by Scott Ronalds
Last summer I wrote a reflection on some on the observations, tips and lessons I’ve learned over two decades working in this business. There were 20 in total (original, hey!). Here’s the piece if you missed it.
Well, another year has passed, and I thought I’d share one more.
#21. This industry is slow moving, but it’s likely to look much different 20 years from now. Technology and the field of psychology are primed to play big roles.
What do I mean by this? First, money management is an Old World business. It’s laden with regulations and powerful incumbents that have thwarted upstarts from disrupting the status quo. While other industries have been turned on their heads via technology and innovation (think retailing, music and taxis), the investment business, and financial services industry as a whole, hasn’t changed much. And although there have been some technological advances, they haven’t necessarily been good for the client (e.g. high frequency trading).
Things are starting to get interesting though. The emergence of robo-advisors and other fintech firms are shaking things up with their focus on technology, apps and digital services. Silicon Valley’s biggest resident, Apple, has entered the financial services space (Apple Pay and Apple Card) while rumours swirl that other innovators, including Google and Amazon, are eyeing the asset management sector. What’s more, artificial intelligence (AI) is starting to enter the money management conversation, for better or worse.
The other area where we’re seeing interesting developments is in the field of psychology, and more specifically, behavioural economics. This is a relatively young field that focuses on the way the human mind operates and how various biases and heuristics impact our financial decision making. Some prominent books have been written on the topic, including Predictably Irrational (Dan Ariely), Thinking, Fast and Slow (Daniel Kahneman), and The Undoing Project (Michael Lewis).
An increasing number of firms are putting resources into educating clients on good investing practices — through blogs, websites, campaigns and other means — and helping them avoid behavioural missteps such as recency bias, loss aversion and the bandwagon effect.
As investors, our own behaviour has the biggest impact on our long-term returns (not stock picking prowess, asset allocation, or even fees), so a greater emphasis on behavioural economics could go a long way in ‘lifting all boats’. It’s an area that we’re particularly interested in at Steadyhand — in fact, it’s where the quirky name came from. This is also where artificial intelligence could play a role. For example, AI can be used to better understand investors’ behaviours and help detect situations where they may be inclined to react adversely to a market event.
Change won’t happen overnight, but the investment industry is too big, too important (we all need a retirement fund), and too old school to simply stand pat.
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