In Practice April 27, 2023

Morningstar Introduces AI Adviser to Aid Evolving Investors

Artificial Intelligence could play a role in scaling investment advice and decisionmaking.

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The CEO of investment and data firm Morningstar Inc., Kunal Kapoor, says that to meet investors’ needs, machines could help solve the problem of ever-expanding investment choices.

In a keynote address at Morningstar Investment Conference US on April 25, Kapoor said the firm is aiming to have its artificial intelligence chat program, Mo, respond within 10 seconds with an answer the user is likely to trust.

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“We think humans and machines can work well together to help solve some of the problems of ever-expanding investment choices,” said Kapoor.

He also discussed the firm’s research on the evolving investor, detailed in its “Voice of The Investor” report.

“We wanted to get a sense of how investors’ behaviors and attitudes have changed, and we turn to investors themselves to do what we call the Voice of the Investor study,” Kapoor said. “We’ve polled more than 2,000 people across the United States to get a pulse on their moods and what they’re thinking about.”

Morningstar found that when working with an adviser, 38% of survey participants had a strong understanding of risk management, while only 21% of respondents who do not work with an adviser said the same.

“42% of investors in our study work with advisers, and 90% of those investors said that they find advisers to be extremely valuable, because advisers are personalizing the risk experience for them in a very tangible manner,” said Kapoor.

Participants said that, on average, advisers are not significantly more valuable than financial news or trading and investment platforms. However, investors who are “adviser-led” are less concerned about their investment decisions in several financial areas, as opposed to those who are “tech-led.”

The study suggested investors want reliable guidance from an adviser, Kapoor admitted: “Investors are telling us that they are just overwhelmed by data.”

Furthermore, according to Kapoor, investors are looking for advice on emerging asset classes. For example, cryptocurrency investors also want to find the best adviser to guide investment strategies, according to the study. Kapoor believes to meet the needs of the evolving investor, artificial intelligence is a potential solution.

“If we put AI as an industry, I believe it puts you as an adviser in a position to provide a much better investing experience and do that at scale,” said Kapoor. “So, let’s have some fun, and let me introduce you to Morningstar Mo.”

Mo, displayed on a vertical standing screen, was then wheeled onto the stage. The male-presenting AI wore a bright red sweater featuring the Morningstar logo.

“Our team has been having some fun loading up the open AI service with Morningstar signature research and data,” said Kapoor. “Then what we did is we hooked it up to a digital avatar from a company called Soul Machines in New Zealand, and then we added voice recognition. And, voila! Over the course of a weekend, Mo was born.”

Kapoor proceeded to ask Mo questions such as, “What makes a good financial adviser?” and “How does Morningstar rate the ARK Innovation ETF?”

Mo answered the questions, accompanied by various facial expressions and hand gestures.

There’s a lot going on for Mo to give you that answer,” said Kapoor. “First, voice is logged and converted to text. That text is then transmitted to an open AI model, which analyses more than 100,000 Morningstar data points to generate an answer. The text is then converted back to speech. That’s when Mo became animated and began to deliver that answer.”

With that, the AI era of investing advisement may have reached a new level, and Morningstar hopes it will only be a matter of time before ‘Mo’ is a household name.

Compliance April 27, 2023

GOP Budget Plan Calls For Spending Cuts That Would Include Social Security Administration

The bill that passed the House yesterday would threaten delays in Social Security payments, according to an industry lobby group.

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Republicans in the House of Representatives passed on Wednesday a bill that increases the debt ceiling and calls for cuts to discretionary items, including the Social Security Administration. The bill passed by a vote of 217 to 215 but is not expected to pass the Senate.

The Limit, Save, Grow Act of 2023 aims to reduce federal spending and would authorize the Treasury Department to issue $1.5 trillion in new debt or issue debt until March 31, 2024, whichever comes first. The suggested cutbacks include reducing the administrative budget for Social Security by 6% to as much as 23%, potentially delaying (but not reducing) payments to retirees, according to Max Richtman of the National Committee to Preserve Social Security and Medicare.

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“The Social Security Administration (SSA) is a key agency that would be negatively impacted by such a dramatically reduced funding level,” Richtman wrote in a response to the bill. “Cutting the Agency’s funding by six percent would significantly affect SSA’s ability to serve the public and [would] undermine the Agency’s core mission [by] producing longer wait times for benefits and to reach SSA representatives, as well as reduced access to in-person services.” 

In a memo issued in March, the SSA stated that cutbacks of 6% would lead to closing field offices and shortening hours of operation to the public, would cause a hiring freeze and would result in furloughs, layoffs and cuts to overtime pay.

The bill is not suggesting cuts to Social Security payouts and is not referring to the 23% cut in benefits that the Congressional Budget Office has said may be necessary starting in 2033.

The bill would also repeal some subsidies provided to incentivize the development of renewable energy and electric vehicles and would require the administration of President Joe Biden to lease more federal lands for gas, oil and mineral extraction. It would also require new work requirements for means-tested programs such as food stamps, TANF and Medicaid, and nullify altogether the government’s student loan forgiveness program.

While the word “veto” is technically absent from the White House’s statement on the proposal from last week, the bill is unlikely to pass the majority Democrat Senate and all but certain to be vetoed by Biden. The White House statement characterized the proposal as “extreme” and said it would be devastating for families, scientific and medical research, and education, among other spending priorities for the administration.

Though the House version won’t survive in its current form, it can be understood as the Republican’s starting position in upcoming negotiations as well as signaling their priorities in those negotiations.

Northern Trust’s monthly asset allocation update noted that the debt ceiling negotiations will reduce investor sentiment and could increase the costs of debt. Anticipating debt ceiling difficulties, J.P. Morgan recommended back in January, that investors should diversify away from the US market, saying “diversification is the best defense” in the event of a “disorderly debt ceiling episode.”

 

 

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