AI-powered robo advisor takes aim at the richest clients

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It’s another step in the march toward advice that erodes investors’ needs for human help: A robo advisor focused on serving the high-net-worth client, powered by artificial intelligence and designed to automate their specific tax management concerns.

Meeting the complicated needs of the wealthy requires a deep knowledge of tax rules and regulations says Hedgeable CEO Mike Kane. "Technology and AI systems can interpret and learn from these rules better than humans can, without our emotional biases."

Doubling down on its embrace of Asian themes, Hedgeable's newest offering in its robo platform is a feature called 'Tax Samurai,' run by an AI bot called 'Katana.'

For 30 basis points, it will work for client accounts with a minimum of $1 million to analyze their securities, aggregate all of their financial data, create tax efficient transfers, apply automated downside protection on any current holdings, and perform tax efficient trading and tax-loss harvesting.

The tax management AI is powered by a set of machine-learning algorithms, Kane says. It pulls data from more than 20,000 financial accounts and live real estate data.

"The more data we get from users, the more Katana learns and adapts. It's very similar to how a HNW advisor would adapt to seeing similar tax circumstances among clients, but Katana can make decisions faster, and without emotional biases," Kane says.

The technology differs from other AI-enhanced wealth management tools, adds Kane, whose platform has started offering advanced features for its clients, such as providing loans as an asset class.

"[Other] AI is built for a robo advisor client, [but] Hedgeable's AI is built for a private banking client," he says, adding that Katana's goal is to provide live financial planning and alerts, estate and trust services, and eventually full family office and legal functionality.

The non-digital wealth management firm should be put on notice, he says.

"What we have learned over the past eight years is that financial services firms lack vision, more than any other industry by a mile," Kane says. "There is no Steve Jobs in financial services. These firms only see what is in front of their face."

Despite Kane's outspoken claims about wealth management, it would be a mistake to dismiss Hedgeable's latest offering, says David Weiss, senior analyst at Aite Group.

"This is a new take," Weiss says. "It's very interesting. You really can't gauge desire for this based solely on dollars right now. This may be particularly appealing to a HNW investor. It is totally optimized for that segment when it comes to taxes."

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Will Trout, senior analyst with Celent's wealth management practice, doesn't dispute AI will further entrench itself into the financial industry.

"We are at the cusp of tremendous expansion of learning capacity in machine intelligence, driven by cloud computing, APIs and computing horsepower," Trout says. "Wall Street firms are already using it to automate report writing and replace their analysts. Soon they will replace their qualitative research people who do the fund selection. This will be completely automated."

But while firms may be finding various ways to automate their work with AI, HNW clients aren't rushing to dump their advisors. "It speaks to why Hedgeable, despite being a leader in product innovation, has basically gotten zero traction in terms of AUM," Trout says.

According to Hedgeable's latest filing with the SEC, it manages $50 million and 1,100 accounts.

Kane is ready to acknowledge these critiques.

"That's a fair point," he says. "Unfortunately capital raising for early-stage companies — especially in fintech — has not much to do with innovation and more to do with personal connections, and most of the AUM traction from others has come from pouring money into the market."

Weiss notes that Hedgeable lists 14 employees on its LinkedIn profile.

"The more volatility we are in and expect a turn, the more you want human supervision," Weiss says. "They're going to have to hire a lot more people."

He adds that to add appeal for HNW clients, the robo will have to expand its offerings beyond ETFs into non equity-based products. "The more HNW you go, the more sophisticated you have to be," Weiss says.

Still, client wariness toward digital advice will diminish with their increased use of AI tech in other applications, Kane suggests.

"Would I rather have Siri give me directions, based on millions of instantaneous big data calculations and live traffic patterns, or a random person on the side of the road?"

"Every single thing a human advisor or private bank does can be replicated by AI and technology," he continues. "We are not there yet, because there were so many other immediate things to tackle, but over time the advisor will become obsolete. Advisors will just become employees of digital advice firms, helping to architect the rules of these AI systems."

Trout points out that machines are still very dependent on humans. According to a new report from Celent regarding AI and wealth management: "Machines are good at things that humans are not (e.g., processing vast amounts of data) and fall short in areas where humans excel (e.g., humor, empathy).”

But firms are looking to the technology to get more done, as the future of the industry is in serving scale. “Overhead costs are just not sustainable for wealth management firms,” Trout says. “The costs of delivery are just too high, so robo advisors and AI are ways to scale capabilities.”

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To that point, Kane sees AI rapidly spreading across wealth management, as the technology has already found a footing in the banking industry.

"[Clients] may say they want to deal with advisors now, not because they need to talk to someone on the phone, but because the technology to improve on the human interaction has not yet been developed. But it is coming, and coming fast."

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Robo advisors Automated investing Investment technology Tax planning High net worth Technology