How to get new tech past the compliance check

There are many new technologies and AI developments that advisors find useful and seem now to be ubiquitous in the industry, but that does not mean compliance departments will easily approve those new tools for use at a firm.

Most advisors and tech developers say the hardest step is often getting their compliance team to sign off on an AI tool or new tech vendor, despite many studies that show AI is increasingly being used by advisors. More than 60% of 400 advisor respondents surveyed by Horsesmouth said they use AI tools, according to the June study. One of the most common tools cited was the large language model (LLM) and publicly free ChatGPT.

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"People may not even think about it and just use something like a ChatGPT, and they're in violation of their firm's policy," said Randy Carver, president and CEO of Carver Financial Services and registered principal at Raymond James Financial. Data security is "an important consideration with some of this AI stuff, even ChatGPT, because as soon as you put it in there, it's out in the cold."

Carver is a frequent user of AI tools, like scheduling and writing assistants, at his office and personally. But he cautioned that not all of these tools can be used for clients due to compliance hurdles and the understandable need to protect data. 

"It's a struggle," he said. "We actually looked at moving our website to a different vendor. Turned out they're running servers in Eastern Europe. I can't do that. Who knows where the information goes?"

A survey by Financial Planning earlier this year found similar results with 63% of respondents saying they use AI tools. However, nearly half (49%) of advisors said they feared that the current forms of AI could create ethical issues and biases, with 24% reporting their firm banned AI or restricted its use to specific employee functions or roles. 

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"The compliance team is not there for technology. They are there for product and regulatory compliance," said Andrew Evans, CEO and founder of Rossby Financial, an open-architecture RIA platform based in Melbourne, Florida."They don't want to mess around with new technology, so they will put it on the back burner."

Compliance has reason to be concerned because anything new with buzz, like AI tools, also attracts the attention of governing bodies including FINRA and the U.S. Securities and Exchange Commission (SEC). 

In June, FINRA released a regulatory note acknowledging the benefits of tools like generative AI and large language models (LLMs). But it also warned that "the development of Gen AI also has been marked by concerns about accuracy, privacy, bias, intellectual property, and possible exploitation by threat actors, among others."

Because of the heightened security concerns with AI, some industry leaders say the first step is to take a new tool straight to compliance.

"You've got to ensure that everything you're doing is protected. Even if you think it's a calendaring app, it's still collecting people's names and email addresses," said Andree Mohr, president of Integrated Partners, a hybrid registered investment advisor based in Waltham, Massachusetts. "I would definitely start with compliance because asking for forgiveness can be extremely tricky."

Evans suggests that advisors who want to implement a new tech should first read the compliance manual about technology implementation, and then take the pitch as high in the C-suite as possible with the expectation that it will be "a roller coaster" ride.

"Take it up as high as you can go, expect for it to tank down to some lower level, but stay on top. Make sure you know when it tanked and then start to push it back up," he said. "It's your responsibility to keep pressing it up. You've got to get it right. You've got to get it back."

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Conversely, Evans added that it's important to know when it's time to stop pushing a new tech.

"If somebody comes to you and says … 'you've got to stop pushing,' then you know it's time to go."

But that does not mean a new technology is permanently dead in the water. 

Ed Friedman, director of business development and growth at Summit Financial, an RIA based in Parsippany, New Jersey, recalled pausing advisors from using ChatGPT nearly two years ago while it was in its infancy. Their perspective began to change this June, when Morgan Stanley released an AI-powered assistant called AI @ Morgan Stanley Debrief to do the so-called "grunt work" for advisors by dictating and summarizing meetings that the firm built through OpenAI's GPT4 — a use-case and integration seen as more secure.  

"That's an example of [change from] a year and a half, maybe two years ago when it was like, hit the brakes on ChatGPT until we figure this out from a compliance standpoint," he said. "But now we're starting to understand that there's an application to it that we don't necessarily have to be as concerned about, if you will."

Many of these AI tools currently being used in the advisor workplace — as well as compliance and regulatory solutions — will be discussed by industry leaders during Financial Planning's new ADVISE AI conference on October 9-10 in Las Vegas.