Author: Maycode – maycode.org
Unlocking Strategic Value: Evolving use-cases of Generative AI in Asset Management.
Over the last few years, the global asset management industry entered a rapidly shifting phase with pressure on firms to cut costs, diversify revenues, and introduce more bespoke services after nearly two decades of impressive performance. Whilst not a stranger to innovation, revolutionary technologies are quietly reshaping the landscape. Generative Artificial intelligence has taken center stage, captivating industries with its potential to transform the way we work, think, and innovate.
A series of breakthroughs, each more awe-inspiring than the last, culminated in the creation of tools like ChatGPT, GitHub Copilot, and Stable Diffusion— the names ChatGPT, GitHub Copilot, and Stable Diffusion now resonate as household terms, symbols of the transformative potential of generative AI. Yet, the journey that led to these remarkable tools spans decades, fueled by relentless research and development. These recent innovations are the fruit of substantial investments that have propelled machine learning and deep learning to unprecedented heights. Consequently, the very fabric of our daily lives has been woven with AI applications, subtly enhancing the products and services we engage with.
“Across the banking industry, for example, the technology could deliver value equal to an additional $200 billion to $340 billion annually if the use cases were fully implemented”. ^ 3
This article explores the multifaceted benefits of Generative AI across seven scenarios, illustrating how it empowers asset managers and asset servicing firms to drive strategic growth, enhance decision-making, and deliver unparalleled client experiences.
Seven Applications of Generative in Asset Management
Scenario 1: Portfolio Optimization
Generative AI’s predictive capabilities can be harnessed to optimize investment portfolios. By analysing historical data, market trends, and risk factors, Generative AI models create optimized portfolio suggestions. This empowers Investment Managers to craft more resilient and responsive investment strategies, minimizing risk exposure and maximizing returns [^1].
JPMorgan Chase’s CEO Jamie Dimon stated. “in the last few years, AI has helped us to significantly decrease risk in our retail business (by reducing fraud and illicit activity) and improve trading optimization and portfolio construction (by providing optimal execution strategies, automating forecasting and analytics, and improving client intelligence).” [^10]
Scenario 2: Sentiment Analysis
Generative AI excels in analysing unstructured data, such as social media sentiments and news articles. Investment Managers can leverage sentiment analysis to gauge market sentiment, gaining insights into investor perceptions and potential market shifts. This informed decision-making can guide strategic asset allocation [^2].
“Generative AI digital assistants are also helping employees to strengthen their customer connections, reinforcing the places where a human touch may be a source of differentiation. Morgan Stanley Wealth Management, for instance, is rolling out an AI assistant to help its thousands of financial advisers better support their clients in a personalized way. The assistant combines search and content creation so that financial advisers can quickly find and tailor the right information for each client at any moment”. [^12]
Scenario 3: Fraud Detection
The financial industry is vulnerable to fraud, and Generative AI offers advanced fraud detection capabilities. By learning from patterns of fraudulent behaviour, AI models can proactively identify suspicious transactions and behaviours, safeguarding investments and client assets [^3]. Generative AI demonstrates remarkable potential in risk assessment, where accurate analysis of intricate data patterns is crucial. By leveraging its ability to generate synthetic data, Generative AI can create realistic datasets for training complex fraud detection models. Moreover, it enhances anomaly detection by creating scenarios of potential fraud patterns that might have gone unnoticed using traditional methods. This approach enhances the accuracy of identifying fraudulent activities and reduces false positives, ultimately bolstering security and minimizing financial losses [^1].
Scenario 4: Personalized Investment Strategies
Creating tailored investment strategies is pivotal to meeting individual investor goals. Generative AI can analyse diverse datasets, including market trends, investor preferences, and economic indicators, to generate personalized investment recommendations. By understanding the nuances of each investor’s risk tolerance and financial objectives, Generative AI empowers financial advisors to offer bespoke advice that aligns with clients’ unique aspirations, fostering stronger client relationships and enhancing portfolio performance [^2].
