AI: FinTech’s ghost in the machine

“There have always been ghosts in the machine. Random segments of code, that have grouped together to form unexpected protocols. Unanticipated, these free radicals engender questions of free will, creativity, and even the nature of what we might call the soul.When does a perceptual schematic become consciousness? When does a difference engine become the search for truth? When does a personality simulation become the bitter mote… of a soul?” – Dr Alfred Lanning from I, Robot.

Since I was a child, the next big social revolution and the greatest existential danger to humanity has always been the potential rise of artificial intelligence (AI). Because AI has permeated the popular consciousness for so long, the great leaps forward being made currently in this space are being underestimated by most.

The evidence is clear that a number of industries are on the precipice of massive upheaval from exponential advances in computational power and software programming. Nothing has illustrated this better for me than Wait But Why’s fabulous series on Artificial Intelligence that I have distilled into a single (borrowed) image:

Source

This upheaval is particularly apparent and immediate in financial services which is increasingly a technology-lead industry. After all, there is a reason FinTech has become the de rigueur term. FinTech represents a perfect mix of the two ingredients most likely to crack the AI conundrum: money and technology. It is therefore no surprise that FinTech startups using AI algorithms have seen their funding increase rapidly since 2014 to record levels. The FinTech landscape will increasingly be populated by AI-powered companies, in fact, it already is across a range of financial technology applications:

Source

But what is AI? What does it represent? I don’t profess to be an technical expert in the field, but to me AI is a culmination of a number of technological advances that are providing computers and software with the capacity to first mimic and then surpass humanity. Taken in isolation, no single advance outlined below would logically or easily lead to a technological organism to rival a human being. Together however, I begin to see how sentience may emerge from computer code.

If all this seems somewhat remote and theoretical, lets hone in for a moment on one of the advances listed above, Google DeepMind, which developed the AlphaGo AI system and pitted it against Lee Sedol (a professional Go player of 9 dan rank). Go is a famously complex game that is distinguished by the fact that it has an extraordinarily large combination of possible moves…larger than any computer could calculate before selecting their next move. This was what made the feat of AlphaGo so stunning:

“What made move 37 so interesting is that no one expected it. It was early in game two and AlphaGo placed its 19th stone on a part of the game board that no human Go master would have considered. Some called it a “mistake.” Others called it “creative” and “unique.” But considering that AlphaGo went on to win its third game in a row against one of the strongest Go players in the world, the move should probably have been called what it really was: intuitive.” – Shelly Palmer from AlphaGo vs. You: Not a Fair Fight

Intuition. An entirely human quality. With that, the lines between machine and human blur just that little bit more. I have previously explored my belief we are on the verge of an autonomous revolution that will be powered by a combination of technologies like AI and blockchain. This revolution will change our perception of what’s possible in the realms of finance, technology, value creation and creativity itself. This revolution may even change or concept of what it means to be human.

Solving the roboadvice riddle: it’s not the investments, stupid!

Roboadvice is many things to many people in many markets, in turn:

once the saviour of Silicon Valley’s savings
now the darling of the emergent Australian fintech economy
the continued whipping boy of alpha seekers, and
an already obsolete technology for skeptical venture capitalists.

For the true believers, “roboadvice” is seen as a dirty word that diminishes and ridicules the weighty aspirations of those immersed in the profession. Many prefer to use more cultured phrases like “automated advice” because their more positive connotations don’t evoke images of thousands of human advisers trudging to the Centrelink queues having been replaced by HAL or WALL-E.

Underlying this terminology war is an insecurity which stems from the personality crisis that pervades most roboadvice platforms. Are they true disrupters or the soon-to-be disrupted?

This is the conundrum I will explore in this article whilst surveying the current roboadvice offerings in the Australian market. My contention is that:

the nascent roboadvice profession lies sandwiched between a well-established but much maligned advice community and a barely comprehensible future of true artificial intelligence

Australia’s roboadvice pioneers

“If I have seen further it is by standing on the shoulders of giants”

When Sir Isaac uttered those famous words, he could very well have been talking about the evolution of the roboadvice industry in Australia. In many ways, it has followed closely in the footsteps of the pioneering Silicon Valley robo houses focusing first on basic multi-sector portfolio solutions and then evolving into more holistic automated advice solutions, as illustrated below:

In the USA, the automated advice solutions of the second generation that have seen the most success have been those with access to existing scale or a captive audience (e.g. Vanguard and Charles Schwab).

Many of the Australian second generation roboadvisers are banking on bringing fresh perspectives to the automated advice game. Some positioning themselves as product-agnostic portfolio construction tools that put the user in control (OwnersAdvisory) and some giving away their talents for free in the hope of entangling the client even further into their product ecosystem (I’m looking at you, Big 4 Banks).

The levers and dials that Australian roboadvisers are playing with form part of a common spectrum. Each offering being a different spectral play on one of the following characteristics:

Despite the active attempts to truly innovate, the cynical side of me suspects the Australian roboadvice platforms that will triumph will share similar characteristics with their USA counterparts (scale and a captive audience).

