The Evolution of Artificial Intelligence in the Creation of Stock Portfolios

By Chris Duderstadt

December 10, 2021

The Evolution of Artificial Intelligence in the Creation of Stock Portfolios

Key Points – The Evolution of Artificial Intelligence in the Creation of Stock Portfolios

  • Defining Artificial Intelligence
  • How Did We Get to Artificial Intelligence?
  • From Quotrons to IBM’s Watson
  • Vise’s Vision: The Evolution of Artificial Intelligence in Portfolio Continues
  • AI Beyond Asset Management
  • The Outlook on the Future in the Evolution of Artificial Intelligence in Portfolios
  • 8 Minutes to Read

Defining Artificial Intelligence

Even when it’s not obvious, artificial intelligence plays a huge role in our lives. Whether you’re asking questions of Siri, Alexa, or Google Assistant, or worse, seeking advice on social media and viewing personalized ads, artificial intelligence (AI) provides instant information through computer-based algorithms that mimic human intelligence. Just like many other aspects of technology, AI has come a long way since computer scientist and mathematician John McCarthy coined the term in 1955. 

Bud Kasper and his son, Matt Kasper, have the background and skill acquired from years of experience in portfolio creation. However, their wealth management expertise today includes a unique perspective on stock selection through the evolution of artificial intelligence, which is shaping the financial world.

Before we get Bud and Matt’s thoughts on how artificial intelligence can impact current and future portfolios, let’s look at how AI is helping financial advisors create complex stock portfolios that are frequently demonstrating their ability to beat some of the best stock pickers in the business.

How Did We Get to Artificial Intelligence?

Bud entered the investment business when he was hired by PaineWebber some 38 years ago. Back then, the only way you could enter the investment world was through one of the big brokerage houses. At the time, that included the likes of Merrill Lynch, E.F. Hutton, Goldman Sachs, Lehman Brothers, and PaineWebber. Out of those five, only Merrill Lynch and Goldman Sachs are around today. And Merrill Lynch nearly went out of business until Bank of America bought them just before imminent bankruptcy. Those were the days when brokers made their living strictly through commissions. 

To buy or sell stocks, you relied on your firm’s research or independent research. Trades, whether buys or sells, were only executed through brokers on the floor of the New York Stock Exchange.

“The investment world has changed dramatically over the last 38 years, and it’s mostly been for the better!” Bud said. “We literally used to have these machines called Quotrons, where brokers keyed in the symbols of stocks to see up-to-the minute prices on stocks on a digital screen.”

Quotrons were created in 1960 and became the first financial date technology company to deliver instantaneous stock prices, bids, and asks. Of course, these were quickly replaced by computers, but they were new at the time and were the most effective way to trade stocks. 

Next in Line: Value Line and Morningstar

The next thing that Bud and his PaineWebber colleagues utilized were services through Value Line, which helped revolutionize the practice of independent security (stock) analysis. It was a massive book that provided numerical ratings on almost every stock traded on the New York Stock Exchange, American Stock Exchange, and eventually the NASDAQ.

“In those days, we could go back to the Value Line book, look up a specific stock, and see what Value Line’s analytical team’s opinion was,” Bud said. “Many of us felt Value Line was a better source of opinion than that fed to us by the firms we worked for. At least Value Line gave brokers some sense of validation if your firm and Value Line had the same opinion.”

Shortly after Value Line came Morningstar. Morningstar introduced brokers to their “star rating” system, which was a comprehensive reporting process of evaluating stocks. If you found a five-star stock (the highest possible rating), it meant that there were a lot of factors that were pointing to the success of that company moving forward. On the flip side, it was best to avoid one-star stocks. Morningstar’s reputation was and still is recognized as one of the best evaluators of mutual funds.

“Morningstar is evolving and favorably recognized by the advisory base,” Bud said. “Value Line and Morningstar are thriving today and represent a good source of well-researched stock, mutual fund, and now exchange-traded fund (ETF) analysis.” 

