Will Artificial Intelligence replace Financial Advisors?
Written May 2023
In 2020, McKinsey published "On the cusp of change" (Baghai et al), referring to the Netflixing of financial advice. They argued streamers and big data technology firms could use their platforms as disruptive enablers across personal finance by 2030, cutting out human-based financial advice as we know it for 80% of new clients.
Whilst Amazon’s entry into the U.K. insurance market last October caught many by surprise, it was the launch of ChatGPT in November and the hype around Artificial Intelligence (AI) that has caused most Advisors to question the threat of technology to the traditional Advice model.
Motley Fool released a study in May 2023, finding that 47% of U.S. adults have already used ChatGPT for stock selection. PortfolioPilot, an automated advice firm that has embedded Open AI’s ChatGPT functionality into its client interface, hopes to grow its 10,000 users and seek SEC regulation. It’s. Therefore, clear AI is becoming a differentiator for automated or “Robo” investment planning, but how does this transcend traditional, more personalized, human-based financial planning?
Earlier this month, Apple revealed its $3,500 augmented reality headset. With Zoom and Teams already a firm part of financial advice channels, could a more cost-effective version of this hardware become the future of advice? Why do clients need a human being if an augmented Warren Buffet is on hand to review their Retirement Plan?
The threat of automation in personal finance is nothing new. Ten years ago, Robo Advisors were heavily tipped to steal the charge from human-based investment and financial advice, but this never came to pass, and most of the disruptors, burdened with platform development costs, have since been swallowed by larger banks and wealth managers.
Most automated platforms use passive funds and risk modeling as their route to cost-effective asset allocation, which continues to be attractive to mass affluent clients with uncomplicated circumstances. However, as most of us know, with more money comes more problems. This is where human-based advice remains exclusive.
In their 2022 report (Costa, P. & Henshaw, J.) comparing human and Robo Advice, Vanguard found across 1500 investors that loyalty to human advisors endured, with 90% of human-advised clients saying they would not consider switching to a Robo Advisor and 88% of Robo Advice clients saying they would consider switching to a human advisor. As part of their research, Costa and Henshaw developed a framework that helps define the benefits of both automated and human-based advice.
Compartmentalizing advice into 3 areas, Portfolio Value, Financial Value, and Emotional Value allows client investing and planning needs to be deconstructed. What becomes clear is that automation, such as AI or Robo Advice, cannot compete with the emotional value offered through human-based advisors. Costa and Henshaw found human advisors increased their clients ’ peace of mind and satisfaction by 80% and 84%, respectively, compared with 71% and 77% through digital advice channels.
Source: Kitces.com (Van Deusen, A. 2022)
But augmented reality and ChatGPT won’t sit still, their evolution continues and with sophistication. Nerdwallet interviewed Matthew Alhonte (Taube, S. 2023), a machine learning engineer for a healthcare technology company, who cites research by The Institute of Creative Technologies and Bard College (2014) indicating that humans may be more truthful in communicating with machines than with humans due to a lower fear of self-disclosure. He also believes ChatGPT could help human Advisors create financial plans and proposals in the short term whilst the technology finds its feet and improves its accuracy.
For now, it seems investors will continue to demand human-based Financial Advice, when they realize they need it and technology can help Advisors reach new clients by formulating investment and planning advice, monitoring and reviewing client plans with greater efficiency.
When asked about its threat to human-based Financial Advice, even ChatGPT agreed- “emotional intelligence, trust and empathy cannot easily be replicated by AI.” (Taube, S, 2023).
