Who should you choose to manage your money: an experienced portfolio manager or a computer program powered by artificial intelligence? by Gordon Pape
Who should you choose to manage your money: an experienced portfolio manager or a computer program powered by artificial intelligence?
Most Canadians are choosing the human manager, but they may be on the wrong track. I decided to dig into the pros and cons of money managers vs. robo-advisors in the most recent edition of our popular investing newsletter, Internet Wealth Builder.
Here’s what I uncovered:
Noah Solomon, chief investment officer of Toronto-based Outcome Metric Asset Management LP, is an example of an AI enthusiast who believes the time has come for a disruptive shift in the way personal wealth is managed in this country. He regards most money managers as closet indexers, who charge high fees for what is effectively index investing.
"Machines have the ability to induct, process, and analyze huge quantities of historical and current data and information," he says. "What they don't have are emotions and cognitive biases that can lead to suboptimal investment decisions. A machine doesn't get in a bad mood or get up on the wrong side of the bed in the morning…it has no emotions."
To prove his point, he developed a computer program to choose stocks for his company's Canadian Equity Income Fund based on two core metrics: dividend yield and volatility.
How has the fund performed? Since inception in October 2018 to April 30, it has outperformed the TSX and the TSX Dividend Aristocrats Index, with lower volatility.
This year, which so far has been a rough one for the markets, the fund is up 8.2% compared to a loss of 1.3% for the S&P/TSX Composite.
Sounds good, I wrote, but what's the catch? Money. This is a fund for wealthy investors only. The buy-in is a minimum of $500,000. So, what does he recommend for small investors?
Mr. Solomon likes robo-advisors. They don't choose individual stocks (they use ETFs). But they use cold, precise algorithms to select appropriate asset allocations according to an investor's goals, risk tolerance, and time horizon.
So, are we on the verge of an AI revolution in the wealth management industry? Probably not, he says. "There are too many vested interests that are content with the status quo."
Perhaps. But if more companies experiment with AI and produce superior results, the future may be closer than anyone expects.
If you’re not ready for this brave new world, you can join thousands of other Canadians who have come to rely on the Building Wealth team of investing experts to help grow their portfolios. Together, we have 110+ years of experience and an enviable track record of success – even when compared to algorithms.