The rise of AI and its implications for investment

Disrupting the investment management and investment consulting industries

In recent years, there has been growing interest in artificial intelligence, also known as "AI", as it has the potential to revolutionise various industries and facets of our daily lives. Advancements in AI technologies have been made possible by the increasing availability of data, more powerful computing resources, and innovations in machine learning algorithms.

This blog explores the potential opportunities and risks AI may bring to both the investment management and investment consulting industries. How it has the potential to transform how investment decisions are made, portfolios are managed, and clients are serviced. However, these opportunities might come at a cost once AI has been widely implemented, potentially bringing unintended consequences.

Sophisticated quantitative models have been used in investment management for some time. Some of these have been incorporating AI elements, such as interpreting text and speeches from company management for signs of optimism about future growth. Some of the future uses of AI may seem like a natural evolution for some managers; for others, it would be a fundamental change.

AI is being used in various applications, such as unlocking our phones with face ID, personalised advertising, social media, medical diagnosis, fraud detection, and many more. It has the potential to improve efficiency, accuracy, and productivity in many areas, making businesses and organisations more productive and efficient. On the other hand, AI is also raising important ethical and societal issues, such as privacy, transparency, racial biases, and its impact on the labour market. Lately, these issues have generated public interest and discussion, leading to a broader conversation about the implications of AI.

Potential opportunities of AI

From an investment consultant's perspective on the investment market, the key potential opportunities are:

• Investment decisions: AI can help make better investment decisions by analysing vast amounts of data and identifying patterns and trends that may be otherwise difficult for humans to identify. AI can also help identify hidden risks and opportunities, which can help improve risk-adjusted returns.
• Research capabilities: Identifying new investment opportunities, analysing market gaps and trends can help research analysts. Researchers using AI may stay ahead of the curve and advise or make more sound investment decisions. Recently, a global financial services provider created an AI model to analyse Fed speeches.
• Risk management: AI may assist companies and market participants by identifying potential risks before they become actual problems. AI can analyse data from multiple sources and use predictive analytics to identify potential risks in real-time.
• Client experience: Personalised and real-time data, along with AI, can improve client experience, satisfaction, retention, and potentially company results. Imagine an AI-powered voice recognition technology that can be used to authorise asset transfers or an AI-powered chatbot able to reliably provide quick and efficient responses to client enquiries.
• Automated reporting: AI can help automate the reporting process in a wide range of areas such as operational due diligence, performance monitoring, accounting, and regulatory reporting, increasing efficiency and reducing the risk of errors.

Some key risks of using AI

Nevertheless, there are key potential risks:

• Cost optimisation: AI can help reduce costs by automating many tasks that are currently performed by humans. This puts certain jobs at risk.
• Deepfakes: The increasing use of AI in creating deepfake videos, which can be highly realistic and difficult to distinguish from real footage, has the potential to spread false information and create confusion and uncertainty around market participants. Manipulated media could potentially lead to volatility in the markets if prevention tools are not developed in advance. Imagine a deepfake video of a central banker announcing a drastic change in monetary policy, causing sudden panic selling or buying.
• Lack of transparency: AI models can often be opaque and complex, making it challenging to understand how they have reached their conclusions. Consultants and managers alike should ensure that their models provide sufficient evidence to sense-check its recommendations and findings.
• Ethical and regulatory issues: Companies integrating AI in their business models should ensure that their models comply with ethical standards and regulatory requirements. AI may raise ethical and regulatory concerns, such as racism, data protection, privacy, and equality.
• Data quality and biases: As with any mathematical model, AI is only as good as the data it is trained on. If the quality of data is subpar or contains biases, it may lead to inaccurate or misleading outcomes.

Industries seeking to implement and integrate AI across their systems and platforms, ought to know it can be complex and costly as it requires significant investments in infrastructure, such as computing power, storage, and network connectivity. From my point of view, the most challenging aspect to implementing AI is a highly skilled workforce to develop and maintain the technology which comes at a high expense. Attracting and retaining top talent will likely pose a challenge for investment consultants and managers alike. However, early adopters may gain a competitive advantage by offering new capabilities and solutions to their clients.

Overall, AI has the potential to transform and enhance some aspects of both industries such as investment decisions, risk management, reporting, costs, and efficiency. It is important nonetheless to ensure that ethical considerations, transparency, and regulatory demands are met and well-integrated into AI systems.

Investment consultants at LCP are exploring the new technology. There are potential pitfalls, and we are mindful of those; however, the opportunities of AI, if well managed, are so powerful they cannot be ignored.