AI or advisor? Machine learning's impact on financial advice

AI or advisor? Experts weigh in on the impact of machine learning

September 13, 2024 3:32 PM

Advisors across the wealth management sector and beyond have been eager to explore how artificial intelligence can streamline processes and deepen relationships with clients. But with a seemingly endless number of tools fueling fears of human talent being replaced, experts say an automated future is a distant — but likely — possibility.

Research published in January by Financial Planning surveyed more than 190 advisors across the U.S. about what market factors they anticipated would impact their firms and the industry at large in 2024. Thirty-one percent of respondents said technologies like generative AI and machine learning were a large concern for the year ahead.

Even so, findings showed that 87% of experts expected AI to have a positive impact on the industry.

"A paradigm shift for advisors, fueled by numerous new technologies including blockchain, digital twins, spatial computing and quantum computing — and of course gen AI and large language models — is on the horizon over the next decade. … Supercharging this shift will be AI agents," Jean Sullivan, head of wealth management at Celent, told Financial Planning last month.

JPMorgan Chase and Royal Bank of Canada are recent examples of organizations equipping advisors with AI-powered tools. Many asset managers are still holding back, however, in light of risks surrounding data integrity, accuracy and more.

"The challenge so many firms, especially in the wealth space, face is: One, how do I actually design a use case to solve a problem with it," Scott Lamont, managing director at F2 Strategy, told Financial Planning's Rachel Witkowski this month. "And two, do I have the data? Do I have the technical expertise? Do I have the thoughtfulness to design and implement something that can take advantage of this new type of technology?"

The compliance burden brings an additional challenge beyond deployment, as regulators continue to weigh in on the tools and what actions are permissible.

Read on for expert commentary on what AI could mean for the wealth management industry and if advisors have anything to fear just yet.

Could AI advisors render human ones obsolete?

Robo advisors have been an oft-debated concept in the wealth management space, with many firms either expanding investor access to the tools or prioritizing the tried-and-true human expertise the industry depends on.

But with the addition of AI-powered models positioned to improve pre-existing robo advisors, the question many professionals are asking is whether or not the market is ready and willing to hear advice from a robot?

In a prior conversation with Financial Planning, Scott MacKillop, strategic advisor for GeoWealth, weighed in on this dynamic by discussing concerns surrounding how well the models can disseminate information across time, face regulatory challenges and handle consumer reception.

"The work of a financial advisor is all about dealing with the future, which, by definition, is shrouded in uncertainty," MacKillop said. "It certainly would be helpful to know everything that has ever happened in the past, but that knowledge has only limited value in predicting the future."

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Will smooth-talking AI avatars replace human advisors?

Could AI agents disrupt the wealth management industry or derail it?

Seasoned wealth management experts doubt that generative AI will replace human talent in the near future but are not ignoring the potential value that the tools bring to the table.

Jean Sullivan, head of wealth management at Celent, told Financial Planning last month that the general consensus surrounding wealthtech products underpinned by AI is that the products will handle menial tasks to thereby free up human professionals for dealing with clients.

"A paradigm shift for advisors, fueled by numerous new technologies including blockchain, digital twins, spatial computing and quantum computing — and of course gen AI and large language models — is on the horizon over the next decade. … Supercharging this shift will be AI agents," Sullivan said.

The prospect of adding these semi-autonomous and human-like agents into a workflow doesn't look the same for all firms, and leaders need to be mindful of the utility these products can fully offer before deploying them.

"Even if a firm is in early stages of considering or implementing gen AI, now is an excellent time to ready the organization for the moment when gen AI and AI agents become more accessible," Sullivan said.

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Are AI agents the next big wealth management disruptor? What financial advisors should know

How AI factors into the advisory compliance conversation among firms

Off-channel and public-facing communications have been in the regulatory crosshairs over the last few years as the Securities and Exchange Commission cracked down on firms messaging clients on platforms like WhatsApp and others. As this trend continues in 2024, professionals are monitoring how to remain compliant when AI enters the conversation.

In the latest regulatory oversight report from FINRA, the agency classifies AI as an emerging risk and is adamant that advisors are individually responsible for the outcomes generated by AI tools — whether that is marketing copy or investment recommendations.

"Marketing teams might not be equipped to check the generated output thoroughly, which is especially problematic in the context of chatbot 'hallucinations.' … Without the correct checks and amendments, a brand's tone of voice and clarity of messaging can be compromised," Harriet Christie, chief operations officer of Mirrorweb, told Financial Planning in a May conversation.

"More worryingly, so can its factual legitimacy," she said.

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Enhancing firm-level advisory compliance in the age of AI

What advisors should know before jumping into the AI fray

"Caution and conservatism are still industry bywords when responding to [AI and machine learning] technologies, and among financial advisors, whose professional success often hinges on adherence to various rules and regulations, fear of the potential threats and challenges of the new and uncharted technology are real," Brian McLaughlin, president of Orion Advisor Technology, told FP in May.

Data from Orion's most recent Wealthtech Survey found that 38% of experts polled identified AI and machine learning as the most disruptive trends in the wealth management industry, and that the share of professionals planning to employ those tools grew from 18% to 30% year over year.

Despite industry trepidation in favor of guidance or legislation that clearly outlines which AI use cases are allowed versus which are not, exploring applications in marketing and portfolio analysis can help "the Indiana Joneses adopting this technology" gain a competitive edge.

"The world is going to keep changing regardless, so the best approach is to embrace the adventure and change with it," McLaughlin said.

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Advisors: Be the Indiana Jones of your own AI adventure

AI insights that are top of mind for advisory firms seeking compliance

"If I was interested in investing in scamming, it's going to be the growth industry of all time," Warren Buffett, founder of Berkshire Hathaway, said about the potential of AI during the firm's annual shareholder meeting.

It's this perspective that experts like Beth Haddock, chief legal officer for AdvisorEngine, say underscore one of the main challenges hindering the responsible adoption of AI throughout the financial services space. The others center around being competitive and improving productivity.

Regarding compliant integrations, it's important for advisors to distinguish between traditional AI applications and their generative counterparts.

Applications including those underpinning recommendation engines on retail platforms "have long been integrated into financial operations to detect fraudulent activities like money laundering," Haddock said. "Many of the risk management, compliance and governance controls used for this technology can be applied to generative AI — and therefore incorporated into firms' AI safety vetting."

Steps to ensure adequate vetting start with outlining which tools are vital and which can wait, then progress to vendor due diligence and conclude with proper internal oversight to make sure the tools remain compliant with current regulations.

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3 need-to-know AI insights for advisory firms to stay competitive and compliant