Artificial Intelligence—Friend or Foe?
Good to Know
Artificial intelligence is either the greatest threat to our species or the greatest boon to humankind, depending on what headline you read. The author makes the cheerful assumption that AI does not become “self-aware” and eradicate humanity á la “Terminator.” Neither this article nor financial planning will matter if the author has assumed wrongly. Here’s the looming question for which no one has a guaranteed-correct answer—how will AI impact financial advisors and financial planners? We will offer insights by:
- Reviewing the history of other “financial advisor extinction” forecasts,
- Identifying key advantages and disadvantages of AI, and
- Viewing AI from a client’s perspective.
Previous “Financial Advisor Extinction” Forecasts
There were at least three times in the not-so-distant past that the press prematurely reported the demise of human financial advice. Those threats included:
- The rising popularity of personal computers—it turned out that PCs dramatically increased productivity for financial advisors,
- The explosion of internet technology—this created a corollary explosion of financial advisor efficiency, and
- Robo Advisors—while these tools exerted downward pressure on some fees, savvy financial advisors found ways to expand their practice in ways such as becoming a Certified Financial PlannerTM.
Let’s take a quick moment to look at Robos in more detail. Headlines once proclaimed that Robos would replace human financial advisors. Here’s a news flash—that didn’t happen. As a matter of fact, client use of Robo Advisors fell dramatically in 2022 according to Investment News.1 Whether that represents a short-term or long-term phenomenon is yet to be seen. While the exact reasons behind that drop are debatable, the reported disadvantages of Robos include:
- Lack of human contact—even clients of modest means like to know they can speak to a human,
- Limited personalization—your client must invest in a standard portfolio instead of one personalized for them,
- Difficulty integrating with a client’s portfolio held outside of the Robo, and
- Lack of comprehensive financial planning services such as optimizing retirement savings and protecting client assets from creditor claims.
Now we turn to AI’s pros and cons.
AI—Pros and Cons
Pros
- Financial advisors can delegate tasks to AI, including trading, so they can focus on existing and new client relationships. As just one example, a financial advisor who knows their clients personally can help them stay invested when a crash tempts them to panic, sell equities, and flee to the “safety” of cash.
- AI can find, assimilate, and analyze staggering amounts of data using published financial reports, news articles, and social media.
- Market sentiment and market movements can be predicted by AI, using correlations found in massive amounts of data that a human advisor may not see, and
- AI can make trades at blazingly fast speeds.
Cons
- AI’s ability to help a financial advisor maximize a client’s risk-adjusted return is only as good as the quality of the data it analyzes.
- History is a huge factor in many AI algorithms, but we have witnessed breath-taking swings in the market that defied historical trends; remember the 37% COVID market drop during a few short weeks and the almost unprecedented recovery a scant few months later?
- AI is only as good as the algorithms with which it performs its tasks—the subtleties of client goals, dreams, and fears may not always translate well into AI.
AI: Through a Client’s Lens
Will clients trust AI with their investments? Here’s an interesting story that brings trust into sharp relief. Self-driving cars were heralded as the ultimate evolution of the automobile. The promise was that the car’s owner could safely work or relax during their daily commute. However, there were over 400 crashes during an 11-month trial period conducted within a limited geographical area, some caused by the unpredictability of human drivers. One story recounts a self-driving car having its algorithms crash because a teenager was illegally “cutting donuts.” Here’s the author’s point—humans are not always predictable.
In closing, only the future will tell if AI is a boon or a bane. As of today, it’s hard to imagine a client fully entrusting their financial future to nameless, faceless software unless there’s a trustworthy financial advisor managing the ultimate financial decisions.
Disclaimer
The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide legal, identity theft protection, investment, income tax, risk management, retirement, estate, or financial planning advice of any kind. An experienced and credentialed expert should be consulted before making decisions relating to the topics covered herein. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.
