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UNLEASHING POSSIBILITIES IN WEALTH & ASSET MANAGEMENT WITH AI

AI

By Suman Nambiar, Global Head of Strategy, Offerings & Alliances at Mindtree Digital

The use of AI in Financial Services has been transforming business processes and functions for some time now across areas like Credit Scoring, Risk, Fraud, Trading and Back Office Operations. Front Office applications on the other hand, especially in Wealth and Asset Management, have a lot of untapped potential where the use of AI is concerned, especially to transform the customer experience and how these services are delivered to retail investors. While Algorithmic Trading has been around for many years, and the use of AI, along with other automation technologies such as Robotic Process Automation, has been a focus for increasing efficiency, productivity and cost savings across Back Office operations.

Given the relationship-based, ‘High Touch’ model of serving customers in the Wealth Management industry, it has been reluctant to use technologies like AI to mediate interactions with customers as this tends to have a negative perception in customers’ eyes and leaves firms feeling that they would lose the customer intimacy and knowledge that helps them differentiate their offerings and quality of service. However, the traditional model is hard to scale without charging significant premiums for quality of service – in some firms, it is not uncommon for Wealth Managers to manage 200 to 500 small portfolios at the same time, which means templatized investment approaches and strategies are rolled over from one portfolio to the next.

Suman Nambiar

As more and more millennials start to become potential customers for these services, the need to use technology to deliver a personalized experience in line with their expectations is becoming critical for the industry, especially as Fintech startups promise to eliminate wealth managers altogether. However, robo-advisers and the like have by and large failed to deliver on their initial promise – there is hence a clear opportunity for the industry to use AI technologies within their current business models to transform the Front Office experience. Other industries such as Retail, Consumer Packaged Goods and Media are now much more mature in how they collect and integrate data to create a comprehensive profile of the customer to personalize their offerings – while the Wealth Management industry has extremely detailed data on the customer, personalizing offerings using this data at scale has always been expensive.

AI technologies now enable Wealth Managers to deliver highly personalized, ‘White Glove’ services to investors at extremely accessible price points, with the kind of deeply personalized investment recommendations and insights that were otherwise generated by teams of expert analysts for High Net Worth investors, thus democratizing investments and making them more accessible than ever before.

There are 3 key ways in which AI is transforming this space:

  1. AI now enables the processing of vast amounts of different kinds of data – news, market data, video and audio feeds, company factsheets – along with data on a given investor’s portfolio and their preferences, to create completely personalized feeds relevant to them and their preferences – in real-time.
  2. Machine Learning algorithms crunch data across markets and asset classes, aligning with investors’ risk propensities and preferred investment styles, to generate investment insights and recommendations tailored to each individual investor. E.g. one sees 5 undervalued equities in European fashion, while another sees 5 recommended Asian Industrials, both generated by the Mean Reversion algorithm. In addition, with the wealth of past data that is available, the investor can back-test these algorithms to see how they would have performed in the past, before they make any decisions.
  3. Lastly, the entire investor experience is underpinned by the Self-Learning capability that AI enables – information feeds and investment insights are continuously tweaked based on actual user behaviour. For instance, if news items on mobile phone manufacturers and investment recommendations on these companies are not being clicked or viewed, these will be deprioritized and others moved up instead, thus ensuring that all content is always tailored to the users’ explicit and implicit preferences.

 

Different Wealth & Asset Management firms are approaching these technologies from different perspectives – some are enabling their investors with self-service tools, while others are focused on putting the power of these technologies into the hands of overstretched wealth managers who can now deliver a true one-on-one experience, with personalization of information and insights matched to each investor. While industry business models evolve to make the best use of AI, it is clear that the transformative effects are already being felt across the Front Office and how investors experience these services, which will only accelerate further as more and more possibilities are unlocked.

 

Finance

GEOSPATIAL DATA VISUALISATION MAKES SENSE OF MASS OF COMMERCIAL PROPERTY INSURANCE DATA

Heikki Vesanto, Manager GIS Data Science, LexisNexis Risk Solutions UK & I

 

Like most areas of the general insurance market, data, analytics and technology are helping commercial property insurance providers make faster and more accurate decisions based on a holistic view of risk.  The big difference in commercial property (and to an extent home insurance) is that it is quite literally a picture or map of risk that’s being created – right down to an individual property outline – through the evolution of desktop based geospatial data visualisation tools.

Knowing that visual imagery is more intuitive and speeds up the ability to assess risk, data visualisation tools developed specifically for the insurance sector have become increasingly sophisticated.  They help make immediate sense of the huge and growing volume of data at the market’s disposal.

This data includes the characteristics of a property (floors, height, roof type etc.); its location; the individuals behind the business; the crime and environmental risks including near real-time data on flood and river flows direct from the Environment Agency plus customer and policy data held within an insurance providers’ own databases.

Heikki Vesanto

All this data can now be analysed, aggregated and visualised in map form for use within the insurance continuum – marketing, pricing, underwriting, claims. It reveals where exposures and accumulations exist in an instant and shows insurance providers where there is capacity to write more business.  Fundamentally, the inclusion of all this data allows insurance providers to more accurately price each risk upfront relative to its unique profile.

The demand for this level of insight is only set to grow as commercial insurance providers face changing risks on two fronts. The first is climate change and the cost of claims emanating from extreme weather events. Profitability in commercial property insurance is significantly affected by weather conditions and a recent report suggests commercial property insurance rates were up around 20% on average in Q3 2020[i].

The second is the shift in the use of commercial property space, partially caused by the pandemic.  Surveys suggest that the enforced exodus of workers from offices could be permanent for at least part of the week[ii].  Indeed, several banks across Europe have confirmed they will be closing branches and asking staff to work from home[iii].   There are also questions over the future of town centres which were already in decline before COVID-19.

