How wealth managers are responding to the impact of AI in the industry

May 16, 2024 4:30 PM

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Artificial intelligence has moved front and center for the wealth management industry. During recent quarterly earnings calls, firms including Goldman Sachs, Morgan Stanley and Citigroup outlined how they are deploying the technology and its impact on their bottom lines.

The potential use of AI in financial planning is rapidly evolving. Researchers from Case Western Reserve University and accounting automation solutions provider AIgency released a paper in April that evaluated the performance of five large language models (Google Gemini, ChatGPT-4, Claude, Mixtral and Llama-2b) on multiple-choice questions from CPA test preparation tools in an effort to assess their ability to "pass" the test.

Results were mixed. The paper concluded that ChatGPT is "the only real option for zero-shot BAR automation," meaning that ChatGPT-4 could be used to help with automated financial statement preparation or additional forecasting. On the other hand, the researchers said Claude was probably better on auditing-related tasks, which the paper said "is a solid indication that it can be used for fraud detection and internal control validation."

The idea of a large language model passing the CPA exam raises concerns for professionals: Am I eventually going to be replaced by a bot?

A recent MIT study co-authored by Andrew Lo, a professor of finance at MIT Sloan and director of the MIT Laboratory for Financial Engineering, suggested that while these models have the potential to simulate certain behaviors of human advisors, there's still a long way to go.

In fact, there may be more potential for job growth on the back end, after AI has created enough efficiencies to generate more assets, or clients, to manage. This means more human advisors will be needed, industry experts have suggested.

"It's going to help the advisor, and it's going to create efficiencies and process changes that will benefit the advisor," Christopher Marsico, chief financial officer and a partner at Rossby Financial, recently told Financial Planning's Rachel Witkowski. "And I can see where you get to a point where you're going to need more people."

Catch up on Financial Planning's coverage of how wealth managers are responding to the growing relevance of AI in the industry.

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No, advisors are not about to be replaced by bots

An MIT study has suggested that while large language models like ChatGPT are fairly new developments for advisors, they could be trained to adapt to simulate both the predictive and empathetic behaviors of human advisors. But advisors should not worry about being replaced just yet.

"To achieve performance that rivals the best human advisors, we will need to incorporate some notion of selection, evolution and fitness into the ongoing training of LLMs," according to the report, which was led by co-author Andrew Lo, a professor of finance at MIT Sloan and director of the MIT Laboratory for Financial Engineering.

When it comes to whether AI could develop fast enough to replace an advisor, Ryan Eisenman, CEO of digital admin platform Arch, said it's no different than when the dishwasher or laundry machine was developed: "We still find a way to fill our time with productive things."

Read more:

For financial advisors, is AI a job taker or maker?

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Consumption drives pricing change for AI services for advisors

AI-powered advancements in cloud services, as delivered via providers like Google and Microsoft, are driving a change in pricing for services and software that advisors utilize based on data usage in the cloud rather than a fixed-price licensing fee or a fee per account or assets under management. With usage-based pricing, the cost by the software as a service (SaaS) provider increases as your data usage goes up.

"Some SaaS firms are trying usage-based pricing in the market in order to protect themselves from increasing usage-based costs from their cloud providers and to protect themselves in multiyear agreements," John O'Connell, founder and CEO of The Oasis Group, a software provider for wealth managers, recently told Financial Planning. "I believe that we will see an increase in usage-based pricing models in the wealth technology space."

Read more:

How Google, Nvidia and other AI-powerhouses influence vendor pricing for advisors

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High cost of AI investment leaves advisors anxious to see value

James Bogart, the CEO and president of Bogart Wealth, which works with fintech vendors and is exploring AI solutions, said the bar is high when it comes to his firm's willingness to adopt new AI technologies.

"This technology is really expensive," he said. "I mean, hundreds of thousands of dollars a year for some of these vendors. So for me to make that level of change, there has to be a significant uptick in value creation."

Gauging the level of value creation is not easy. The accuracy of the AI in the tools being sold is difficult to determine as AI programs are still learning. Pricing structures also differ, with some charging advisors through a license or subscription-based model, or fees based on number of users or AUM.

Read more:

The ROI on AI: Advisors struggle to get unbiased answers from tech providers

Big industry players dive into the AI pool

AI has become an unavoidable conversation during quarterly earnings calls for wealth managers, with both analysts and investors keen to hear what the leading firms are doing.

Goldman Sachs CEO David Solomon recently acknowledged that clients want to learn more about AI: "As we look longer term, to the extent that this technology develops in line with expectation, there will be significant demand for AI-related infrastructure, and as a result, financing, which will be a tailwind to our business," he said.

At Citigroup, CEO Jane Fraser touted plans to enhance platforms and capabilities to elevate the client experience, while Morgan Stanley CFO Sharon Yeshaya described the firm's work on advanced investment platforms. "What we're trying to do is make sure that we also have the right trade-offs between investing in the business, giving ourselves room for technology and being able to build a 30% margin for a sustainable business and durable revenues over time," Yeshaya said.

Read more:

Goldman Sachs, Morgan Stanley, Citigroup: How they're deploying tech and what it costs

Bots have pros and cons when taking the CPA test

Large language models such as ChatGPT and Claude have the ability to pass multiple-choice sections from CPA Exam practice tests, but like their human counterparts they have their strengths and weaknesses, according to a recent paper from Case Western Reserve University and accounting automation solutions provider AIgency.

"While some LLMs have made significant advances in mimicking the complex decision-making skills required for CPA exams, there remains variability in performance across different sections of the test," the report, published in April, said. "This variability underlines the importance of tailored training and specialization in developing LLMs for professional applications such as the CPA exams."

Read more:

Which generative AI model did best on the CPA exam?