Trust, truth and acceptance

“without trust, there is no cooperation;

without assuming others are telling the truth, there is no communication; and

without accepting people for what they present to the world, there is no foundation on which to build a relationship.”

Source: https://www.independent.co.uk/voices/inventing-anna-delvey-tinder-swindler-victims-scam-b2020185.html

Worth reflecting on

Regulatory compliance data availability will transform the financial services industry landscape and affect competitiveness

(Beyond merely “compliance” with PRIIPs , MiFID, IDD, IORP, UCITS, AIFMD)

Regulatory change and disclosure for investor protection will provide significant amounts of previously inaccessible data in the public domain for analysis. The regulators have initiated action in Oct’2017 to keep up within the data available with a formal request by the EC to the ESAs (link to pdf) to analyse and issue recurring reports on the cost and past performance of the main categories of retail investment, insurance and pension products. The ESAs are expected to initially tap data that is already available including privately managed databases, and tap into regulatory reporting in due course as required.

The aim of this initiative by the EC seems to be to foster retail investor participation in capital markets by providing an assessment of retail investment products in relation to i) their net return and ii) the impact of diverse fees and charges.

The formal request document articulates three specific parts of the report expected (analysis, data challenges and recommendations to improve methodology), and a baseline analysis of costs and past performance is expected to include the following:
– Net return and impact of costs, including comparison with relevant indexes or indicators (benchmarks?) where possible
– All fees, especially the main categories of PRIIPs costs, such as management fees, transaction costs, performance fees, initial and exit charges, etc.
– Disparities in fees across distribution channels – this is a key outcome
– Inflation adjustments

For this analysis, costs and past performance data is expected to be sliced by
– Member state
– Comparable indicators at a more granular level (such as the PRIIPs cost sub-categories)
– Product sub-categories i.e. groups of products with broadly homogeneous characteristics
– Time periods, such as the last 1/3/7/10 years

As an industry participant, the question is whether one:
1) has a handle on their past performance and cost data (including costs by distribution channel)
2) is aware of the competitive implications and is able to articulate their differentiation (by cost or by benefits) effectively to the customer
3) is able to anticipate and mitigate the risk of adverse flows due to higher customer bargaining power through the additional disclosure (including additional liquidity risk and performance risk due to potentially higher volatility of flows)
4) is able to use regulatory requirements to analyse their existing operating model and support business decisions, such as strategic choices for distribution or for managing operations/delivery of services (including the provision of core services such as portfolio management and investment advice, and internal sub-delegations)
5) is able to adapt their internal processes to align product design and governance with decisions on factors that are linked to external comparability (e.g. recommended holding period, etc.)

Do you work with an asset manager or a provider or distributor of retail investment, insurance and pension products?

If yes, has your organisation commissioned a strategic analysis of your product portfolio? How ready is your organisation for the competitive impact of data availability? Will your team adopt a wait-and-watch approach or are you pro-actively assessing your product inventory and distribution costs ahead of the year end and preparing in anticipation of higher volatility in flows?

It’s perhaps best to be as ready and prepared as one can be in the evolving regulatory environment, as failing to plan is planning to fail.

AI and focusing on the key messages

Tags

,

As everyone from Nature to BBC Tech Tent throw the spotlight on the new self taught AI AlphaGo Zero, what perhaps seems key to me as an observer from a weekend read of public information is that:

1) Thinking matters: The algorithm itself seems to be the key compared to data or computing power i.e. once you know the rules of the game, it’s probably how you think that matters more than how much you know and how much thinking you can get done

2) The ability to make intuitive predictions matters: Expert opinions seem to have an evolutionary edge over comprehensive deductive logic i.e. the ability to form intuitive predictions accurately based on the rules of the game and the situation at hand matters much more than one might expect

[Update: Yes, AlphaGo Zero did not use any human input unlike the AlphaGo that beat Lee Sedol, so “expert opinion” was not as useful, right?

Well, I’m not referring to data about “expert opinion” (ie data about human games played), but to the method of thinking itself i.e. the choice of algorithm. I was referring to the fact that sometimes we humans do not have the knowledge, time, or resources to thoroughly analyse all possible courses of action. At such times, we make an expert judgement based on “intuition”. Some of these judgements are wrong, and we learn from our mistakes. Finally, learners are encouraged to try to intuitively assess/predict and learn from their own mistakes, rather than have someone teach at every step (although the availability of a teacher makes every step less risky, but the ability to learn on one’s own takes longer to develop). 

Hence, the act of learning is better solved by the activity of “learning to predict” (i.e. the ability to form intuitive predictions or expert opinions) rather than by acquiring lots of knowledge about who decided what (i.e. data about what each expert did). 

