Financial Advisors

A Trial by Fire for AI in the Financial Advisor Space

Artificial Intelligence (AI) was built to absorb, analyze and fashion recommendations out of huge piles of datasets at a fraction of the time that human efforts can achieve. Many were further designed with the ability to learn – called machine learning - to hopefully, perpetually, keep getting better and keep adjusting to changing dynamics in the environment they are working in. So, how did AI with machine learning function during the coronavirus pandemic?

To better explore and understand artificial intelligence technologies in a crisis scenario, we talked with Institute member David Aferiat, Co-Founder and Managing Principal of Trade-Ideas – an award winning A.I. and machine learning Fintech firm with a SaaS-based revenue model. We wanted to explore how AI helps advisors and traders make sense of investing when nothing is making sense.

Hortz: From your perspective, can you explain more about the nature of this current market disruption and trying to respond to this environment?

Aferiat: The Covid-19 virus is an enigma.  More is unknown than known.  And initially medical professionals were treating it against known medical models – flu and pneumonia – only to discover that the virus was completely different from either.  Markets reacted in much the same way – against the “known.” The simple fact is that we have never been here before.

That said, there are navigation tools – most importantly Artificial Intelligence – that are designed precisely to operate in unknown oceans.  It is important to point out that these are navigation tools designed to help people make better decisions, rather than crystal balls that make decisions on their own or for others.  These tools though provide three key underlying guide markers: information, predictability, and confidence.

Hortz: How does artificial intelligence such as yours make that happen, to provide that navigation?

Aferiat: Artificial Intelligence sources massive data sets such as market data, social media, news, and runs these sets overnight through dozens of multiple algorithm scenarios across tens of millions of simulated trades.  The result: daily active trading strategies that enable portfolio managers and traders to make better decisions, based on likely outcomes. 

As trading proceeds, risk on/risk off guardrails enable portfolio managers and traders to know where and how their strategy is executing intraday.  When the guardrails are hit, then traders can stay/go/modify their approaches in response.

Hortz: Did your AI system you call “Holly” surprise you in anyway in its functioning, analysis, or stock picks during the recent coronavirus meltdown?

Aferiat: Holly is a highly robust system and able to immediately recognize and respond to events. So, actually, there were no surprises.  Holly does not have emotions around events – it merely responds to what the data is telling it. In terms of functioning, we were “already ready” for any sharp market actions.

Hortz: What was Holly’s greatest value-add through the chaos in the markets?

Aferiat: The greatest value add is making sense of nonsense.  What Holly was able to deliver is information that led to rational strategies that could provide some confidence and predictability, all tracked in real time. Helping investors make sensible decisions in the middle of chaos, fraught by immeasurable unknowns, is a tremendous benefit.

Hortz: Were there times you had to adjust or tweak the AI system and/or the algorithms used by Holly during this timeframe?

Aferiat: Not really, Holly is always market ready, and the modifications and building of new approaches is continuous – it is not predicated on events – no matter how seemingly catastrophic.  For our teams it was business as usual, technically and culturally.  Adjustments and tweaking are constant, not anomalous. Holly’s algorithms also teach themselves at all times.

Hortz: What are some ways you have been seeing that advisors and asset managers seem to work best with Holly during a downturn like this?

Aferiat: Advisors, asset managers and traders work best with Holly when they need to navigate volatile markets and active strategies. The minute a market, a strategy, or a portion of a portfolio moves from passive to volatile, there is no better tool anywhere than Holly.

I find it interesting how just a few short months ago passive strategies prevailed, even to the point of a supposed death knell sounding on anyone with the temerity to raise the idea that active strategies might still be meaningful. And just like that, the world changed. When the virus hit, market confidence came under scrutiny as predictability and certainty were out the window.  And the role of active strategies became part of the mix once again. With new tools like AI and other technologies, they immediately became most relevant.

Hortz: Did it help human advisors keep focused? Provide immediate direction where human managers might be struggling to find steps?

Aferiat: Absolutely.  Again, we do not make the decisions for traders or asset managers.  One way to think of this as a pilot who is instrument certified. The pilot can fly by sight, which is really hard in this turbulent weather as there are no visual clues, or you can trust the instruments, which sometimes seem counterintuitive but can more reliably lead to being in the right direction and having a greater chance of a safe landing.

Hortz: Based on what you are seeing on how AI has been performing, especially during this market panic, do you have any recommendations or last thoughts you would like to offer advisors and asset managers about using AI in their investment process?

Aferiat: Well, I have an obvious bias, but this environment of many unknowns - and there will be others - is not one where relying on what has worked in the past will continue to apply, nor is it one where intuition alone can provide meaningful guidance.

What artificial intelligence can help with more than anything else at this point is giving portfolio  managers and traders the information they need to make decisions in unchartered waters, to have a modicum of confidence in their decisions, and to each day have risk guardrails in place against strategies that track markets in real time.  Another way to put it is thus: why wouldn’t a professional avail themselves of a tool that is designed to help in the most challenging market environments?

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors - Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information click here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Bill Hortz

Bill Hortz is an independent business consultant and Founder/Dean of the Institute for Innovation Development- a financial services business innovation platform and network. With over 30 years of experience in the financial services industry including expertise in sales/marketing/branding of asset management firms, as well as, creatively restructuring and developing internal/external sales and strategic account departments for 5 major financial firms, including OppenheimerFunds, Neuberger&Berman and Templeton Funds Distributors. His wide ranging experiences have led Bill to a strong belief, passion and advocation for strategic thinking, innovation creation and strategic account management as the nexus of business skills needed to address a business environment challenged by an accelerating rate of change.

Read Bill's Bio