Key Points:
- Wealth management in the Algocen Age is characterized by the use of algorithms to create customized investment solutions for clients.
- Algorithms have allowed wealth management firms to scale their operations and offer hyper-customized investment strategies.
- The rise of algocen firms has led to the transformation of roles within portfolio management and compliance.
- The adoption of algorithmic solutions has not eliminated irrational behavior in the market, but rather reinforced certain cognitive biases.
- The near-extinction of exchange-traded funds (ETFs) can be attributed to their overreliance within algocen portfolios and the lack of arbitrage opportunities during the flash crash of 2015.
- The biggest value add of algocen firms is the increased level of customization available to individual investors, allowing them to align their investments with their financial goals and values.
Yvette receives a list of trades executed by algorithms before heading into a sign-on meeting with a new client. The client expresses concerns about investing in stocks at market highs and avoiding certain industries. Yvette assures the client that their concerns will be included in their investment policy statement.
In the past, firms used to run model portfolios that didn’t take into account individual client needs. However, the advent of algorithmic solutions has allowed for customization on a client-by-client basis. Each firm has its own proprietary algorithms that can be customized by portfolio managers in consultation with clients.
The automation revolution threatened the careers of human advisors, but instead of leading to fee compression, it actually increased scalability and offered better solutions. Robo-advisors, although efficient and scalable, couldn’t provide the human interaction critical to areas like retirement planning.
Coding became a way to institutionalize the “house view” of firms, allowing for scalability and customization. Portfolio management has become more standardized and compliance has shifted to include code-review functions. Regulators have also become more involved in overseeing algorithmic solutions.
While algocen firms have not eliminated irrational behavior in the market, they have provided individual investors with unprecedented levels of customization and the ability to align investments with their values.
Despite the advantages, the overuse of passive investment funds, particularly ETFs, has had negative consequences. The flash crash of 2015 exposed their vulnerabilities in illiquid market segments. However, the advantages of customization still remain the biggest value add of algocen firms.
Yvette receives feedback from compliance on her client’s investment policy statement and makes the necessary code revisions. She notifies her client that they can proceed with their custom algorithm pending their electronic signature.
In conclusion, the Algocen Age has revolutionized wealth management by providing hyper-customized investment solutions to individual investors.