Mutual Funds and ETFs Make Their Way into the Bigger Picture

Bud remembers how there started to be a shift of thinking in the 1980s and early-to mid-1990s with how people and advisors viewed the markets through the lens of these new analytical tools. But now, “financial planning” was evolving. Financial planning began to view the analyzation of stocks, mutual funds, and ETFs as just one of the components of what investors—more specifically retirees—needed to secure their financial futures.

“Serious financial planning started to replace simply picking stocks and like investments,” Bud said. “Unfortunately, there are still people in the industry today who call themselves financial planners who are really just stock pickers. Or worse, they’re just selling insurance products as a proxy for real financial planning. Financial planning is recognized as the best way to increase a retiree’s probability of success.”

How AI Fits into a Comprehensive Financial Plan

Bud, who became president of the Institute of Certified Planners Heart of America and later the chairman of the Financial Planning Association of Greater Kansas City, recognized that retirees needed high-quality, comprehensive planning that covered tax planning, Social Security analysis, risk-based investment advice with the assistance of artificial intelligence, Medicare planning, estate planning, and more. He also recognized that the old commission-based stockbroker was on the way out, and fee-based compensation coupled with the legal requirement of serving clients as a fiduciary was now the most accepted way to represent a client’s best interests.

“There will always be people who are do-it-yourselfers,” Bud said. “However, most retirees were saying, ‘You know what? I’m not good at this!’ Let’s quit fooling ourselves that we think we have the skill sets to get through retirement. Let’s find a true fee-based advisory firm that is professionally dedicates itself to comprehensive retirement planning.'”

Now, fast forward to 1993. ETFs surfaced in the American Stock Exchange and made an immediate impact in the markets. Despite their differences, ETFs and mutual funds have helped people find diversification within their portfolios. Our director of financial planning, Jason Newcomer, also shares his thoughts on what to consider so you can decide which might be the best for you. 

Is the Next Evolution Going to Be AI?

Before we dive deep into artificial intelligence in portfolios, let’s reflect on the amazing advancements within the industry that set the stage for AI. 

“What’s cool about what my dad shares is this evolution and integration of technology in our profession,” Matt said. “He talks about reading stocks off a Quotron. Before that, you read them off ticker tape. Can you imagine how difficult, inefficient, and laborious our industry used to be without today’s technology? Technology has gone from trading individual stock online, to mutual funds, and then to ETFs. Is the next evolution going to be AI?” 

IBM Introduces Watson to the World in 2010

So, what is Watson? Watson is a question-answering computer system that is capable of answering questions posed in natural language that was originally developed by IBM’s DeepQA project led by David Ferrucci

Ten years ago, IBM’s new creation entered the spotlight on one of the most highly anticipated episodes of Jeopardy! Watson competed against two of the show’s best human contestants, Ken Jennings and Brad Rutter. So, who won? Watson did so in convincing fashion with a total of $77,147. Jennings and Rutter finished with $24,000 and $21,600, respectively.

“When I think of AI, I think of IBM’s Watson,” Bud said. “This intelligent thinking machine in Watson takes in more data than a person could ever consume. What’s more, it does it with lightning speed and provides a correct answer 99.9% of the time. When you think about what AI can do, it changes your thinking about the future. It sounds so surreal, but it is quickly becoming reality.” 

Vise’s Vision: The Evolution of Artificial Intelligence in Portfolio Continues

While Watson didn’t ignite the early advancements of artificial intelligence nearly as much as IBM thought it would, Amazon, Microsoft, and Google have more than picked up the slack. As mentioned earlier, we’ve seen through the likes of Siri, Alexa, and Google Assistant that AI has been validated and accepted into almost every aspect of our lives. Bud and Matt believe we should embrace it.

Artificial Intelligence in asset management has been used by top hedge funds since the 1980s, but Matt shares that most independent wealth managers and financial advisors haven’t had access to AI tools. In November 2020, Matt and Bud were fortunate to be introduced to Vise, a technology-powered investment manager that provides financial advisors with customized and intelligent investment solutions to help their clients achieve their goals through the enhancement of AI. 