Robo-advisors are digital investment platforms that use computer algorithms and/or expert oversight to build personalized portfolios for retail investors.
Here are some of the best robo advisor according to Business insider
- Charles Schwab Intelligent Portfolios: Best Account Selection
- Betterment Investing: Best for Human Advisor Access
- Ally Invest Robo Portfolios: Best for Investing and Saving Under the Same Roof
- Ellevest: Best for Goal-focused Investing
- SoFi Invest: Best for Low Fees
- Marcus Invest: Best for Beginners
- Interactive Brokers: Best Portfolio Options
- Fidelity Go: Best for Mutual Funds
- Axos Invest Managed Portfolios: Best for Portfolio Customization
- Wealthfront Investing: Best for College Savings Plans and Crypto
- Vanguard automated investing: Best for Retirement Plans
Vanguard uses an AI solution called Vanguard Digital Advisor which is a robo advisor powered by data-driven technology and backed by Vanguard’s 45 years of investment experience. [^9]
Scenario 5: Customer Engagement
Generative AI-powered chatbots and virtual assistants enhance customer engagement. These AI-powered tools can understand and respond to customer queries in real-time, providing instant support and assistance. By automating routine tasks and providing personalized recommendations, chatbots are helping banks and financial institutions reduce costs, increase efficiency, and enhance customer satisfaction.
Virtual assistants and chatbots can be enhanced with Generative AI to generate contextually relevant responses that mirror natural conversation flows. Investment Firms can offer personalized advice and address client queries in real-time, fostering trust and satisfaction. This elevates customer experiences, leading to improved satisfaction, faster query resolution, and increased customer loyalty. Moreover, Generative AI-powered chatbots can assist customers in financial planning, investment queries, and routine transactions. This dynamic interaction strengthens client relationships and boosts brand loyalty [^5].
For instance, Bank of America’s virtual assistant, Erica, has been assisting millions of customers with their banking needs since its launch in 2018.
Royal Bank of Canada uses an AI-enabled assistant called NOMI to features include timely tips pushed to clients, personalized budgets, and savings recommendations based on spending behaviour and cash flow.
Scenario 6: Risk Assessment and Regulatory Compliance
Generative AI is supporting the development of comprehensive risk assessment by simulating various market scenarios to detect compliance and regulatory risks, assess risk exposure and anticipate future threats. Investment firms can evaluate the potential impact of market shifts and optimize risk mitigation strategies accordingly, ensuring resilient investment portfolios [^5]. Navigating complex regulatory landscapes is a challenge for Investment Firms. Regulatory technology firms are using generative AI enabled solutions to automate compliance processes, ensuring adherence to changing regulations and minimizing operational risks [^6].
Here are the top 5 global AI-enabled regtech solution provider;
- ComplyAdvantage: is a leader in AI driven fraud and AML detection.
- MindBridge Ai leverages artificial intelligence to detect errors in financial data.
- FundApps provides software solutions for financial compliance management to asset managers and other financial institutions.
- 6clicks offers a platform designed to conduct audits, manage policies, automate risk management, and more.
- Complia a compliance Regtech/Suptech that will offer policy/procedure writing, compliance research copilot called “TiTi”(in Alpha testing) amongst others through generative ai.
Scenario 7: Market Prediction
Generative AI’s ability to recognize intricate patterns equips Investment Managers to make more accurate market predictions. Can it accurately time the stock market? By analysing historical data and current trends, AI models can forecast market movements, enabling strategic decision-making [^7].
“We believe the application of AI in actively managed funds transcends the limitations of the human mind, allowing for potentially better risk management and investment decision making,” said Marcus Kim, Qraft founder and chief executive
Generative AI’s potential to transform the investment landscape is undeniable. With incremental breakthroughs above and more in development, massive foundation models will continue to power thousands of specialized AI products designed by perhaps nearly as many companies.
