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Specifying Investments with Automated Financial Management Systems (AFMs)

By Sterling Xie


Technological growth has left its impact on the financial market with the newfound growth of the automated financial management system.


Automated Financial Management systems or AFMs are a system of automated investment strategies that outperform mutual fund and self-managed stock portfolios.


Diversification


AFMs allow users to specify investment types (long-term or short-term, more or less diversified, more or less risky, etc.) using a robo-advisor in order to optimize portfolio development and management. A Harvard University study finds AFMs lower the threshold for the initial investment into portfolios, increasing account flexibility and “disproportionately rais[ing] new account formation by less-wealthy investors”. AFMs are also particularly impactful on increasing diversification relative to non-automated portfolios.


How Businesses use AFMs


Businesses use AFMs to simplify workflow to maintain a more accurate record of finances. Strategy and data analytics become a lot simpler when records of finance are digitized and can be easily manipulated. Specifically, with the growth of artificial intelligence and predictive software, AFMs also forecast potential risks and suggest decisions in order to boost productivity, evaluating the urgency of critical business tasks. As a result of this benefit, McKinsey & Co explains AFMs in businesses have expanded by over 57% in the past three years.


The Trends in AFM


There are certain balances that are needed to create the most effective financial system. Deloitte finds that “in order to elevate its role as a more strategic business partner, finance will need to balance human and machine-based competencies,” meaning today’s professionals should be more familiar with data analysis and synthesizing information from machine-created data.


Conclusion


AFMs are critical to the growth of economies and investment portfolios. They are not yet widely accepted in most companies and personal portfolios, but they certainly play a key role in determining what our future looks like. AFM systems are likely going to replace low-level analysts in portfolio creation as a result of their ability to efficiently and consistently produce high-quality metadata for data analysis. In the personal realm, AFMs will allow for more effective investment management and portfolio growth, perhaps for a higher cost as they become more accurate.

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