This article first appeared in The Edge Financial Daily on May 2, 2018

KUALA LUMPUR: Disruptive technology has upended traditional practices in the retail banking and insurance sectors, so it’s only a matter of time before investment banks are affected too. As robo-advisers and algorithm-based decision-making proliferate, will human financial analysts cease to be relevant?

According to Nick Pollard, CFA Institute managing director for Asia-Pacific, the rise of machine-managed investing is an inevitable trend.

“It doesn’t necessarily mean that we will need [fewer] human analysts, but the analysts of the future will require different skills,” he said.

This will include a shift away from quantitative data crunching towards a growing demand for soft skills in providing financial advice.

“I was in India having lunch with 12 chief executive officers of knowledge process outsourcing companies, who shared that the skill set has moved on from doing the math to understanding the math and being able to articulate what the numbers are telling you,” he said.

Therefore, while analysts must still be technically competent, there will be an increasing need for them to sell ideas, build relationships and present compelling narratives, Pollard said.

This is especially true as younger investors are becoming more receptive to technological solutions. A recent survey by the CFA Institute showed that while a majority of investors continue to prefer hearing advice from a human being rather than a machine, the younger generation (70%) is most likely to trust an adviser due to the increased use of technology.

The study also showed that younger investors (67%) are also prioritising technology platforms and tools in the future to execute their investment strategies.

“It’s important for people to be thinking about that, because if you base your product delivery, your branding and the values you have on yesterday’s customer, you’re not going to be in tune with tomorrow’s customer,” Pollard said.

However, it doesn’t seem as though most banks are currently equipped enough to offer a human touch that can complement the growing capability of artificial intelligence (AI) in processing data.

“We asked the industry through the survey: How prepared are you now and how easy is it to access these skills? In both cases they said, ‘We’re not prepared enough.’ Finding people with these skill sets is difficult,” Pollard said.

This does not mean that managers and leaders of investment banks are unaware of the changing landscape. Fresh from a lunch meeting organised by the Securities Industry Development Corp that brought together local industry leaders, Pollard shared with The Edge Financial Daily that it is clear from the full attendance and questions raised that these subjects are being discussed.

“It was very evident at the lunch meeting that there is a willingness to understand the issue and to contribute funds towards fixing it,” he said.

However, cost is still a major consideration for most players when it comes to implementing new technological solutions. Pollard said last year, a majority of wealth management businesses in Singapore struggled to turn a profit due to heavy investments in back-end human expertise, in order to ensure they remained compliant in the face of changing regulations.

In fact, wealth management firms around the world were struggling to stay afloat as margins remained compressed by pressures of low-cost robo-advisory competitors and increasing regulatory costs, Financial Times wrote in a report last year.

“From a cost-income perspective, firms are having to invest a lot more in costs than they are generating income,” he said.

“One way of managing those costs is to look at how your existing processes can be streamlined using technology,” said Pollard. “Is there a way for compliance checking to be automated? Would that be more secure and, in the long term, more cost-effective?”

Asia-Pacific: younger and more agile

Interestingly, investors and institutions in the Asia-Pacific region appear more comfortable using fintech than their global peers, both as providers of services as well as using fintech to help make financial decisions.

This could be because financial institutions in Asia are much younger on average than their bigger and older counterparts in developed markets. Pollard noted  that large financial institutions are weighed down by legacy systems “that are almost impossible to change” due to the costs and scale required to do so.

“That’s an advantage in this part of the world. If your underlying system is relatively young, it’s easier to adapt to new technologies as they come along,” he said.

This could also explain the proliferation of fintech start-ups, including those that were not previously involved in the traditional banking space. Alipay, for example, could be considered the world’s largest bank without being a bank itself, Pollard said.

While he doesn’t see anything as game-changing on the investment banking landscape, he stressed that this shouldn’t lull leaders into being complacent.

“In fact, we should be looking for it ourselves. The smart way of thinking about the future is not to put your head in the sand but to see how you can adopt what’s out there to what your organisation is trying to achieve,” Pollard said.

Increasing partnerships between banks and non-bank tech firms may therefore be the way forward. Considering the budgetary constraints of smaller start-ups, he highlighted that new ideas in the market are likely to get increasingly incubated by bigger brands.

“If this incubation is successful and there’s a way of incorporating those ideas within the platforms [of these bigger players], it’s likely that they’ll do so,” he said.

Equipping financial analysts for the future

The CFA Institute itself is also actively evolving its curriculum to equip financial analysts for the future, changing some 5% to 10% of its syllabus annually to keep it relevant by accounting for changes in real-world practices.

“We have what we call practice analysts, who are volunteers that take a look at our curriculum from year to year and test it against real roles in the marketplace,” said Pollard.

“If they think that things are no longer done like that, or that it’s irrelevant, or that things are missing, it’s their job to tell us so we can have a dynamic editing processing of the curriculum,” he added.

As interest in financial activities grows in developing economies, Pollard also remarked that “the pendulum has swung from West to East” in terms of interest in the qualifications the CFA Institute offers.

“About 55% of our global candidates are based in the Asia-Pacific,” he said, adding that although highly populated China and India are driving volumes, all regional markets are recording an increase in interest in the programme, including Malaysia.

This could be explained, Pollard said, by the growing desire by Asian economies to participate in a global market, where having internationally recognised credentials can help instil trust in prospective foreign partners.

“[Growth in demand for the CFA charter] has slowed down for sure in the developed world, not because the market is saturated but because most practitioners in the industry have already taken it. Here in the Asia-Pacific, you have booming economies and a high level of ambition and confidence about the future, which is different from other regions,” he said.

One of CFA Institute’s initiatives to develop talent is an annual global competition titled the “CFA Institute Research Challenge”, which sees teams of university students present a stock recommendation to a panel of judges comprising leaders in the financial research and analysis industry.

“Part of the challenge is learning and practising some of those softer skills, such as how to present ideas, how to listen and how to answer questions in a way that is compelling to the audience. It’s the perfect opportunity for these students to practise not only their analytical skills, but also their powers of persuasion, articulation and presentation,” Pollard said.

This year’s research challenge saw a Malaysian team of students from Sunway University becoming regional champion.