Investment firms can elevate their capabilities and deliver exceptional outcomes. By harnessing the power of Generative AI, the industry will gain a competitive advantage, foster innovation, and unlock new opportunities for strategic growth and client satisfaction.
Deploying gen AI – How do we start?
Given how fast GenAI has taken off, the first step is to start with foundational education, so that everyone—including the Board, C-suite, and staff—understands its importance. This will be critical to creating a level playing field across the organization. Firms that invest time early will position themselves to navigate GenAI the most effectively.
According to Mckinsey report on Companies with innovative cultures have a big edge with generative AI [^13], these are five steps innovative organizations can take to create a competitive edge with this technology with services like ChatGPT and similar chatbots open to the public.
- Know how to ask the right questions.
- Spot “wrong” answers fast and weed them out.
- Continually build proprietary data.
- Create an organizational ability to learn quickly.
- Wire key “no human touch” workflows to take advantage of gen AI’s speed.
Artificial intelligence and the new subset generative AI are here to stay, as with all industries capital market is not immune to its impact. It is imperative to start implementing GenAI strategy to maximize the benefits and minimize risks.
[^1]: McKinsey. (2023). The state of AI in 2023: Generative AI’s breakout year. [Link](https://www.mckinsey.com/capabilities/quantumblack/our-insights/the-state-of-ai-in-2023-generative-ais-breakout-year?cid=soc-web)
[^2]: IBM Institute for Business Value. (2023). C-suite study. [Link](https://www.ibm.com/thought-leadership/institute-business-value/c-suite-study/ceo)
[^3]: McKinsey. (2023). The economic potential of generative AI: The next productivity frontier. [Link](https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/The-economic-potential-of-generative-AI-The-next-productivity-frontier#work-and-productivity?cid=aisurge2023-soc–mar-mar–07/23-c1a–bam-ip)
[^4]: McKinsey. (2023). Technology’s generational moment with generative AI: A CIO and CTO guide. [Link](https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/technologys-generational-moment-with-generative-ai-a-cio-and-cto-guide?cid=aisurge2023-soc–mar-mar–07/23-c1a–bam-ip)
[^5]: PwC. (2023). Seven crucial actions for managing AI risks. [Link](https://www.pwc.com/gx/en/issues/c-suite-insights/the-leadership-agenda/seven-crucial-actions-for-managing-ai-risks.html?utm_campaign=602e8f84e9865a0001eb6183&utm_content=64d25f6a6669070001db1752&utm_medium=smarpshare&utm_source=linkedin)
[^6]: McKinsey. (2023). Four essential questions for boards to ask about generative AI. [Link](https://www.mckinsey.com/capabilities/quantumblack/our-insights/four-essential-questions-for-boards-to-ask-about-generative-ai?cid=aisurge2023-soc–mar-mar–07/23-c1a–bam-ip)
[^7]: McKinsey. (2023). The top trends in tech. [Link](https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/the-top-trends-in-tech?cid=aisurge2023-soc–mar-mar–07/23-i1a–bam-ip&linkId=229536127#tech-talent-dynamics)
[^8] Deutsche Bank Partners with NVIDIA to embed AI into Financial Services https://www.db.com/news/detail/20221207-deutsche-bank-partners-with-nvidia-to-embed-ai-into-financial-services.
[^9] Vanguard digital advisor
[^10] Jamie Dimon’s Letter to Shareholders, Annual Report 2022
[^11] Best robo advisor according to Business insider
[^12] Using AI to Build Stronger Connections with Customers by Maureen Burns, Sharona Sankar-King, Priscilla Dell’Orto, and Eduardo Roma – https://hbr.org/2023/08/using-ai-to-build-stronger-connections-with-customers
[^13] Companies with innovative cultures have a big edge with generative AI https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/companies-with-innovative-cultures-have-a-big-edge-with-generative-ai