Amazon recently introduced the Echo Look, which lets you use the digital assistant Alexa to answer questions, including a style guide, where you can get suggestions on what looks better on you.

 

Theoretically, an individual can achieve a similar outcome by taking several pictures, doing a google search on a laptop, and then calling up friends.

 

These are both valid approaches toward solving the same problem. Both are technologically complex and have brilliant mathematicians, engineers, and talented, experienced professionals behind them. The differences lie in the interface and objective.

 

Alexa uses technology to simplify complexity and address the question being asked. On the other hand, the traditional approach provides several tools leaving it to the consumer to figure out how they should use the information.

 

The institutional investor’s portfolio faces a similar issue – a bunch of tools (or managers with different approaches) – perfectly rational because that’s how the investment industry has evolved, with its fragmented network of asset managers, consultants and service providers.

 

But it doesn’t have to be this way.

 

What would an Alexa of investing look like?

In principle, an Alexa of investing would need to deliver on five concepts that lie at the core of an investor’s needs.

• Outcome oriented (goals, liability, risk tolerance)
• Conflict -free solutions (what a client needs, not what costs the most)
• Data driven / evidence based decisions (why is it a good idea, where can it go wrong, is it repeatable)
• Behavior aware (a 10 year plan doesn’t work if the investor pulls out at the first drawdown)
• Transparent (investors are smart – they will understand if you explain it)

 

Focusing on these can help simplify processes and eliminate what may be complex but not relevant.

 

Why are institutional investors not finding their Alexa?

 

There are two main reasons why we haven’t yet seen an Alexa for institutional investors.

1. Institutional investors are potentially asking the wrong questions

Similar to transportation back at the turn of the 20th century, to paraphrase Henry Ford, instead of asking for the automobile, investors have been asking consultants and asset managers to provide better horse drawn carriages. Traditional consultants are responding by rebranding, or asset managers are trying to come up with multiple forms of smart beta or making their investment processes more complex – all logical responses to the question “what can you do better for me”.

 

The investment industry can learn from a growing group of allocators that are asking the right questions and respond accordingly. For example, in 2014, David Slifka of the YMCA Retirement Fund made an excellent presentation on how institutional investors can “earn more by doing less”, making the point that controlling behavioral impulses and focusing on signals not noise can create more value. I would recommend you watch his video here.

 

2. Investment industry is slow to change

Legacy systems, relationships, and a “silo” driven mentality take time to change. Unlike the consumer world, where incumbents face the threat of disruption by an upstart startup, institutional investors place great value of brand name and track record. Brands that have built themselves up over the last thirty or fifty or even a hundred years might find it hard to overcome legacy inertia, or are afraid to disrupt something that has worked well for them over the years.

 

But we don’t need the entire fragmented industry to change right away. Better solutions can be created with long term investors collaborating with those asset managers and consultants that have the willingness and ability to change.

 

Further reading:

• David Slifka at AI-CIO’s Summit of Dangerous Ideas