AI In Finance, Part 4: Using AI In Portfolio Construction


We continue with part 4 of our five-part series, exploring how artificial intelligence (AI) enhances the client experience by creating an end-to-end digital experience without armies of software engineers.

Part 1 of this series covered AI and client experience; part 2 explored AI chatbots, and part three on account setup. Now, part 4 of our series outlines the benefits of using AI in portfolio construction.

By Teresa Leno

As we navigate the ever-evolving landscape of technology and business, it becomes increasingly crucial to understand the impressive capabilities of artificial intelligence (AI) and its applications in wealth management. More specifically, AI in portfolio construction is becoming an indispensable tool for global wealth managers, enhancing portfolio management’s efficiency, reliability, and outcome prediction capabilities.

Given its computational prowess and cognitive capabilities, AI is particularly suited to portfolio construction. AI can process an enormous amount of financial data—from market trends, risk factors, and economic indicators to individual security specifics—at a speed and accuracy beyond human capability. Combining these factors, AI can support wealth managers in creating a more effective and informed investment portfolio, aligning it closely with an investor’s knowledge or experience profile and preferences. The implementation of AI in portfolio construction brings several notable advantages;

Portfolio Risk Management

AI’s advanced predictive capabilities and real-time data processing can drastically improve portfolio risk management. AI can provide wealth managers with early warning signs of potential market changes and portfolio vulnerabilities, enabling proactive adjustments to the portfolio.

Improving Efficiency

Utilizing AI, wealth managers can assess the vast array of available investments more efficiently, drastically reducing the time and effort required to construct and manage a portfolio.

Enhanced Returns

AI offers superior analysis and predictive algorithms that can improve decision-making, potentially increasing portfolio returns.

AI-Driven Personalization

AI algorithms can factor in an investor’s risk tolerance, investment objectives, financial conditions, time horizons, and socially responsible investing preferences to construct a portfolio aligned explicitly with the client’s knowledge or experience profile.

While the benefits are significant, adopting AI in portfolio construction is challenging. These challenges include a need for more understanding and trust in AI technology and data privacy and security concerns. Although AI has time-tested its ability to process and analyze data effectively, the quality of the data fed into these algorithms remains critical. Thus, data quantity, quality, and integrity are essential considerations. Wealth managers must remember that AI can support decision-making, but it doesn’t replace the need for human judgment. Hence, wealth managers should leverage AI capabilities and rely on their advisors’ instincts and understanding of their clients’ unique situations.

With the wealth management industry becoming increasingly more digitized, the use of AI in portfolio construction will continue to grow. Wealth management firms ready to embrace AI’s power have the potential to revolutionize portfolio construction, enhancing efficiency, mitigating portfolio risk, personalizing investment strategies, and ultimately improving investment returns. Despite the challenges, the intersection of AI and wealth management holds immense promise. It has the potential to transform the industry and democratize access to sophisticated wealth management services, opening up opportunities for a broader range of investors.

The future of portfolio construction is, without a doubt, becoming more aligned with AI technology.

Read all the posts in this series here:

AI In Finance, Part 1: Harnessing the Power of Artificial Intelligence in the Finance Sector

AI In Finance, Part 2: Chatbots and the Client Experience

AI In Finance, Part 3: The Transformative Role of AI in Account Setup

AI In Finance, Part 4: Using AI In Portfolio Construction

AI In Finance, Part 5: Using AI to Write Financial Content


Author Bio: Teresa Leno is a former financial advisor turned entrepreneur and the CEO and founder of Fresh Finance, a marketing technology designed for the wealth, banking, and insurance industries. Her experience has touched wealth industry technology across applications- portfolio management systems, trading and rebalancing, CRM, etc., including the use of AI in wealth tech and marketing technologies.