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business of investing

To make decisions that will result in great returns, financial advisors are adapting to the world of algorithms and statistics. But 'you're still going to need human beings to interact with people and explain what all this means'

Paul Shelestowsky, centre, senior wealth advisor at Meridian Credit Union, discusses investment strategies with his clients, Melanie Heathers and Matt Roszkowski at their bed and breakfast, the Brockamour Manor, in Niagara-on-the-Lake, Ont.

For financial advisors like Paul Shelestowsky, artificial intelligence is starting to get real.

"The popular belief until recently was that artificial intelligence (AI) would work best alongside a human, active portfolio manager," says Mr. Shelestowsky, senior wealth advisor at Meridian Credit Union in Niagara-on-the-Lake, Ont.

"This theory is starting to be tested. Large firms have been investing in research behind portfolios managed solely by AI."

Mr. Shelestowsky is not prepared to surrender to robot masters yet. He advises clients in person, as he did recently with Matt Roszkowski, 41, and Melanie Heathers, 42, who own a 200-year-old bed and breakfast, Brockamour Manor, near his credit union branch.

"They want advice from a human. But they also want to know how AI might start affecting their investment decisions. It's starting to become part of the conversation," Mr. Shelestowsky says.

The era of artificial intelligence as the predominant method for making investment decisions is still as much as a decade away, maybe longer, he believes. But there's no doubt that AI is gaining ground in the investment industry. Recently, for example, Mr. Shelestowsky attended a session hosted by one of the major multinational investment firms. "They're not talking about getting rid of active management, but if AI is performing better than their active managers, they're not going to discount it."

"AI is so nascent in investing that none of the big banks or fund companies, or individual planners are really drawing on the technology. It's still very much in research stage, and they're figuring out how to best utilize it. I am looking forward in the near future to being able to overlay AI with the products and services that I offer," Mr. Shelestowsky says.

Just after his AI session, on Nov. 1, the first robot-run exchange-traded fund (ETF) was launched in Canada.

Mr. Shelestowsky advises clients in person, as he did recently with Mr. Roszkowski and Ms. Heathers seen here in the kitchen of their bed and breakfast. ‘They want advice from a human. But they also want to know how AI might start affecting their investment decisions. It’s starting to become part of the conversation,’ Mr. Shelestowsky says.

The Horizons Active A.I. Global Equity ETF uses algorithms to determine exposure to major global equity indexes based on a basket of North American-listed ETFs. AI can process huge amounts of data in a few seconds – tasks that would be mind boggling to, well, the human mind.

Yet while Mr. Shelestowsky and other experts see the advancing role of AI in investing as inevitable, they don't envision advisors surrendering totally to machines.

"You're always going to need a combination of humans and algorithms to make financial decisions," says Moshe Milevsky, professor of finance at York University's Schulich School of Business.

"But the way that the combination is done is going to change. If I could sum it up in one word it would be, 'coexistence'," Dr. Milevsky says.

The same week as Mr. Shelestowsky was learning about how institutional investors are exploring AI as a tool, Dr. Milevsky helped organize a conference on the subject at McMaster University's DeGroote School of Business.

Mr. Shelestowsky makes house calls to clients wanting to discuss investment strategies. He’s seen here in Niagara-on-the-Lake at the Brockamour Manor, an historic building that now runs as a bed and breakfast.

The conference reminded him that, "the science [of applying computer skills to investing] isn't new. What has changed is the speed and the ability to go through reams of statistics, finding relationships quickly and being able to implement the statistical techniques."

For investors and fund managers, there are obvious strengths offered by artificial intelligence and machine learning, in which computers develop intuitive "soft" reasoning skills based on data. A machine can look at the variables that come from infinite bits of information in the time it might take fund managers to scratch their heads and sharpen their pencils.

"But is the algorithm going to convince my mother that she has too much money in GICs?" Dr. Milevsky asks.

"You're still going to need a human being to take all the information analyzed by AI and convey it to individuals in ways that resonate with them. You're going to need human beings to interact with people and explain what all this means."

Both Dr. Milevsky and Mr. Shelestowsky also caution those who predict an investment robo-future coming soon to remember that individual investment clients have different needs.

"I think the biggest mistake in this industry is to generalize and say that the 30-year-old millennial is the same as the 60- or 70-year-old baby boomer. Even their relationships with technology differ from each other," Dr. Milevsky says.

Chris Nicola, co-founder and chief technology officer of WealthBar, a British Columbia-based robo-advisor, agrees that even the most advanced tech has limits.

"Let's be clear: for the task of making trading decisions, artificial intelligence/machine learning has yet to really prove itself," Mr. Nicola says.

"Right now, we see the biggest opportunity for investing and AI is on the customer service side. That is, chat-bots who can anticipate and even answer clients' most common questions when it comes to basic tasks," he explains.

"For instance, clients might message the chat-bot on their smartphone and get a real-time answer around the timing of making withdrawals and contributions."

All of this suggests that human advisors are not about to disappear, but they will have to adapt to the new, AI world, Dr. Milevsky says.

"Advisors are going to have to do more than just advise about money. They're going to have to become social workers and gerontologists and understand more about tax and estate planning and family dynamics – all things the algorithm isn't going to be able to do," he says.