The event, organised by CFA UK, reflects well on the sector. Scotland’s investment community is traditionally close-knit and professional, with its members willing to share ideas and practice for the benefit of the industry and its clients. Few financial centres show as much cohesion.

Read more:

This matters for Scotland, and indeed the UK, as international competition increases and the London stockmarket loses relative importance.

Across all financial and related professional services, which include wealth management, Scotland now has 157,000 jobs and £17.7 billion of annual output, roughly a tenth of the Scottish economy. Over half of the assets managed in the UK now belong to overseas clients, so investment management earns export income as well as providing a service.

The discussion showed that some AI benefits are already being captured by using AI for modest, practical tasks. Screening long lists of companies to summarise financials and ratios is now simple, allowing more to be reviewed by fund managers. AI can readily capture actions from meetings – sometimes even picking up subtle changes in mood and confidence from a discussion.

But professionals must still provide the judgement and investment selection. The decisions made and the narrative reporting to clients needs to reflect the firm’s methods and investment edge. A good manager’s edge typically lies in insight that can be hard to find in public text, while AI tends to a consensus view and often lacks long-term vision.

Read more:

AI may offer more in risk assessment. Some managers use it to challenge their thinking before they invest. This can enhance the value of individual investment professionals, boosting the quality of their work at low cost. However, most larger firms have built their edge by using human questioning within teams, and are a long way from handing this key role over to AI.

Firms are also cautious about data. Research fed into an outside AI service may help to train a tool that competitors can also use, so firms are building firewalls between their proprietary material and external services.

Some are turning to smaller models that run on their own systems. These are cheaper and use far less power than the large AI models that are actually over-powered for a lot of current tasks.

Most firms seem alert to the risks of compromising the core value of a business by leaking data or over-reliance on a third party.

Read more:

Some wealth managers that manage portfolios for private clients are considering more radical change to their business models. They see scope to offer personal service at much lower cost to reach savers who are priced out of advice today.

This addresses the ambition of the regulator, the Financial Conduct Authority, which believes that around 23 million people are poorly served by the advice and guidance available. It estimates that seven million UK adults hold £10,000 or more in cash and may be missing out on the long-term gains from investing.

If AI lowers the cost of a tailored service, a mass market that has never made commercial sense may become viable.

Will these new growth opportunities offset the employment shrinkage that many fear from AI? Revenue, assets and employment may each move differently. Lowering costs might expand the scale of assets managed, even if employment falls and profit margins are squeezed.

Read more:

The early evidence from the USA shows no wave of redundancies yet. But across industry, among firms that adopted AI at least a year ago, employment fell by a net 5%, mainly because leavers were not replaced.

This is a concern for Scotland. Our firms depend on a steady supply of graduates who learn the trade and in time lead it.

Several speakers at the seminar argued that cutting graduate hiring now would be a mistake. Younger staff are often best-placed to teach AI to the rest of the firm, and they are the managers of the future. The advice to younger staff was to learn how the tools work so that they can question AI results, and also to develop their own critical thinking.

The first actions that most industries take with AI involve enhancing capabilities and cutting costs. But previous advances in technology have spurred entirely new services, as firms explore the potential and re-imagine their offering. Unfortunately, as yet there is little sign of the radical change in active management that would help it to survive and grow in Scotland.

Read more:

The pressures are severe. In the second quarter of this year, low-cost passive funds took 70% of net inflows on UK investment platforms. These funds track a stockmarket index rather than being actively managed by investment professionals.

Scotland’s skills are weighted towards active management, and so the rise of passive investing is a particular challenge.

It is becoming harder to outperform passive funds. Global stockmarket gains have become concentrated in a small number of very large companies – performance that is easily and cheaply captured by passive funds. This trend challenges skilled active investment managers – can Scotland’s firms respond by re-inventing their business models?

Scotland has a long record of creating new investment products and services. It needs to do so again – heritage is not enough. A strong cluster in Scotland underpins a wide range of services and employment, and our five-year AI strategy should treat investment management as a core sector.

Scotland’s investment sector has the people, the tradition of cooperation and the history to adapt. It now needs the resolve to build new services before cost pressure makes the choice for it.

Colin McLean is director of Barnton Capital.

Source link