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File Name | S22-Policy-Stoa-17-AFF-RoboAdvisors.docx |
File Size | 757.68 KB |
Date added | October 18, 2021 |
Category | Policy (Stoa) |
Author | Vance Trefethen |
Resolved: The United States federal government substantially reform the use of Artificial Intelligence technology
Case Summary: Investment firms and their clients are turning more and more to AI-driven “Robo Advisors,” rather than human advisors. Robo Advisors give the potential client a questionnaire with a dozen questions about things like their age, investment goals, tolerance for risk, and then come up with an investment strategy that, when accepted by the client, allocates the client’s savings into the stock and bond markets based on the AI’s formulas and calculations of what is appropriate. There are 2 problems with this:
1) Inappropriate investments. A Robo Advisor cannot “know” a client well enough from a questionnaire to be able to accurately counsel someone on how to invest their life savings. It may well make inappropriate investments, or not be able to counsel an investor when questions or problems come up. An example of inappropriate investment would be an elderly widow who is scared of losing her savings and wants it invested safely at low risk. But the Robo invests it in gold mines or African junk bonds or a hot new internet startup that may fail tomorrow or make a trillion dollars next year. Her money probably should have been invested in US Treasury bonds.
2) Conflict of interest. This problem has already been known to have happened at Charles Schwab. The Robo invests in mutual funds or other investments owned by the company that is providing the Robo service, regardless of whether that’s the best investment for the client. The client thinks the Robo is acting in the client’s best interest, but the Robo is unknowingly directing investments in a way that increases the Robo owner’s profitability at the expense of the client.