The wealth market in the US, UK, and Canada; expectations and benefits of using big data analytics; the promise of the blockchain, and the anticipated future of wealth management.> More details
WealthTech Insights #19 with Boris Khazin: Blockchain and Algorithmic Future
Boris started his career at Bloomberg as a municipal analyst and then moved over to their derivatives department Later, at S&P he was responsible for multiple indices and the creation of the Hong Kong and Singapore Index as well as started work on rules to create the alternative investment index. At Citibank, Boris worked under Sallie Krawcheck while she was CFO of Citigroup. After that, he ended up at TD Ameritrade as a senior analyst and promoted to Investment Oversight Officer for the $5.5 Billion Amerivest Product. Today, Boris is a CEO at Algo-Lead, which empowers non-accredited clients with strategies that have only been available in the past to accredit individuals.
With Boris, I discussed trends and prospects of the wealth management industry, the promise of blockchain, and how the industry is being changed by technology percolation. Boris also shared his vision of an innovative financial company.
Will Humans be Totally Replaced?
Financial software platforms that provide online advice on investments (so-called robo-advisors) are becoming more and more popular. However, Boris doesn’t recognize a “robo-advisor of the future” in today’s market leaders—Betterment, Wealthfront, and Vanguard.
“Currently, a robo-advisor means that you’re not talking to an individual, you’re just answering a set of questions, filling out forms online, sending forms through PDFs. It just takes out the interaction between you and a financial advisor to do the onboarding, assess your risk characteristics, and find out what you want. Then the underlying selection process for your ETFs or mutual funds and stocks, though it might be done with an algorithm, still requires a chief investment officer to certify that everything is done correctly.”
Boris feels that Algo-Lead’s platform goes further, although not significantly yet. “The difference with us is that we don’t utilize the standard ETF allocations. We have a full built-out platform with Statistical Arbitrage that has been developed over the last 30 years in line with technological advancements and new algorithms development by Alex Teichberg, the founding member of Algo-Lead.”
The reliable algorithm they use doesn’t require validation or confirmation that the asset class selection is appropriate. “It’s not reinventing the wheel. The questionnaires and requirements are standardized across the United States. There’s no point trying to make it different.”
Boris admits, “We are a few years out but we’re getting to a point where most of the financial advisor aspects will be replaced by some sort of robo function, and the only real individuals will be people who are either developing the strategies and algorithms or writing the programs to do all the work.”
However, Boris doubts that human will be totally replaced by robots. “Humans are social beings, we’ll still need humans. If a person is worried about their performance, worried about somebody, they feel more comfortable if a human is on the other side and is answering their questions than a robot. But are you really going to be able to tell whether you’re on with a human or a robot?”
From Machine Learning to Blockchain
Today, more and more things are moving online, which simplifies our lives and saves significant time. Boris agrees that with artificial intelligence (AI) and machine learning the industry is moving into an algorithmic selection process that increases the frequency of trading and leads to phenomenal results. Blockchain development is going to reduce the whole onboarding process from days to minutes because requests for information and all exchanges will be done instantaneously.
Boris has high expectations regarding how technology will impact our lives. “Eventually, robo-advisors are really going to be robo. We’re going to have AI making decisions for the investor that are in their best interest. That’s good for the system because we take away that human desire to go around or make more money. A computer will follow the rules as they are.”
Boris considers himself to be one of the few who really understands how technology can improve financial services and make the industry work better. He believes that since technology’s moving forward, financial advisors will be replaced.
“If you develop the software with all the rules and regulations, it will act in a fiduciary manner. For a computer, it’s a lot easier to do that than it is for a human being, whereas human beings are flawed. And technology will make it cheaper and simpler for everybody to do what they’re doing without human advisors.”
Every new generation is utilizing technology to a greater extent. Boris believes that in 10+ years, as money is going to transfer to today’s children, banks, financial institutions, and financial advisors are going to need fewer humans. “Demand to speak with even a human customer service representative is going to drop to close to zero because the computer with AI and language learning is going to be able to answer 99.9% of all of your questions.”
Correct Questions for Appropriate Risk Assessment
Boris considers people to be very risk-averse and conservative, and whenever they fill out a questionnaire, they fill out what they think is appropriate for the general individual for their income level, how much they have gained, and their net worth.
To conduct an appropriate risk assessment, the questionnaire should be built so that questions are associated with real-life risk situations. To illustrate this, Boris gives the following example:
“If you ask somebody, ‘would you be willing to flip a coin and win $200 if you get heads but lose $50 if you get tails?’ they will say ‘yeah, I am willing to do that.’ But if you ask them ‘would you be willing to flip a coin and win $200,000 if you get heads and lose $50,000 if you get tails, and you can only flip it once,’ a lot fewer people are willing to do that, even though the characteristics of the question are exactly the same.”
Transition to Algorithmic Trading
We discussed which WealthTech companies may be considered innovators in the industry. For Boris, the standard argument to prove that a financial company is innovative is that they make money, move forward, and survive. He named the following two companies:
“Now Goldman is more for the high-net-worth individuals (HNWI). But money trickles down. People leave Goldman, they start their own firms. And eventually, Goldman will move to retail. I always keep an eye on Goldman for the institutional services.”
“Whereas BlackRock has been very innovative, it has seen the ETF, it has been developing its own robo-advisory and everything for the retail market.”
In the future, Boris anticipates a transition to algorithmic trading. “The future is in more algorithmic computer decisions, in more blockchain, instantaneous communications, and onboarding. The advisor tells you information and you already have that information somewhere on the blockchain and it’s just retransmitted. So everything will be very quick, significantly simplified, and preferably, with the algorithms, perform better. Retail individuals will get access to the type of performance that only is available to HNWI right now.”
Boris is confident that the strategies that are utilized for hedge funds are going to come down to retail due to the limited number of HNWI. “If they want to grow assets, they really have to open up strategies to retail. A really good example of that is AQR. They started with hedge funds and now they have multiple mutual funds and they are utilizing hedge-fund-like strategies for retail.”
Interviewed by Vasyl Soloshchuk, CEO and co-owner at INSART, FinTech & Java engineering company. Vasyl is also the author of the WealthTech Club, which conducts research into Fortune and Startup Robo-advisor and Wealth Management companies in terms of the technology ecosystem.