Smart money: AI transitions from fad to future of institutional investing

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Artificial intelligence (AI) is changing the operating model for investment firms. From back office procedures to front office decisions, AI is becoming the preferred tool for gaining a competitive edge. While AI often leads to better predictions and results, it also introduces a new set of challenges. Keeping the challenges in mind when building AI capabilities helps ensure success. Firms that neglect AI in the years ahead will likely fall far behind.

Artificial Intelligence and Institutional Investing - PwC

AI and investment firms

AI is advancing rapidly in virtually every industry. Technologies rooted in AI are affecting cost dynamics, introducing new market participants, and changing long-held assumptions about value on a routine basis.

For financial institutions on both the buy-side and sell-side, this wave will disrupt an industry that has long been stuck in its ways. With stakes this high, the risks are great, and correspondingly, so are the opportunities.

Some firms are using AI to improve the way they analyze securities and make investment decisions, while others use it to improve core operational processes. AI can lead to better predictions, fewer errors, and greater efficiency for the investment industry.

Many of the investment firms in the spotlight for using AI are quantitative hedge funds and asset managers. But a growing number of companies, large and small, are finding new ways to incorporate the technology into their own operating models. Firms across the buy-side and sell-side are now using AI to execute trades, manage portfolios, and service their clients.

Common challenges in using AI in investing

Financial institutions should consider AI’s potential downsides, including:

  • Difficulties with data management 
  • A winner-take-all environment 
  • Lack of transparency as algorithms learn and become more complex

How can your firm start using AI in investing?

If you don’t have a strategy for understanding how you’ll use it, you’re taking on too much risk. Not all companies will adopt AI at the same pace: some will be followers in an effort to limit spending and avoid short-term uncertainty. But doing nothing is not a viable option to remain competitive over the long-term.

We believe that to gain the benefits AI has to offer, your firm should concentrate on four key areas:

  1. Creating a broad AI strategy 
  2. Focusing on your people 
  3. Improving your processes 
  4. Making sure that your AI systems are well protected

AI will not supplant the need for investment firms and the people who are a part of them. If anything, it makes people even more important, guiding AI-based processes and increasing profitability with techniques that will scale.

Demographic trends, regulatory swings, and changing investor preferences are likely to keep the pressure on both buy-side and sell-side firms. Given this, AI is an indispensable tool for firms to use to compete and become more efficient.

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How PwC can help

Our teams in asset and wealth managementbanking and capital markets, and insurance are helping our clients tackle the biggest issues facing the financial services industry. With professionals across tax, assurance, and advisory practices, we can help you find ways to thrive even in a period of uncertainty. Whether you're preparing for regulatory changes, putting FinTech/InsurTech to work, or rethinking your human capital strategy, we work together with you to deliver value to your business.

For more information on how PwC can help, reach out to one of our leaders below or explore our digital services.

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Christopher Scarpati

Principal, PwC US

Arjun Saxena

Principal, Financial Services, Strategy&, PwC US

John Giannotto

Director, PwC US

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