AI In the Financial Advisor Industry: Present and Future Impact

Over the past two years, artificial intelligence (AI) has transformed from an emerging technology to a household name, weaving its way into many different industries. With the technology being here to stay, it’s up to business owners and professionals to decide how to implement it into their day-to-day processes. In particular, financial advisors face both a unique opportunity and challenge in how they will use these tools to run their businesses and serve clients.

Offering high-quality, ethical guidance is paramount in the financial advice industry. For this reason, implementing AI into a financial advisor firm, no matter the size requires careful consideration. This article will explore the implications of financial advisors using this technology for administrative purposes and as a tool to help clients.

How AI Works

AI broadly refers to any intelligence that a machine possesses and displays. More specifically, this technology is designed to “mimic human intelligence,” through problem-solving, perceiving the outside world, and processing and conveying information, according to CSU Global. It manifests in several different forms, which we currently use in our everyday life, including:

• Search engines
• Social media algorithms
• Generative AI, i.e., ChatGPT or art producers
• Self-driving vehicles

Of note in the list above is generative AI, which many refer to as ChatGPT. With this technology, individuals can provide prompts, which a machine will then respond to with as much or as little detail as the user would like. The information that feeds this is from a large language model (LLM), which is a program that focuses on learning and absorbing as much data as possible, including from books, the internet, scholarly texts, and more.

Because LLMs and generative AI are becoming both comprehensive and prominent, many are turning to them to assist with daily tasks, such as writing, cooking, or even financial advice. However, many argue against its validity, especially when people use it for consequential issues, such as their health or finances.

Applications for AI In the Financial Advisor Industry

While the everyday use of AI has been ever-increasing in recent years, the technology is also becoming a tool within the financial advisor and wealth management industry. This manifests itself through many different applications, both for large and small firms. These uses can help both the client and administrative side, making it easier for advisors to serve individuals.

The most common instances of AI in the financial advisor industry are robo-advisors, also commonly known as automated portfolio managers. These are based on advanced algorithms that build a portfolio on a client’s behalf based on a variety of factors, including their goals, risk tolerance, time horizon, and resources. They offer a more affordable and streamlined portfolio management experience for clients with a novice investing history.

Today, 51% of firms are either using or planning to incorporate AI in their operations, per a study by F2 Strategy. However, according to Phil Siegel, founder of AI nonprofit, CAPTRS, current uses for it are “more generic than specific” and emphasize helping them “write plans for their [clients].” This is in line with F2 Strategy’s study, which lists workflow automation and predictive analytics as two major applications for the technology.

Andrew Bellak, a partner and wealth advisor at Perigon Wealth, explains that he and his team use both “AI-enabled search” and a “financial planning tool called FP Alpha,” which uses AI technology. Per Bellak, the latter can analyze “various planning-related documents like tax returns, estate docs, and insurance policies and then pre-populate forms and make suggestions about areas to review/explore.”

AI, as Siegel and Bellak point out, can help advisors streamline their processes because it’s able to quickly analyze data. In a wealth management firm, a professional may be able to use the technology to review a person’s portfolio, budget, financial goals, or other variables. This allows it to act as an assistant to an advisor, making it easier to review a client’s finances.

Benefits and Limitations of AI in the Financial Advisor Industry

The use of AI by financial advisors is likely to bring a wide array of benefits to both clients and professionals in the industry. Tedious quantitative tasks and the compiling of information are likely to become more streamlined, leaving more time for advisors to better serve their clients. However, it’s important to be realistic about what limitations this technology currently has, especially with how it may impact the client.

Generative AI’s ability to quickly and easily analyze, interpret, and compile data is likely to help immensely with important tasks financial advisor firms face each day. “Quants have already been using versions of AI, machine learning, and large language models, to try and develop trading strategies that ‘beat the market,’” says Bellak. Similarly, an automated tool could assist “advisors” with creating “drafts of various reports like a client annual review or financial plan.”

Robo-advisors, as mentioned, are a convenient choice for investors with little resources or minimal experience. In this case, AI helps provide an accessible, albeit slightly limited, option for clients. Today, this technology is mainly geared toward investment management, with little to offer in the way of financial planning.

An important limitation to consider is an AI’s capacity to act as a fiduciary. Bellak believes it isn’t “that easy” for a computer to know if “recommending something is very clearly in the client’s best interest.” The U.S. Securities and Exchange Commission (SEC) requires robo-advisors to act as fiduciaries; however, the lines blur when a professional uses generative AI as an assistant to write a financial plan or even make recommendations. The lack of legislation to regulate this emerging technology raises questions that clients should be aware of.

Future of Financial Advice

As technology continues to improve and the number of professionals that adopt AI grows, the financial advisor industry is set to experience significant change. The advancement of these tools is likely to bring about new, useful applications that firms can take advantage of. This is likely to make it easier for firms to serve clients and, potentially, garner better results for them.

For example, as advanced as they already have become, robo-advisors are likely to see their capabilities “significantly increase in the coming years,” predicts Thomas J. Brock, CFA, CPA, an expert contributor at Annuity.org. More specifically, algorithms may become more adept at understanding a client’s needs and preferences, allowing them to structure a high-performing portfolio. Additionally, the industry might see robo-advice go beyond investment management as it does today, extending to financial planning tasks.

AI, as useful as it may be, does raise concerns and fears for many. The continued implementation of this technology in the financial advisor industry may leave some wondering how it will impact their jobs and the integrity of their firm. As it stands now, the use of a machine as a quantitative or administrative tool doesn’t replace the invaluable expertise of a real financial advisor. Rather, they serve a more complementary role in firms. However, while this is currently the case, Bellak shares an important insight on how society should take great care as it grapples with the rapid ascent and spread of AI:

I hope we can be more thoughtful and intentional about how we introduce AI or any new technology. My friend, Dr. Richard Sclove wrote a book many years ago that’s still relevant today called Democracy and Technology. He studied the Amish, among others, on how they are intentional about introducing tech. Unfortunately, in the US, the mantra is often: move fast and break things. It looks like we regret now how the social media genie was unleashed from the bottle and now we’re trying to legislate it under control.

Today, it seems as if we blink and a new technology — AI in this case — is engrained in our work, education, and daily life. For this reason, it’s crucial to understand what the implementation of it has on various industries and, as a result, our overall society. In the case of the financial advisor industry, it will be up to firms to decide how to utilize the technology ethically and effectively to best serve their clients. Conversely, regulatory authorities, such as the SEC and the Financial Industry Regulatory Authority (FINRA), will be responsible for determining how best to legislate the technology to protect retail customers.