However, there is another way…

Making roboadvice sticky

Roboadvisers should be catnip to a prospective client like me. I’m young, growing my wealth, financial savvy but don’t currently have a financial adviser. So what could a roboadviser do to make me use them?

Roboadvisers need to know their client-base and solve real advice problems for them.

Risk-appetite based investment portfolios or generating returns through a top-down asset allocation approach are tried and tested formulas. But they are not engaging or relevant concepts for the average joe investor.

To engage effectively, roboadvisers can take a powerful lesson from the development of mobile applications for financial products and accounts. For example, what do you suppose is the most downloaded superannuation app?

The answer is:

Why do you think this has been downloaded by so many Cbus Super’s members?

Because it:

(a) is useful and relevant to its user base (most construction employees work outside, love their footy and can’t wait until their next holiday)

(b) emphasises features that are much more human and customer-focused than the current balance of their superannuation.

In a previous post, I argued that goals-based advice conversations are the beginning of an industry-wide paradigm shift that will make financial advice relevant again to the masses. Perhaps empathy is the missing ingredient for human and robotic advisers alike.

Unifying the advice community

If humans struggle so much with empathy, what hope for a computer? Roboadvisers don’t need to feel or mimic human emotions to become more useful and relevant to their prospective client base. However, roboadvisers do need to reassess their position in the advice spectrum. Are they cold and calculating or warm and fuzzy? Are they the saviours of the advice profession or the destroyers?

I tend towards the view that roboadvisers can become a powerful part of the advice toolkit, helping to serve clients with simpler advice needs and providing full service advisers a reliable way to begin advice conversations with clients who need help achieving their financial goals or meeting their financial needs.

Roboadvisers that understand their place within the advice spectrum and can humanise their value proposition with gamification techniques are well placed for long-term success. Gamification can turn a chore into a challenge and one of the more appealing conceptualisations of this, from an advice perspective, is Melius.

Melius is a lead generation tool for financial advisers. Prospective clients answer a series of personal finances and wealth questions which are translated into a peer-benchmarked financial wellness (Melius) score. Clients are behaviourally incentivised to improve their Melius score by contacting their financial adviser to, for example, increase their insurance coverage, re-weight their investment portfolio or refinance their home loan.

The Melius concept, whilst appealing, isn’t the panacea for roboadvice. Roboadvisers need to become more human. Or rather, they need to seem more human.

Disrupting roboadvice (the 3rd generation)

Imagine, Siri for financial wellness. Lets call her, Robotica. For the same price as your monthly Spotify subscription you can hold your financial future in the palm of your hand:

Hello, Robotica!

Good morning, Ashton. How can I help you today?

Robotica, how is my investment portfolio performing?

You’re doing OK, Ashton. Your portfolio is currently outperforming the market by 5% which is better than 98% of your peers. However, I recommend that you reduce your allocation to Australian mining stocks by $22,000 as iron ore prices are continuing to soften.

Thanks Robotica, please go ahead and implement that.

All done Ashton, you have incurred $55 of brokerage costs. Have a good day at work. Let me know if you need anything else today.

The future of roboadvice will be built on natural language processing, machine learning and artificial intelligence. With sufficient processing power to mimic human conversation, roboadvisers will interact with clients fluidly and naturally. Once the uncanny valley is bridged, the floodgates will open and the industry will never be the same again.

This may seem like science fiction now but human advisers would be well advised to make friends with their robotic counterparts. Whilst the current and near future generation of roboadvisers may not be that impressive, a new world of financial advice awaits only a quantum computing heartbeat away.

If you enjoyed this post, please like or comment below. You can read previous articles in this series on ideas transforming Australia’s wealth in 2016 below:

Idea #1 – Goals-based investing

Idea #2 – Blockchain (Part 1, Part 2, Part 3)

Blockchain (3 of 3) – the autonomous revolution

Three revolutions, simple but overwhelmingly strong, have governed our lives (to paraphrase Bertrand Russell):

the Agricultural Revolution: where the cultivation of land and food powered the formation of cities and economies for the first time
the Industrial Revolution: where machines transformed our productive capacity and drove community-wide improvements in the standard of living
the Digital Revolution: where computers and the internet saw the creation of a whole new economy beyond the physical realm.

In this article, I make the case that we are at the dawn of a fourth revolution:

the Autonomous Revolution:where blockchain will enable autonomous technology to transform our concept of value and wealth

For a refresher on blockchain, please revisit my previous articles in this series:

part 1 (here) a primer on the fundamentals of blockchain technology
part 2 (here) an overview of the blockchain technology enablers.

The Australian blockchain landscape

Until recently, blockchain has been very much a fringe technology in the Australian financial services landscape. The common perception of it has been heavily influenced by the more colourful episodes in Bitcoin’s history.

In 2016, blockchain is going mainstream. If you want proof of this, you only needed to click on the Sydney Morning Herald (SMH) website last Saturday. Right there on the front page was this:

Source: Blockchain and how it will change everything

How has blockchain reached this tipping point? The answer lies in two cross-border blockchain-focused collectives that Australian financial services companies have increasingly tapped into:

COALA: the Coalition of Automated Legal Applications, a regulatory-focused think-tank undertaking collaborative research into blockchain, smart contracts and decentralised applications.
R3 CEV: a global blockchain project whose participants include some of the world’s largest banks, including Australian giants CBA, NAB and my own Macquarie.

