Blogs

Technological changes are a consistent part of the investment management industry. From the time that computers began replacing calculators and journal ledgers, the industry has used technology to develop practices and techniques that enhance research and trading efficiency. Although artificial intelligence is just the latest iteration of the ongoing advancement of technology, fundamental ethical norms must be applied to its use to ensure that investors’ interests continue to be protected.

CFA Institute Standard V(A): Diligence and Reasonable Basis requires CFA Institute members to exercise diligence, independence, and thoroughness as well as have a reasonable and adequate basis supported by appropriate research for taking investment action. In the realm of Al-based decision making, all decisions are made within the programmatic platform. Ng reviews the model’s performance and risk metrics, but it is unclear from the facts if his validation of the decisions is grounded in sufficient research.

CFA Institute Standard V(C): Record Retention requires CFA Institute Members to develop and maintain appropriate records to support their investment actions. But in Al-based decision making, the process and information used to arrive at specific decisions are within the programmatic platform. From the information provided, it is unclear what, if any, processes are in place to support appropriate decision based record retention.

CFA Institute Standard V(B): Communication with Clients and Prospective Clients requires CFA Institute members to describe the basis of the investment process. This information allows clients to make informed decisions about engaging with an investment adviser. With AI, the investment decision making process continues to “learn” and evolve as data are provided to the programmatic platform.

Ng’s introduction of the new sentiment data transforms the initial model used for back testing into the evolved model used in practice. The question, then, is whether the program’s “learning” process is considered a significant change to the investment process that needs to be disclosed to clients. Individuals researching investment options certainly rely on many sources of information. But a human’s ability to consume data is not as great as that of an AI-based model. The outcome described here of the introduction of a new data source demonstrates the model’s potential sensitivity to new factors. It is unclear from the facts if Ng’s clients have been informed of these changes.

Although the use of AI represents an advancement in investment management, all of these considerations must be addressed in some manner as they relate to ethical practices that protect investors. Choice D is the best answer.

To better understand these and similar concerns, the CFA Institute Standards of Practice Council (SPC) issued a consultation seeking input from CFA Institute members and other industry participants who are using or researching AI techniques. The SPC will consider the responses received in the development of future guidance on the Code of Ethics and Standards of Professional Practice.