As a parent of young children and a financial journalist, my instinct is to make sure they grow up with the knowledge and confidence to navigate the world of investment and personal finance. Recently, I’ve been considering how much the landscape might change by the time they reach adulthood. What will the term ‘investment’ mean to them and their peers? What will the act of investing involve? It’s an intriguing thought-experiment and there are plenty of clues out there to feed it.
Let’s begin by acknowledging some of the trends in the UK, where I’m based. The first is that, whether they realise it or not, in the future, more young people than ever will become investors, thanks to the impact of pensions auto-enrolment. Between 2011 and 2012, when auto-enrolment was introduced, and 2015 and 2016, the proportion of people aged 22–29 paying into a pension doubled to 72%, according to the UK Department for Work and Pensions. That trend will be reinforced during the next decade, when the UK government plans to cut the minimum age for auto-enrolment from 22 to 18. Although the majority of this investment will happen without their direct involvement – monthly deductions from their salary will be go to the National Employment Savings Trust, a workplace pension scheme set up by the government, or similar providers – over time many of tomorrow’s adults will need to engage with the world of investment.
If today’s trends are any guide, many of them will want to do so via their smartphones. In personal finance, you can already see the appetite for service innovations from the new generation of digital banks, such as Monzo’s system of ‘pots’ that allows users to allocate the money within a single account to different goals and purposes. Simple, intuitive tweaks like this deliver convenience and control over their financial lives, enabling them to move money around instantly and without friction. This kind of innovation will set the baseline for a user experience that young adults will come to expect everywhere, including from investment providers.
On the providers’ side of the fence, automation is a crucial trend. It’s steadily becoming established, with basic investment services increasingly using ‘robo’ technology to deliver a low-cost, personalised service adapted to the individual user’s circumstances and preferences.
But these robo-services are still in their infancy. Automation has much further to go in this sector and you can see the direction it could take in new services such as Exo Investing, a retail-focused offshoot of Madrid-based institutional quantitative asset manager ETS.
Algorithmically-driven asset management is nothing new in the institutional market. Extending this technology into the retail market, as Exo is doing, might offer a hint of what investment will come to look like over the next 20 years.
Exo’s service resembles other robo products, in that it uses an online questionnaire to gather information on each investor and establish their goals and risk appetite, and then invests their funds in portfolios of London-listed exchange-traded funds (ETFs). The big difference is that instead of placing investors in one of ten risk-based portfolios that are rebalanced periodically to keep them on track, the algorithms construct each investor’s portfolio individually depending on their goals and risk appetite, any preferences they express for particular assets or markets, and the conditions at the point when they invest. Each portfolio is then managed actively, the mix of assets shifting automatically from day-to-day as the algorithms calculate the probability of different market outcomes.
The possibility that clever machines could end up managing a significant portion of future generations’ savings is intriguing and not all that far-fetched. If I’m correct, investment will become more of a black box for most people than it already is, and deciding who to entrust with your money could turn on comparing the performance of competing companies’ algorithms.
Who’s to say that by the time my children are old enough to take notice, investing won’t just mean transferring funds from a banking app to an algorithmic investment manager, which will allocate it automatically into funds and assets and monitor it, shifting the blend of assets constantly while the humans get on with their lives? If data scientists can create algorithms that can do this well enough and cheaply enough, active management by humans might eventually give way to automated active management.
Those days are still far off. But as algorithmically-driven investment services migrate into the retail market and reduce their minimum investment (Exo’s is currently £10,000), they become a more realistic prospect. If algorithms are able to manage money better than humans, the promise of 24/7 vigilance by intelligent machines could prove difficult for flesh-and-blood managers to compete against.
The original version of this article appears in the Q3 2018 print edition of The Review. All members, excluding student members, are eligible to receive the quarterly print edition of the magazine. Members can opt in to receive the print edition by logging in to MyCISI, clicking on My account, then clicking the Communications tab and selecting ‘Yes’.
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