The burgeoning visibility of blockchain in the Australian public consciousness is owed largely to the work and experimentation being driven out of these collectives and their participating organisations.

Two recent examples have received broad media coverage:

11 banks completed an experiment using R3’s private blockchain to simulate trading with each other. R3’s blockchain has been built using Ethereum (read more on Ethereum in part 2 of my series) and hosted on a virtual private network in Microsoft Azure’s Blockchain as a Service module.
ASX is building a blockchain for Australian equities and has taken a 5% equity stake in Digital Asset Holdings (a blockchain start-up headed by former JP Morgan executive and inventor of the credit default swap, Blythe Masters). Blockchain is seen as a credible and potentially superior alternative to the ASX’s existing clearing and settlement system (CHESS).

To reinforce the increasing ubiquity of blockchain, regulators are paying close attention too. In relation to blockchain, Greg Medcraft (Chairman of ASIC and the IOSCO Blockchain Taskforce) has been quoted as saying: “institutions should harvest the opportunity and mitigate the risk.”

What will be the water cooler moment for blockchain?

In December last year, I was lucky enough to attend COALA’s inaugural Australian blockchain workshop in Sydney. More than anything, I was struck by how many smart and intelligent people truly believed in the transformative potential of blockchain. Quotes such as “Blockchain is the biggest innovation since the internet” (Lawrence Lessig, Professor of Law at Harvard Law School) were thrown around casually as though this was a truth as self-evident as gravity or relativity.

Despite this, conversations about blockchain are still confined to a niche space of the financial services industry. You definitely won’t hear blockchain being discussed around the water coolers and coffee tables of the general population…yet.

Imagine, it’s 2017 and you’re browsing the latest articles on SMH again:

An evolutionary security lists on the ASX

Robocorp (RCP) listed today, representing the first evolutionary security to trade on the ASX’s newly built blockchain exchange. RCP is a decentralised autonomous organisation with fully transparent corporate milestones and an automated dividend payment policy. RCP’s digital prospectus states that:

shareholders receive $1 per share once RCP’s gross profit reaches $100m
a 3 for 1 share split will occur once RCP reaches a $500m market cap

all fully paid ordinary shares in RCP will be converted to hybrid notes if the corporate debt/equity ratio exceeds 75% for more than 2 quarters.

You scroll a little further on your iPad and see a flashy advertisement:

Smart Will: the autonomous digital will

Tired of scrawling all your dying wishes onto reams of paper? Tired of lawyers with million dollar smiles and 3 piece suits? Tired of your grandchildren squabbling amongst themselves? Then you need Smart Will.

Using secure, transparent and irrevocable blockchain technology, Smart Will allows you to create an autonomous digital will to distribute your assets in accordance with your wishes without the hassle and mess of big, complex legal documents. With Smart Will, you can choose to automatically distribute your assets when you reach a certain age; when your estate gets to a certain value; or upon your death.

Your Smart Will executes automatically as the conditions are fulfilled and verified by the blockchain network. Picture this, once your Smart Will has confirmed your untimely demise with the Registry of Births, Deaths and Marriages it will arrange for your prized van Gogh portrait to be released from our secure vaults and transported to the NSW Art Gallery, in accordance with your wishes. Smart Will: easing your troubles, today.

What is the key to unlocking the autonomous revolution?

As these futuristic examples illustrate, the blockchain will accelerate the autonomous revolution across a number of robotic channels. From artificial intelligence and self-driving cars to smart contracts and autonomous corporations, blockchain will provide the infrastructure to enable computers and internet-enabled devices to continuously interact with each other without the need for trust as we currently understand it.

However, the real key to unlocking blockchain’s potential and transforming our concept of wealth and value lies in a little known project called the Interledger Protocol: “The idea is to create a single worldwide network that can not only unite all digital currencies, but all companies and individuals who use those currencies.”

Whilst the project is specifically focusing on payments, its power lies in the philosophy behind it – creating a global protocol layer that allows any blockchain network to communicate in the same language:

“The Internet can move almost any financial instrument as easily as it moves texts and emails. We just need consensus on how this should happen.”

Source: The Plan to Unite Bitcoin with All Other Online Currencies

In 2016, I predict blockchain will move from being a conversation about “what’s possible” to a conversation about “what’s next”. Financial services organisations (from the big banks to a dizzying array of fintech start-ups) will increasingly experiment with blockchain. For now though, blockchain’s water cooler moment will have to wait until greater consensus is reached. Bring on 2017 and the dawn of the autonomous revolution.

Please comment below to share your thoughts on blockchain’s potential to transform the Australian wealth management landscape in the coming years. What do you think will be the first blockchain water cooler moment and when will it happen? Is blockchain the key to unlocking the autonomous revolution?

Revisit part 1 and 2 of this series:

“Blockchain (part 1 of 3): a digital frontier of trust through consensus”

“Blockchain (part 2 of 3): the pillars of trust”

Ashton Jones – Freelance Writer

Australian perspectives on global disrupters

Tag: AI