Understanding which insured properties are vacant versus occupied in a flood, fire or a severe storm, knowing roads closed due to fallen trees, where flood water will flow or how a fire in one building could spread to another is now possible through the evolution of geospatial data visualisation tools such as LexisNexis® Map View, enabling complex property data to be quickly and easily understood and acted upon.

When a weather event occurs, insurance providers can look at a specific geographical region, a postcode, an address or a single property outline, pulling on a wide range of data including live feeds from the Environment Agency.  This means that rather than wait for an influx of claims to assess the exposure to a climate event, they can upload their policy and claims data to visualise the risks and exposure for a whole book of business. They can understand which policyholders could be impacted and where on the ground resources need to be located.

The flexibility of the tools offered today makes it easy to filter down to the risks most of interest, focus on one property for underwriting purposes or a whole block of properties in the path of a coming storm.

The use of ‘live’ data also means that Estimated Maximum Loss and Potential Maximum Loss can be calculated.

Risk can be assessed as needed or a constant monitor created for a whole commercial property portfolio. Looking at a whole portfolio alongside past claims may also help insurance providers price more accurately and understand how they could help mitigate future claims and potential losses.

As well as supporting underwriting, pricing and claims management, with this visual depiction of risk, insurance providers can easily identify areas where they can sell more business in large cities and automatically see where they have areas of high concentrations of Sums Insured for reinsurance calculations.

Insurance specific geospatial data visualisation tools are enabling the insurance market to utilise the increasing availability of ‘live’ and new data sources related to commercial property risks.  This is helping the market to price with pinpoint accuracy, manage their portfolio and get on the front foot when a weather event hits to limit their losses and protect policyholders.

 

[i] https://www.artemis.bm/news/commercial-property-insurance-price-rises-accelerate-globally-in-q3/

[ii] https://www.bdonline.co.uk/news/london-office-market-collapses-amid-pandemic-deloitte-survey-finds/5109149.article

[iii] https://www.ft.com/content/a15f17d3-dc86-4030-85fe-74a29eb1fafa

 

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Top 10

A GUIDE TO HMO PROPERTY INVESTMENT

Many experienced property investors are turning their attention to HMOs and achieving much higher rental yields as a result. Find out what a HMO is, why they are so popular and how to finance these properties.

 

What is an HMO?

A property is considered to be a house in multiple occupation (HMO) if at least 3 tenants live there forming more than 1 ‘household’ and share facilities with other tenants.

HMOs can have a range of tenants such as students, professionals or for social housing.

 

Why are HMOs such a popular investment?

There’s no doubt that HMO properties are very popular with landlords, the main reason for this is the fact that the rental yield is much higher than with a standard single household type let.

HMOs are let on a ‘per room’ basis i.e. the rent generally covers the use of 1 lockable bedroom and use of the shared facilities such as the kitchen and bathroom. This is in contrast to a single let whereby the rent covers the whole property.

As an HMO has scope for multiple tenants, if a tenant was to move out or to stop paying rent for any reason, there will likely be other tenants still making payments. For a landlord, this can help cash flow, especially if the property is mortgaged.

This isn’t the case with a single let, meaning there can be a greater risk of rental voids. As the demand for affordable housing grows, so does the popularity of HMO style investments to landlords.

 

Are there any drawbacks of HMO property investment?

Like most property investments, there can of course be drawbacks when investing in an HMO.

The main factor when considering investing in HMOs is the interest rate of the mortgage. As this is a more specialised area of investment you may need a special HMO mortgage product, this almost certainly means the interest rate will be higher than with a standard buy to let. As HMO rental income is higher compared to a buy to let, there is still a good profit to be made even if you are paying a higher interest rate.

As there are multiple tenants this can mean multiple tenancy agreements and a greater turnaround of people moving in and out. As such HMOs can be more time consuming to manage compared to a single let.

You must also consider the start-up costs when buying a property to let as an HMO. As each room is let individually, you must consider the fire regulations and things such as waste disposal and planning regulations.

 

What finance is available for HMO properties?

As HMO’s have become more popular the number of lenders offering HMO mortgages has increased, this means a greater choice of products. Interest rates and deposit requirements vary depending on both the property type and the applicant’s profile.

A seasoned landlord generally needs to put down a deposit of 25% whereas a first-time buyer would be expected to pay a 35% deposit. A low-value property or a property with a large number of bedrooms may require a larger deposit, even if you are an experienced landlord.

As with any mortgage, there are other factors to be taken into account such as credit history and personal earned income.

 

What should I look for in a potential property?

When considering properties, there are important factors that need to be taken into account to make sure your property investment is successful.

The location should be researched to make sure there is a good demand for HMO properties in the area, if it’s near a university, hospital or near a large town or city you would expect demand to be high, it is worth speaking to a local letting agent to confirm this.

If the area is already flooded with HMO properties the local authority may impose an Article 4 Restriction. This restriction means you cannot simply convert a property to an HMO, you must apply to the local authority for approval.

Another thing to look for is the size of the rooms, depending on the number of tenants you have, the bedrooms and shared areas have to be a certain minimum size. It is easier to buy a property that is already set up and running as an HMO although you may pay a premium for this.

 

What are the key considerations before moving forward?

HMO’s can certainly be a good investment but you should weigh up the pros and cons compared to other types of lets.

You should also compare buying the property in your personal name compared to buying through a limited company. A good accountant will be able to provide advice on the tax implications involved in each route.

Due to the work involved in running the property, it may be worth using a local letting agent to manage the property for you, they will look after the property and deal with tenants, although you will have to pay for the service.

When looking for a suitable mortgage it is worth speaking with a specialist HMO mortgage broker who fully understands the market. Again, there may be a fee to pay for the service but this will often save you money in the long run.

 

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