More than two-thirds of UK investors are comfortable with artificial intelligence (AI) being used in investment decision making, according to a research survey by Avaloq. 

 Only 15% of respondents said they would be comfortable with an entirely AI-driven analysis of their portfolio. But more than half were happy with a blended approach that combined AI and human involvement.  

 “Our research reveals that investors are more open to using AI in the investment process but still want the human touch, indicating natural opportunities for wealth managers to integrate AI into their offerings in a way that augments the service they provide,” Gery Zollinger, head of data science at Avaloq, said.   

A separate study by CoreData found that 32% of UK financial advisers think AI will “revolutionise” the sector. CoreData found that this figure increased to 40% for advisers focused on high-net-worth clients.  

Lingering concerns

It is no surprise then that three in ten advice firms say they will be “competitively disadvantaged” if they don’t embrace the technology.  

 There remains lingering concerns, however. 42% of advisers believe that AI raises serious risks for advice firms in terms of client confidentiality and data protection. Over a third do not trust the information produced.

 An emerging technology, known as explainable AI, may help quell these fears. 

Explainable models?

 Explainable AI, or XAI, allows users to comprehend and trust the results and output created by machine learning algorithms. The technology stands in contrast to the ‘black box’ technology which is currently the standard. 

 ‘Black box’ AI offers no transparency. Not even the engineers or data scientists who create the algorithm can understand or explain what exactly is happening inside or how the AI arrived at a specific result.  

 In a world as highly regulated as financial services, transparency is essential. XAI could go a long way in building trust in the use of AI in the industry. 

The so-called ‘Great Wealth Transfer’ is looming. Over the next thirty years, baby boomers are set to transfer a total of £5.5 trillion to the younger generation, according to research by the Kings Court Trust and Centre for Economics and Business Research. 

However, the heirs of this wealth transfer won’t necessarily be sticking with their parents’ advisors. In fact, research by Cerulli has shown that just one in five ‘affluent’ investors use the same advisor as their parents.  

Difference in risk appetite

The younger generation also invest differently to their parents. 

As of late 2022, 21% of affluent millennials held some cryptocurrency. This compares with 22% of Gen Xers and just 3.6% of baby boomers. Meanwhile, more than half of Gen Z reported owning this asset class.  

Younger investors were also far more likely to invest in peer-to-peer lending platforms or crowdfunding. With just under 10% of millennials willing to invest in these ways, compared to just 1% of baby boomers. 

Michelmores, who ran the study into this generation gap, noted that though these numbers weren’t necessarily high, they showed that younger generations were more willing to take a risk with their investments. 

But risk appetite wasn’t the only thing that set the younger generation apart.

Concern for ethical investing

According to the study, 22% of millennials see ESG as a primary consideration when making an investment decision. This compares with just 6% of baby boomers. Strikingly, over 40% of the older generation reported that “social and environmental impact has never been a consideration” in their investment decisions. 

A separate report from the Charities Aid Foundation found that demand for help with their charitable giving was much greater among millionaires aged between 18 and 34. 57% of this age group wanted help with their charitable giving, compared to 49% of those aged 35 to 54 and just 34% among those aged 55 and older.  

With such stark differences, it’s no wonder that one in three financial advisers cited client longevity or an aging client base as their biggest concern.

Aaron Gibbs, personal finance commentator at Charles Stanley, said firms will need to adapt their proposition or risk getting “left behind” by the younger generation. 

Deloitte warned, however, that trying to be “everything to everyone” is unlikely to yield good results. Instead, the professional services firm suggests “fine-tuning” product, distribution, and pricing strategies to fully meet customer needs. 

We’d like to take the opportunity to formally welcome the newest members of the ITL team. Trevor Edwards, Vimal Lalla, and Shamsul Abdin have all recently joined our tax-focused subsidiary, FSL.

We look forward to seeing what the three will achieve as they continue their journey here and support our vision to accelerate the evolution of wealth management 4.0.

Trevor Edwards, Agile Coach

“I joined FSL in November 2023 as Agile Coach, having carried out the same role for the previous six months as an external consultant. What made me want to join was the people here – a great team, really welcoming and supportive and keen to embrace changes to their way of working and to give the best service to our customers.” Prior to joining FSL, Trevor was Principal Assurance Consultant at Acutest.

Vimal Lalla, Senior Software Developer

“Having joined FSL in October 2023 as a Senior Software Developer, I was met by a very supportive and welcoming team. During this short space of time, I have learnt and worked on new technologies. I’m looking forward to adding value and contributing in FSL’s future goals.” Prior to joining FSL, Vimal was Specialist Developer at the JSE.

Shamsul Abdin, Corporate Actions Team Lead

“I’ve been with the company for 3 months and really enjoying it. Super friendly work environment helped me settle in lot quicker. Looking forward to contributing as well as learning as the company continues to expand.” Prior to joining FSL, Shamsul was Senior Corporate Action Analyst at HSBC.

Last week, the UK Treasury confirmed that it will regulate environmental, social and governance (ESG) rating providers. The announcement followed a year-long consultation which began in the wake of 2023’s Spring Budget.  

The finance ministry said a new regulatory regime would improve “clarity and trust” in the ratings.  

The decision was welcomed by the Financial Conduct Authority who said last week it would work to develop a “proportionate and effective” regime focused on “transparency”. 

What are ESG ratings? 

ESG ratings measure a company’s exposure to environmental, social and governance risks. These can include things like its energy efficiency, worker safety, and board diversity. They are becoming increasingly influential, with the government projecting that $33.9 trillion of global assets under management will consider ESG factors within three years.  

Research has also shown that changes in ESG rating can lead to responses in financial markets and firm behaviour. However, rating providers’ methodologies and objectives have often been considered opaque and inconsistent. 

Why regulate ratings providers? 

In the consultation paper released last year, the Treasury said it saw a “clear benefit” from improving the transparency of methodologies, governance and processes of ESG ratings providers. 

“Better ESG ratings would benefit consumers, who are often the end-users of investment products that increasingly rely on ESG ratings. As one of the first jurisdictions planning to introduce such regulation, this provides an opportunity for international leaderships by the UK,” it said. 

When will we see the new regulation? 

Currently, there is no specific timeline for this ESG rating regulation. However, the Treasury did confirm that a full response consultation response and legislative steps are due “this year.” That being said, a general election in the UK is also expected this year, which may impact the timing of this new regulatory regime.