Even before the pandemic, 2020 was forecast to be a volatile year for financial markets. The coronavirus, Brexit and an oil price stand-off exacerbated that trend, producing six days when the Dow 30 skyrocketed more than 1,000 points and another three days when it slumped between 2,000 and 3,000 points.
Ups and downs of that sort can spark emotional buying and selling responses. Prompted by the thought of losing all our money, we exit our investments to cut out losses – often only to repent at leisure when markets recover. Between 1986 and 2015, for example, the US S&P returned 10.35 per cent annually, but the average investor only made 3.66 per cent per year, according to investor behaviour analysts Dalbar.
But what if an external fiscal partner prevented us from such ad hoc choices by keeping our investments in line with our more rational values? Historian and author Yuval Noah Harari described the concept in a seminal 2019 TED interview, suggesting that artificial intelligence could work as a benign second brain to stop us from acting against our preferred risk profiles. Data proves that algorithms make superior decisions to humans, Mr Harari explained – something that may not be beneficial in romance or politics, but is certainly welcome in finance.
While a full AI assistant remains just out of reach for now, a new class of asset management firms are putting the technology to use in robo-advisers. These digital platforms provide low-cost financial advice based on mathematical algorithms, building on the Nobel-prize-winning investment theories of behavioural economists such as Eugene Fama, Robert Shiller and Richard Thaler.
November saw the launch of FinaMaze, a hybrid human-AI robo asset manager that offers an alternative to the cold-calling financial salesmen, the likes of which are familiar to many UAE expats. Launched during the Fintech Abu Dhabi 2020 forum in November and regulated by Abu Dhabi Global Market, its USP lies in the way it customises profiles for investors from a possible choice of thousands of different options and then offers investment advice based on a combination of human experience and machine learning outcomes, says Mehdi El Amine Fichtali, founding partner and chief executive.
"There is a big gap in the wealth and asset management industry in the UAE and beyond when it comes to the category of the sub-$1-million investor. Swiss-style high-grade private banking exists with smart, highly qualified dedicated wealth managers, but only to serve those who invest millions," he tells The National.
“But when it comes to lower sizes of investments, most institutions cannot afford to offer customised products and try to sell standard products such as a ‘product of the week’, a sort of in-house, one-size-fits-all product with sometimes hefty hidden fees. We want to bridge that gap.”
Daname Kolani, FinaMaze’s chief research officer, explains how the solution works. Clients are asked a series of questions around risk tolerance, wealth and experience at the time of opening an account. The site’s in-house AI algorithm uses this information to determine each investor’s personality. Clients then pick one or more investment themes – FinaMaze calls it a SmartFolio – across regional and global financial markets.
Choices include equities in the US, Europe, India and other emerging countries, exchange-traded funds and futures, commodities, forex, real estate, sovereign bonds, and Sharia-compliant assets. A pre-selected range of diversified baskets is available to those without specific preferences.
“We do not push or sell products to our customers. It works the other way around. After the AI algorithm understands the investor’s personality and the investor has chosen a theme, the AI/ML algorithms build a personalised portfolio from scratch for each investor, with a personalised rebalancing strategy that ensures that, even through uncontrolled market conditions, it will remain aligned with the investor profile and benefit from AI/ML screening of sentiment analysis and market trends,” Mr Kolani says.
“Our AI/ML algorithms can build not 10, 100 or 1,000, but over 4,000 types of different profiles, instead of the four or six buckets that classical asset managers may propose.”
These profiles are recalibrated through sporadic questions at regular intervals into what Mr El Amine Fichtali calls a multi-dimensional fingerprint that evolves over time.
Not everything is left to the AI algorithm. FinaMaze has a team of human asset managers who pick the different instruments on the platform and set the boundaries within which the AI can allot weightages.
“The master of the decision is a human investment expert,” Mr Kolani says. “Unsupervised AI could lead to undesirable outcomes, so we use AI as a powerful, tactical heavy-lifting tool that complements the performance of human asset management experts who set up well thought-out strategies.”
If you’re investing in gold through FinaMaze’s precious metals folio, for example, asset managers will have fixed the weight of gold within that basket, say within 50 to 70 per cent. Even if the AI determines your allocation should lie outside these limits given your risk profile, it will not be able to assign any available funds below 50 per cent or above 70 per cent. Customers can make any changes they like or exit any positions without paying an exit fee once a day.
“AI helps us tame irrational biases based on fear and greed,” says Jaafar El Harouchi, chief technical officer at FinaMaze, an ex-Citibank alum who says he oversaw IT systems that still automate daily funding processes in excess of $100 billion. “The AI algorithm functions like a second brain. This multi-dimensional data-powered second brain shields investments from any rushed decisions that could be fuelled by excitement that don’t serve the investor’s best interests and objectives.”
Robo-advisers have become a force to reckon with partly because algorithms can crunch large and intricate datasets across different parameters faster and more precisely and at greater volumes than most people. In addition, they reach a historically underserved market of middle-class investors unable to access portfolio management services due to minimum investment requirements.
Some, such as Sarwa, which launched in the UAE in 2018, allow clients to open accounts with as little as $500. Others ask for higher minimum balances – at FinaMaze, the range is $5,000-$20,000, depending on the plan.
Worldwide, these digital financial planners were estimated to have more than $985bn in assets under management in 2020, according to the Statista Global Consumer Survey. An annual growth rate of 26 per cent will see market value cross $2.5 trillion by 2024. Within the Middle East and North Africa, pre-pandemic estimates by Indian market intelligence firm Netscribes put growth at 55 per cent annually, rising to a valuation of $3.8bn by 2023.
A handful of other players are now active in the UAE. The New York-headquartered Sharia-compliant digital investment adviser Wahed Invest has received a multimillion-dollar injection of finance from Dubai Cultiv8, a subsidiary of the Mohammed Bin Rashid Fund for SMEs. In March, the portfolio manager Wealthface launched a robo-indexing service for passive investors, while South-East Asian digital wealth manager StashAway launched operations from the Dubai International Financial Centre in November.
A major selling point for most are their low fees. FinaMaze, for example, charges an annual fee on investments made through the platform, but not on the cash balance. This does not exceed 0.85 per cent per year, says Mr El Amine Fichtali.
“We structurally run on low costs. We do not rent premium real estate, instead, we harness the power of AI, which does not sleep, does not forget, does not get emotional, calculates fast, never asks for a pay rise, lives in the relatively inexpensive cloud and delivers the best execution at a fraction of the cost,” he says. “Furthermore, we keep FinaMaze interests aligned with our investors as we do not receive any incentive, payment nor advantage from any third party or broker.”
The company has absorbed $1.9 million that Mr El Amine Fichtali raised from friends and family since he began work on the project in 2018. Going forward, FinaMaze hopes to attract a few thousand investors over the next year, beginning with qualified investors with experience of financial markets, before reaching out to newbie retail players.