AI in Investment Management: Ethics Case Study
Investment professionals have increasingly embraced artificial intelligence (AI) to augment and improve the investment management process in many ways. However, as with any cutting-edge investment practice, managers must be diligent in ensuring new practices do not run afoul of the fundamental ethical principles of integrity, transparency, competency, diligence, and protecting client interests that are embodied in the requirements of the CFA Institute Code of Ethics and Standards of Professional Conduct.
The following case study illustrates a specific use case of AI in the investment management process and related client communications. Read the case study and identify ethical issues that arise from how the investment manager used AI to provide investment management services to clients. An analysis of the case will be presented in my second blog post on this topic later this week. Check back here to see how well you applied the Code and Standards to analyze this case.
Facts
Simmons runs an investment management firm serving retail and high-net-worth investors. Eager to take advantage of AI technology and capabilities to enhance his advisory services, Simmons engages the services of a big data provider to gain access to raw information that can be used to identify attractive investments. One area of potential investment that Simmons would like to explore is global food service companies. The big data service provider promises a variety of sales data from companies all over the world, including online orders, delivery, app usage, and other information that sheds light on company performance. Simmons plans on mining this data to gain insight into fast-growing regions and products to identify promising investment opportunities in the food service sector. While the big data provider promises comprehensive data for all regions, the data is spotty from food service providers in certain regions. The big data provider uses formulas and algorithms to create model data for those regions in which data is incomplete and folds that model information into the data provided to Simmons.
Simmons hires an AI technology consultant to examine the data to identify global food services companies that could experience above-average growth and profits in the next three to five years. Simmons relies on the consultant to analyze the data and make recommendations. Simmons is excited to use the consultant’s recommendations to enhance client returns.
After the analysis is complete, he invests in the recommended companies for all clients who have given him discretionary authority, regardless of their investment mandate. He then sends the research and recommendations to his remaining clients who retain investment approval. Simmons is not enthusiastic about sharing his firm’s use of AI to generate research and recommendations because he knows that many of his clients are reluctant to incorporate AI into their investment decision-making process. Simmons is also concerned that disclosure of the role of AI in firm research will cause his clients to question the firm’s robust fee structure because he promotes his firm’s services as “tailored, hands on” investment advice provided by experienced investment managers, all of whom hold the CFA designation.
In conjunction with his efforts to use AI to supplement his investment research, Simmons works to establish a client communication portal for his firm that relies on AI technology. Because he has limited firm investment personnel, Simmons leverages AI technology through an online chat function to keep overhead costs low and improve communication with clients. The chatbot function adopted by Simmons’s firm is used to distribute new investment recommendations to clients. It is the first line of communication for clients who are seeking basic information about their accounts or who have questions about the firm’s investment recommendations.
Simmons’s goal is to provide more timely, frequent, and focused client-specific interactions through AI technology. For client inquiries about research and recommendations on global food service industry investment opportunities, the AI responses reflect Simmons’s enthusiasm for these investments. He programs the chatbot to guide conversations toward promoting the securities of the companies in the AI technology consultant’s analysis, invariably recommending these investments to clients.
Challenge
Can you identify which of the CFA Institute Standards of Professional Conduct are implicated by the facts of this scenario and whether Simmons’s actions have violated those standards?
