Educational Alpha: Where Are the Customer's [Yachts] Bots?

By William (Bill) J. Kelly, CAIA, the President & CEO of the CAIA Association.

Where Are the Customers’ Yachts Bots?

Fred Schwed’s book, which eponymously contributed to the title of this post, was written some eighty years ago, but that is not where this story begins. You need to go back yet another eighty or so years, to the late 1800’s, when this phrase was first turned by William Travers, a very successful lawyer and Wall Street financier. At the time, Travers was admiring the many large yachts in the Newport, RI harbor and learned that they were all owned by the Wall Street crowd, with none belonging to the clients for whom they (dutifully) served. What would be the modern-day equivalent quip from Travers, or the title of a sequel book from Schwed? Let’s ask ChatGPT as we now look out on a sea of bots.

As it turns out, ChatGPT claims it “doesn’t have access to real-time information or data about specific customers’ bots”, but further clarification was forthcoming and maybe quite telling in that “the specific location of customers’ bots would depend on the implementation and hosting choices made by the respective businesses (emphasis added).” Sounds like we have found the appropriate working title!

No doubt the speed and breadth of generative AI and its many (Large Language Model) LLM cousins should be embraced. Its ability to harness (Natural Language Processing) NLP tasks is, and will continue to be, a game changer for financial analysis, and Bloomberg has 50B (parameter) reasons as to why we should take heed. But let us not forget that genius once (spectacularly) failed when “finely tuned computer models had (theoretically) tamed the genie of risk” (ChatLOL!).

Maybe this time it’s different, and when a respected institution like JP Morgan talks, people listen (or was that EF Hutton?). Just last week, JPM announced that they are developing their own generative AI model (IndexGPT) that will actually “select investments for their customers” who are perhaps saving to buy a yacht of their own? When you read the closing quote from their global tech chief, “We’ve recognized the power and opportunity of these tools and are committed to exploring all the ways they can deliver value for the firm (emphasis added),” it is hard not to be at least a bit cynical and the bot happens to agree!

When queried, ChatGPT emphatically starts with this opening salvo: “No, a bot does not have a fiduciary duty.” It goes on to say that such a relationship is demarked where “trust and confidence are placed in one party on behalf of another” and that bots “do not possess the capacity for the type of judgement, discretion, and ethical responsibility that would be required to fulfill a fiduciary duty.” Turns out the bot is keenly self-aware, maybe to a fault, especially when the friendly regulator comes a-calling.

It also turns out that we have yet to see a bot register as a Candidate for our FDP exam, but then again, we never expected that to happen. We did not need to wait for the bot to state its limitations when it comes to the client. When we developed the FDP program several years ago, a cornerstone needed for this highly specialized course of study was the new and complicated questions related to privacy and the ethical use of unstructured data. Embracing change and understanding the use case for new technologies are part of what we must always do as professionals. But let us never forget that we are responsible for the customers’ hopes and expectations (which may include a yacht of their own), as they are the ones who have placed their assets with us, and their trust in us. Your bot and all its decisions, limitations, and outcomes must ultimately be understood and owned by your client.

Seek education, diversity of both your portfolio and people, and know your risk tolerance. Investing is for the long term.

About the Author:

William (Bill) J. Kelly, CAIA is the President & CEO of the CAIA Association. Bill has been a frequent industry speaker, writer, and commentator on alternative investment topics around the world since taking the leadership role at the CAIA Association in January, 2014. Previously, Bill was the CEO of Boston Partners and one of seven founding partners of the predecessor firm, Boston Partners Asset Management which, prior to a majority interest being sold to Robeco Group in Rotterdam in 2002, was an employee-owned firm. Bill’s career in the institutional asset management space spans over 30 years where he gained extensive managerial experience through successive CFO, COO and CEO roles. In addition to his current role, Bill is a tireless advocate for shareholder protection and investor education and is currently the Chairman and lead independent director for the Boston Partners Trust Company. He has previously served as an independent director and audit committee chair for ’40 Act Mutual Funds and other financial services firms. He is also currently an Advisory Board Member of the Certified Investment Fund Director Institute which strives to bring the highest levels of professionalism and governance to independent fund directors around the world. A member of the board of the CAIA Association, Bill also represents CAIA in similar capacities via their global partnerships with other associations and global regulators. Bill began his career as an accountant with PwC and is a designated Audit Committee Financial Expert in accordance with SEC rules. Follow Bill Kelly on Twitter @CAIA_BillKelly