data that is available or suboptimal outcomes and devising better strategies. This is clearly impressive but what is even more astounding is that this happens in very quick speed rather than the days or months required for manual changes in strategy.

While many companies will keep these revenue generating models for themselves, we have started seeing investment managers using AI in financial retirement companies like Charles Schwab and Vanguard Group, as well as other investment advisers such as Wealthfront and Betterment. Most online AI tools ask individuals a few questions to find the strategy that best fits their needs and risk profiles, they then offer a smart product that is not static and is able to quickly change its strategy given market news or financial results. This is far more pragmatic and quicker than the services of any financial adviser.

Data scientists

It is known that several big asset management firms like Bridgewater Associates and BlackRock have started employing data scientists and assembled teams to create automated portfolio management solutions. The idea these companies have in mind is to assemble AI teams to build investment algorithms that make predictions based on historical data, live news events and statistical probabilities. This trend is not new, as there are already big players in the AI investing field like Two Sigma and Renaissance; who have a proven track record for their AI strategy style investment returns.

So what are the implications of these new technologies for the asset management industry in the GCC? The impact in the region will be similar to the global market, albeit at a much slower pace due to the maturity level of the industry, market limitations (such as low volumes) and a lack of different investment instruments. Some implications have already been witnessed in back office and operations workforce requirements; however, effects on portfolio management practices will take more time to materialise. The main shift we can expect to see is how financial professionals will work. The type of role will change for such professionals as they will be working hand in hand with AI experts and data scientists to fine-tune their intelligent investment algorithms and solutions.

Yacoub Husein Nuseibeh, CFA, is a member of CFA Society Emirates and a previous president of CFA Society.