Over the past several years, “advisors” empowered by artificial intelligence have gained ground in the financial industry.
Recent reports show that 47% of Americans now use chatbots or other AI platforms to identify new investment strategies. With younger generations, usage is generally higher.
Financial experts at Deloitte last year predicted that AI advisors will move into a leading role by 2027. Deloitte expects that nearly 80% of retail investors will be relying on AI for advice by 2028.
For human financial advisors, the trend is obviously troubling. AI has already shown its capacity for replacing human labor in a variety of industries, from transportation to retail to the military. Does the fact that more people are turning to AI for financial advice point to the technology ultimately replacing human advisors?
It is too early to identify precisely what tasks AI will ultimately be able to accomplish, as well as whether the trust issues surrounding the technology can eventually be resolved. But certain characteristics of the advising process indicate humans will always play a key role in financial advising. The following are some of the key issues that promise to prevent the complete shift to AI advisors. I’ve also included related steps advisors can take to stay relevant and add more value to the advising process.
There is a formulaic component to financial advising. Processes are used to identify short-term and long-term goals, determine timeframes and gauge risk tolerance.
Thus far, AI has shown itself to be capable of easily carrying out formulaic processes. In fact, it does so with greater speed than humans could ever achieve and can include more data sources to allow for more sweeping analyses.
However, effective advising requires much more than plugging numbers into a formula and providing a data-driven investment path. For many people, investing involves decisions influenced by values, life goals and emotions. Human advisors can offer the emotional intelligence needed to appreciate and accommodate those components.
Financial advisors can increase their value by developing and leveraging their emotional intelligence. They can notice, for example, when unexpected market developments are causing clients to doubt the strategies they’ve adopted. Coaching clients through those movements with reassurance and support requires nuanced behavior that algorithms can’t manage.
Emotional intelligence can also be used to help develop trust between advisors and their clients. Trust is critical to the advising process, facilitating an environment where clients believe advisors act in their best interests. Open communication and empathy are two key drivers of trust that human agents can offer, but AI can’t.
Advising Requires Attention to Nuances
Some investors are comfortable being placed within a particular category — conservative, moderate or aggressive — and offered limited options designed for that category. AI, to a large degree, can serve those investors.
Others, however, have nuanced needs that require careful consideration. For them, human advisors offer an invaluable service. They can listen, probe deeper and interpret how unique circumstances can be addressed in an investment strategy.
For example, a client seeking estate planning may have family dynamics that are difficult to express or discuss. An experienced financial planner can understand those dynamics and talk a client through strategies for addressing them in a sensitive and respectful way. Whereas AI may be able to offer personalized financial plans, it can’t provide personalized service informed by the client’s personal challenges, values and complexities.
Advising Requires a Deep Understanding of Timing
Investing has a lot to do with timing, especially when it comes to retirement investing. Understanding how unique elements in both the market and the investor’s life impact investment performance is critical to optimizing strategies. But that type of understanding is something today’s AI can’t offer.
For example, emotional readiness plays a role in making the transitions investors face as they approach retirement. AI’s recommendations will be based on data. A human advisor can consider data while assessing a client’s emotional state to determine the timing that will work best for the client’s needs.
AI could be counted upon to identify the correct timing for investment decisions based on market movements, tax law and the client’s financial data, but the ability of human advisors to connect with clients on a deeper level allows them to identify the right timing for their clients.
To better understand what the future may hold for financial advisors, consider the preferences expressed by younger generations now entering the investing space. Reports show that 67% of Gen Z are tapping into AI to help with their personal finances. Yet when asked to identify their go-to source for financial consulting, parents and other family members were the most popular answer for those in that age group, followed by financial advisors.
The results seem to indicate that those who are embracing AI as a key element of their financial planning also want a personal touch provided by someone they trust. Professional financial advisors who can provide that hybrid approach will most likely continue to be seen as a valuable resource for investors.
Aaron Cirksena, founder and CEO of MDRN Capital, is a 2011 graduate of the University of Maryland, College Park, where he studied economics. Since then, he has devoted his career to financial planning, distribution planning and managing client money. Aaron worked with multiple $1 billion teams at Morgan Stanley and independent firms before creating MDRN Capital,a fully digital, independent services firm that offers income planning, investment management, tax planning, healthcare planning and estate planning.
