Who’s driving here?

Artificial intelligence is taking on a growing role in how asset managers research, test, rebalance and even design investment strategies. While some firms use the technology to support human decision-making, others are handing it the reins. Portfolio managers aren’t necessarily becoming obsolete, and those who learn to use AI effectively may even gain an edge.

“We could build … the best AI systems, but if our folks don’t know how to leverage and use them well, or don’t trust what they’re seeing, then it won’t be productive,” Charlie Flanagan, chief AI officer at Balyasny Asset Management, said during a panel discussion at a Bloomberg event last week.

In the Driver’s Seat

This summer, Ai Funds launched its first ETF, the High Conviction US Equity AI-Managed ETF (HIAI), which is autonomously managed by the firm’s in-house agent, BAILA, which stands for Bayesian AI Learning Algorithm. “[The] AI isn’t helping a portfolio manager make decisions. It makes them,” company CEO Tal Schwartz said. “Most of what the industry calls ‘AI-powered’ is really AI-assisted: The AI suggests and a human decides.”

It’s an entirely new investment category, Schwartz said. Active management offers the potential to beat the market, but results vary widely, while passive indexing offers low costs but no alpha. “AI-managed investing will follow the path passive investing took, from a contrarian idea to a standard option in every portfolio,” Schwartz told Advisor Upside.

AI adoption across the industry is already growing, even if most firms haven’t handed over investment decisions entirely:

• Globally, 55% of asset managers say AI is integrated in at least one of their strategy’s investment processes, according to a Mercer survey conducted in February.
• Plus, 91% of respondents said at the time that they planned to increase their use of AI in the 12 months ahead.

Learner’s Permit: Not every asset manager is ready to let AI take the wheel. Don Cody, founder of Global Macro Asset Management, said he uses AI for research, stress testing, developing client materials and comparing funds. Tasks that once required a team of analysts can now be completed by a small firm in an afternoon, he told Advisor Upside.

“It changes research hours spent, not investment judgment,” he said. “AI can create a hundred strategies in a day, but it can’t tell you which one survives a regime change nobody has seen yet. … It’s going to be a while before we turn over the keys completely for product design, development and management.”

Even the hot RIA mergers and acquisitions market needs a cooldown every once in a while.

After seven straight quarters of transactions setting or tying a record, activity fell 17% in the third quarter of 2026, according to a recent report from DeVoe & Company. There were 77 transactions announced, down from 93 during the same time last year, marking the “clearest break in the market’s upward trajectory since activity plateaued in 2022 and 2023,” the report read. Small sellers, which DeVoe defines as those with $100 million to $500 million in assets under management, accounted for just 36% of total transactions year to date, putting them on pace for the lowest full-year share on record.

It likely has more to do with sellers pulling back than buyers being out of the market, CEO David DeVoe said, adding that transactions announced today reflect decisions made six to 18 months earlier. Rewind to a period defined by tariffs, AI-related market volatility and geopolitical uncertainty.

“When markets become unsettled, smaller RIA founders often turn their attention to clients and running their businesses rather than pursuing a sale,” DeVoe said. But as conditions stabilize, more of these owners may return to the market, he said. “Buyer appetite remains strong, and smaller RIAs continue to have meaningful opportunities to sell.”

What Sellers and Buyers Want

RIA owners, including those of smaller firms, have ample opportunity to explore a sale, since there’s still a high supply of well-capitalized, private equity-backed acquirers, said Sam Sphire, vice president at Echelon Partners. They’re often looking to find a succession path for advisors and owners as well as grow, expand their offerings and create career opportunities for employees.

And increasingly, they’re looking for more than liquidity, DeVoe said. “They want a partner who can help them grow and take some of the burden of running a business off their shoulders.”

As for the buyers:

• RIAs are typically attractive to buyers if they have strong organic growth, a fee-based business model with holistic financial planning as the main service, M&A experience and expertise in a specific client niche, Sphire said.
• Leo Kelly, CEO of Verdence Capital Advisors, said his firm’s search starts with people over size or earnings. “Culture is everything to us and is the cornerstone of our growth story,” he said, adding that finding partners who are client-first and growth-minded is also important.

Respect the Process: Firms that struggle to find a buyer are often not prepared for a sale process, Sphire said. “They may not know their options, what to ask potential partners, how to negotiate through the inevitable challenging moments of a transaction, or how to position the firm, especially if it’s lacking in one or more of the areas that drive valuation.”

And you thought you had a lot of obligations in life.

US-listed ETFs holding collateralized loan obligations drew a record $3.3 billion in September, bringing the yearly total up to about $18 billion, according to TD Securities’ US ETF weekly report. While CLOs used to be the remit of institutional investors, ETFs focused on the asset class have opened up the category for individual investors. Since CLOs are made up of floating-rate bank loans, they’re less sensitive to rising rates and offer higher yields than other fixed income products, said Joe Bullard, active fixed-income research analyst at Morningstar.

“If you want to lessen duration in your portfolio, or if you just don’t want much interest rate sensitivity, while still getting some premium for corporate exposure, CLOs can provide that,” Bullard said.

Still, while the interest on CLOs rises along with rates, they fall with rates too, cautioned Matthew Chancey, founder of Tax Alpha Companies. “It went up on the way up, and it will come down on the way down,” he said. “If you’re using this as a better savings account, you’ll feel it first when rates fall.”

You’re Not a Loan

The turning point for CLO ETFs came in 2022, when the Fed first started raising rates. Traditional bonds suffered, but floating-rate AAA CLOs held up. “Category assets roughly quadrupled that year, from about $500 million to $2 billion,” American Beacon CIO Paul Cavazos said. “Investors got yield without duration risk, and they haven’t forgotten it.”

In the tranches:

• CLO ETFs brought in about $2.5 billion in July, $2.6 billion in August and $3.3 billion in September, per TD Securities. Roughly 80% of this year’s flows have gone to the PGIM AAA CLO ETF (PAAA) and the Janus Henderson AAA CLO ETF (JAAA).
• JAAA has returned nearly 3.6% this year, outperforming the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) (at 2.9%) and the Invesco Senior Loan ETF (BKLN) (at 2%), as of Oct. 19, per ETF.com data. The difference is even more pronounced when compared to traditional bond funds, with the iShares Core U.S. Aggregate Bond ETF (AGG) down 1.6% for the year, the iShares National Muni Bond ETF (MUB) down 2.1% and the iShares 20+ Year Treasury Bond ETF (TLT) down nearly 5%.

CLOistered No More: Prior to 2022, there were only two CLO ETFs. Three more were added that year, and then things exploded. “If you had told me six years ago when we launched JAAA there were going to be 56 CLO ETFs, I would have said you’re crazy,” said John Kerschner, global head of securitized products at Janus Henderson. “We’re probably at peak CLO ETF right now. I would bet in another year that number actually goes down, as some of these are shuttered.”