The output of our investment engine is applied to our portfolio which adapts logically to changing conditions over time. As humans, we check the output to make sure it is consistent with the engine’s design but prevent the common pitfalls of emotion through disciplined, systematic execution. This key advantage lets us to spend our time analyzing new pieces of logic and building processes to identify these automatically through machine learning.
How do you expect machine learning to affect the future of investing?
Machine learning is useful across many disciplines, and its application to investing continues to evolve. When you consider a rules-based system, each rule can be improved, and borrowing an idea from genetics this can happen through evolutionary computation. In this, sets of trading rules are processed through different market scenarios, and at the outset the strongest or most profitable survive. These combine with other surviving rules to create stronger, more profitable rules for the future. Increased computing power in turn increases the number of rules that can be tested across an ever-expanding set of data. These conditions are what make machine learning such a compelling tool for investing, and at the same time they are what make it harder for humans to compete.
What other forms of artificial intelligence could provide an investment edge?
Another area where artificial intelligence can be applied to investing is the process of deep learning, as machine learning often faces a challenge in feature extraction. To solve this, deep learning was initially used for facial and speech recognition, and is based on how we, as humans, recognize these. The process uses neural networks, effectively connecting neurons by mimicking the design of the human brain. While still in the early stages, deep learning can be applied to financial markets in seeking to recognize patterns in the prices of securities.
How can advisors remain competitive as the investment landscape changes?
Rules-based systems have been used for decades and change is inherent in financial markets. Much of the logic used in these systems has also been consistent since being examined by the likes of Benjamin Graham. As such, investment value remains fundamentally determined by future cash flows. The key difference is in how these principles are applied, whereby offering clients access to new approaches can create meaningful value.
We have built an advanced AI-based investment platform so that advisors can continue to compete and grow as technology changes the industry. Because we built a flexible system that can be applied in different ways and different markets, we can develop different services and products for money manager clients focusing it to their specific investment areas as an overlay tool. Our strength is that our investment signals are applicable to any investor or advisor. We can essentially plug this system into managed accounts or ETFs and plug into any platform, if anyone is looking for an enterprise solution. Our first AI-based product is a mutual fund, Wavelength Interest Rate Neutral Fund (WAVLX), and now we are rolling out a robo-advisor, Longwave Advisor, our white-labeled, digital interface for advisors and their clients, that offers access to AI-driven return predictive signals and automated portfolio management so they aren’t left behind as others adapt.
Investment advisors remain a key component of the financial system and in this an engine for growth. Those who operate ahead of the curve and use new tools to deliver principled investment advice are positioned to make the greatest impact moving forward.
The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms. 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).