End of Update]

3) AI is yet to self-learn complex rules: The really powerful AGI (one that self learns the rules and masters its behaviour) is probably yet to be developed i.e. one that combines:

– something like AlphaGo Zero’s ability to learn complex behaviour on its own after it has been provided the rules of the game, and

– something like the original Q-learning algorithm that figures out the rules of a game and learns to play it well, albeit for less complex games

While this sounds easy to define, the dimensional implications of doing might require significantly more learning time or thinking differently e.g. perhaps building on metadata about learning, such as what you remember about how you changed your understanding before. When accomplished, such a powerful AI agent might end up teaching humans the art (or now science) of deciphering rules and then working them to your advantage – similar to how AlphaGo Zero already seems to have creatively imagined better ways of playing Go that were not known before to human experts (talk from Prof. David Silver at DeepMind)

4) AI is yet to learn to act in a multidimensional and evolving reality: Even an AI agent that can learn complex rules on its own will need to confront the boundaries of changing rules of the game, changing games e.g. changing behaviours (and intentions) of agents, and changing levers (i.e. ways of translating the agent’s thinking into actions) across different dimensions instantly if it needs to be effective – all which the human mind seems amazingly at ease to perform naturally in familiar contexts. Surely, there’s a lot of progress needed, but technological development seems to happen at an exponential rate (interesting TED talk on this) and a breakthrough probably may not be too far away.

5) Governance and risk frameworks need to keep up at a faster pace: AI is definitely the space to watch, as the use-cases of cutting edge technology can go far beyond perhaps protein folding (mentioned by Nature) and probably pathogen/cancer research, and I wonder if effective governance and risk management frameworks for AI can keep up with the pace at which this technology seems to evolve. Or can the AI agent itself be used to support the definition and management of risks, and can that be done effectively?

Multiple efforts to spur research on AI governance have been initiated worldwide in recent years, and the effectiveness of risk frameworks and the 1st and 2nd lines of defense might probably be reassessed now that an AI agent can seemingly teach its human expert counterparts.

Note: Disclaimer: This is NOT research or advice. This is merely a blog post reflecting my individual opinions viewed through my cognitive biases.

To share your comments, please message me directly via my Linkedin profile

Asset Management industry themes

For all the noise, disruption can be a painful process, and the asset management industry is facing its fair share of disruptive change. Here are some thoughts :

1.      Low yields, increasing inter-connectedness and systemic risk are driving complexity in investment decisions: With extended low rates and quantitative easing, potential systemic risks of deflation and a liquidity trap, political issues across the Middle East and south east Asia (and now Brexit and political change across the pond), ageing global demographics and the end of a commodity supercycle, it seems that the drivers of asset return correlations are changing (greater need for multi-factor models and non-linearity).

2.      Greater focus on risk management supported by technology: Monitoring, measurement and control of risks has become highly advanced with technology driven early warning systems based on big data analytics, sophisticated models for market price and tail risks, credit risk and XVA models, collateral optimisation, etc. The inherent systemic risk of passive strategies has also consistently increased due to flows and automated tracking.

3.      Keeping up with regulatory updates is a challenge, especially across borders: Regulation has significantly and consistently increased on both sides of the Atlantic since the global financial crisis. Cross-country operations or transactions face greater risk of breaches breaches due to changing regulation. Furthermore, compliance is probably one function that cannot be completely outsourced, especially oversight and regulator engagement roles.

4.      Focus on cost reduction driven by competition, disclosure and governance: With low returns, the focus on costs is significantly high. Passive management fees face a race to the bottom driven by automation, and active managers have to justify management and performance based fees against dwindling sources of alpha and their reducing sustainability. At the same time, regulation has been driving greater granularity of disclosure, providing customers comparable costs across managers. The focus on governance and treating customers fairly is driving more rigorous due diligence assessments by asset allocators to justify manager selection and continuance.

5.      Automation/AI is disrupting processes and operating models: Conventional management fees are being seriously challenged by basic automation and robo-advisors, let alone the application of advanced AI such as convolutional neural nets and deep belief nets, which are yet to conquer their growth pangs of parallel computing and processing power needs at an industrial scale. Apart from automating processes, applied AGI can potentially develop abilities to significantly alter the playing field.

6.      Outsourcing, off-shoring and crowd-sourcing is redesigning the playing field: Location strategy projects to outsource or offshore roles are extending beyond the traditional domains of trade support and fund accounting to functions such as performance measurement and client reporting. It’s interesting to note the expansion of outsourcing on the investment side through platforms such as quantopian and quantconnect to crowdsource algorithmic strategies.

That’s enough from me. I’m interested to know what you think will emerge as the single strongest disruptive change driver to the global wealth and asset management industry over the next 3-5 years?

Disclaimer: This is NOT research or advice. This is merely a blog post reflecting my individual opinions viewed through my cognitive biases.