Joseph Byrum is Driving Financial Innovation

Published on INFORMS OR/MS Today (Joseph Byrum)

Most people spend their entire adult life setting aside a little money here and a little money there to build a retirement nest egg that, they hope, will give them a secure future. Getting the mix of investments right can make the difference between enjoying one’s golden years and struggling to get by. Principal® uses data sciences to help its customers meet their investment and retirement goals.

Principal offers retirement and insurance services to individuals, employers and institutional clients – with products designed to help fit the investor’s risk tolerance, goals and time horizon. The company got its start 140 years ago, when Edward Temple opened a life insurance company firmly rooted in Midwestern values. The company, which was then called Bankers Life, grew quickly. Within 10 years, it had $29 million in memberships – a massive sum in the 19th century. Today, the firm now known as Principal is a global asset management leader, led by Principal Global Investors, with $675.4 billion in assets under management and 24.2 million customers spanning more than 80 nations and territories as of March 31, 2019.

Despite the growth, the company never left its hometown of Des Moines, Iowa, nor did it abandon the small-company culture that made it a success. Principal Global Investors has a broad group of autonomous asset managers, a diverse set of asset classes and comprehensive financial solutions devoted to meeting specific client needs. 

Data and Operations Research Group

Financial services companies increasingly have to think of themselves as technology firms to satisfy the demand for tailored solutions and digital offerings. That’s why Principal invests $600 million annually in technology and product innovation. As one part of this ongoing commitment, the Data and Operations Research Group formed in 2017 serves as an innovation center to work through tough business challenges in a powerful, yet cost-effective way.

The group has completed projects across the enterprise, finding ways to address common problems in uncommon ways using traditional quantitative analysis, O.R. techniques and the application of artificial intelligence (AI). It’s a full-service shop that manages the development of all aspects of each solution, from programming a system through finishing it off with a polished user interface. The group’s integration of analytics, data and subject matter expertise is its greatest strength, as there are many projects in which taking a solely quantitative approach would not be enough.

For instance, Principal Portfolio Strategies, one of the autonomous asset management groups within Principal Global Investors, wanted a system to visualize the marketplace in a way that brings together the different factors that come into play when managing a complex, multi-asset portfolio. The ultimate goal was to enhance “situational awareness” for portfolio managers, under the presumption that they would make better, more informed decisions with a visual interface presenting significant amounts of relevant data in an easy-to-use, yet comprehensive interface. The Data and Operations Research Group pulled together the considerable analytic and computer science resources needed to build out the system. It was exactly what the end users wanted – and more. 

The Analyst Cockpit

Perhaps one of the Data and Operations Research Group’s most ambitious projects to date got its start when Principal Global Equities – another autonomous asset management group within Principal Global Investors focused on fundamental investment – expressed interest in using data science to give its research analysts an edge in spotting the elusive investments that may deliver above-market return. Unlike investment firms that make bold calls based on the macro economy or market direction, Principal Global Equities is heavily research-focused, making stock selection decisions based on bottom-up insights gathered one company at a time.

The basic idea was straightforward. No human analyst can possibly keep up with each day’s developments across every company in the world’s key markets. Machine intelligence, on the other hand, never tires and has an effectively limitless ability to process the never-ending stream of financial data to identify the information most likely to impact financial returns. The machines take care of the drudgery, leaving human intelligence to do what it does best – apply judgment to a clearly established set of relevant facts.

And thus, the Analyst Cockpit was born. This artificial intelligence, or more precisely, augmented intelligence, system captures news and reports touching every company around the globe in real time. It uses textual analytics to evaluate the information, applying a clever algorithm to predict better-than-expected corporate earnings and zero in on long-term variations in financial performance that we believe are likely to bring potential success to a portfolio. The system prioritizes items that contain important signals of value while unimportant news is filtered out. The most critical developments are brought to the analyst’s attention on a user-friendly visual dashboard.

With these key metrics at analysts’ fingertips, each investment professional can make an informed judgment about what to do based on experience – without wasting time chasing leads that may not pan out. The resulting investment decisions are more firmly rooted in the facts, and as such can be far more effective than choices made by a machine alone or by a human alone. And they are based on a comprehensive, bottom-up analysis of the market, entirely in line with the core philosophy of Principal Global Equities. 

The Role of Cognitive Diversity

No off-the-shelf system provides anything like the capabilities of the Analyst Cockpit. The Data and Operations Research Group set out to build the system from scratch, in the most efficient way we could, and cognitive diversity proved to be the critical ingredient for success. When the focus is innovation, doing something nobody has done before, it’s useful to come up with multiple options. Consensus is a great thing in many contexts, but it’s often innovation’s worst enemy. You can’t get “outside the box” thinking if everyone thinks the same way and agrees on everything.

Working closely with Principal Global Equities stakeholders, the operations research team divided the ambitious Analyst Cockpit project into a series of discrete problems that had to be solved in order to achieve the final goal. This included, for example, developing a natural language processing system, creating an algorithm for analyzing financial news, and working through other intricate tasks that culminated in deciding the most effective user interface for presenting the information. We set up a series of diverse teams that could draw on members’ unique backgrounds and experiences to look at the challenge from multiple angles.

So how do you achieve cognitive diversity drawing from a pool of employees who all work for the same company? Our combined skillsets are diverse for sure, but to really capture the value of unique experiences and backgrounds, we use a number of techniques, including engaging external third parties, setting up competitions and using capstones. 

Capstones

At Principal, we’re big fans of senior capstone projects, which are required by many business and engineering programs at top colleges and universities. Students near graduation participate in these projects to demonstrate a mastery of the skills they need to succeed in their chosen discipline under the guidance of a corporate sponsor. For students, it’s an amazing opportunity to learn under real-world conditions. For companies like ours, we have a way to harness the power of a fresh perspective – cognitive diversity.

After collaborating with 500 students on more than 100 projects serving business units across the enterprise, we’ve learned what works and what doesn’t. We ensure the strengths of each educational institution are matched with the task at hand, and our group also handles all the details involved in setting up capstone projects across Principal. Without exception, the student teams have impressed us with results that more than exceed expectations. And after seeing these young minds show off their skills, we’re in a great position to offer some of them positions with Principal. By now, multiple exceptional graduates from these capstone projects have joined the Principal family.

The O.R. Team

The Data and Operations Research Group team is built around cognitive diversity. Rather than hire the same people with the same degrees and life experiences over and over again, we ensure every team member brings something different to the table. One might have, in addition to the relevant technical background, a degree in philosophy. Another might have been an English major. What they share is an ability to work well with others toward a common goal and communicate their ideas with impact and clarity. The combination has proved effective, and the company appreciates their contribution to the overall success of the organization.

Quantitative expertise is fundamental to a financial services company like Principal, so the company’s leaders readily grasp the importance O.R. can have. While the application of AI to solve business problems is new for the industry, the Principal leadership team has been quick to appreciate the value of cutting-edge implementation of data science to help clients and customers achieve their retirement and financial security needs.