The Evolution of Artificial Intelligence in Portfolios

FIGURE 1 | The Evolution of Artificial Intelligence in Portfolios | Vise

“We now see the evolution of technology reaching a new level. Through Vise, we can access AI as an adjunct to what we’re currently doing in portfolio development,” Bud said. “Vise helps us understand the power behind artificial intelligence. Vise gives us a sense of direction that other solutions haven’t. We see Vise as a unique complement to our traditional portfolio strategies.” 

Getting Validation Through Vise

While Bud and Matt have the utmost confidence in their portfolio modeling process following decades of experience in the industry, the validation they receive through the AI program created by Vise is reassuring and educational. Adopting something new wasn’t necessarily easy for them. However, they saw this as an opportunity.

“AI was solving for investment solutions uniquely to how we were solving for them,” Matt said. “The amount of data and factors AI can run daily—in fact, minute by minute—is impossible for any advisor to duplicate without extremely sophisticated technology. Fortunately for us, Vise presents solutions that marry nicely with our own established investment philosophies and our models that are created through our investment team at LSA Portfolio Analytics. Vise’s portfolio results compare nicely with what we’re doing inside of our core mutual fund and ETF models. We believe Vise’s risk and reward characteristics can enhance our returns and help our clients attain their goals.” 

The Additional Value of a Quantitative Approach

Even though Matt and Bud have learned a lot about artificial intelligence over the past year from Vise, what they already had in place certainly hasn’t lacked from their own quantitative approach. Matt’s older brothers (Bud’s sons), Brad and Ryan, respectively serve as president and partner at LSA Portfolio Analytics. Modern Wealth Management CEO and Founder Dean Barber was one of the first advisors to partner with LSA Portfolio Analytics, which Modern Wealth Management uses to help build their investment solutions. 

Mixing the Best of Both Worlds with Adding a Qualitative Approach

LSA also has a layer of qualitative analysis, which is Bud and Matt’s financial forte. Solving the unpredictable market performance puzzle is no easy task. Investment advisors need to be versatile. They need access to effective and reliable portfolio analytics that follow a fiduciary-first methodology. Then, they need to monitor client portfolios diligently every day and make appropriate adjustments when necessary. 

“That’s the difference between us and solely using AI. AI is all quantitative. Which way is better?” Matt said. “One isn’t necessarily always going to be the winner. I think it’s going to be a nice compliment to have both. Building and implementing a highly personalized goal-based strategy and rebalancing investments for the purpose of tax loss harvesting are two of many features that make Vise a very special company. Because of its own cost efficiencies, the inclusion of Vise into our portfolios has also driven down our total cost to clients.”

Vise has a fee for its services, but it’s less than what you typically see for the internal expense of a some mutual funds and/or many ETFs.

“Vise’s technology creates a more efficient and simpler life for us because of its incredible efficiencies,” Bud said.

AI Beyond Asset Management

While this article primarily focuses on the evolution of artificial intelligence in asset management, AI also supports tax planning and estate planning. At Modern Wealth Management, we invest in technology that can read through 1040 tax returns as well as trusts. Artificial intelligence can identify tax and estate/legacy issues and help develop strategies that are advantageous to their clients.  

“Modern Wealth Management has investment professionals, tax professionals, legal experts, and CERTIFIED FINANCIAL PLANNER™ Professionals to go through all the options that AI uncovers,” Bud said. “We then implement what is best for each individual client. Technology helps us serve as better fiduciaries to support our clients and their needs.” 

The Outlook on the Future in the Evolution of Artificial Intelligence in Portfolios

According to Grand View Research, Inc., global artificial intelligence in asset management is project to be almost $13.5 billion in the next six years. AI for Asset Management will continue to evolve and grow, so financial advisors must strive for the technology that best serves their clients and their needs. 

If you have any questions, for Bud and Matt and all the CFP® Professionals at Modern Wealth Management as they continue to familiarize themselves with AI, please check out our calendar to schedule a complimentary consultation. They can visit with you by phone, in person, or virtual meetings. 

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.