In recent decades, the financial services industry has used computers to aid in the construction of mutual funds and individual portfolios. In the past decade or so, the use of artificial intelligence in the financial services industry has only increased. The first firms that nearly exclusively used artificial intelligence came online around 2010, and they started using complicated algorithms to manage portfolios.
The use of artificial intelligence in the investing field has led to a few major changes in the investing world. First, these portfolios look at an individual’s risk profile and financial goals and construct a portfolio that will automatically re-balance periodically. This process cuts down on the risk that human error will lead to lower returns. By using complex algorithms that are computerized, emotionally based investing is reduced. The target date funds that are common with the so-called robo-advisors will provide a mixture of stocks and bonds that are tied to an investor’s age and level of risk tolerance.
Another benefit of using artificial intelligence in the financial services space is the ability to maximize the advantages that are tied to the current tax code. Some brokerages will automatically engage in tax loss harvesting. Essentially, the algorithms will look for investments that have experienced a capital loss in the previous year. Investors can offset $3,000 of dividend income and capital gains per year with capital losses. Effectively, by using tax loss harvesting, an investor who has a decent nest egg built up will be able to reduce his or her taxable income by up to $3,000 automatically by utilizing a firm that maximizes the benefits of artificial intelligence. The actual tax reduction will depend upon an investor’s tax rate. For example, those who are in the 22% tax bracket could save $660 in taxes through automatic tax loss harvesting. Robo-advisors are going nowhere, and it’s likely that investors who want a set-it-and-forget-it strategy can benefit from using them.