Tech innovation reshaping financial guidance: exploring the impact of AI on investment strategies
Financial advisers increasingly embrace artificial intelligence (AI) as a tool to enhance their services, with the majority expecting to incorporate the technology into their processes within the next five years.
In the United Kingdom, three-quarters of financial advisers anticipate integrating AI into their advice process, according to a survey by Benchmark Capital, Schroders' financial advisory arm. The question remains, though, on how soon advisers in other regions will follow suit.
The transformative impact of AI in the financial services sector is evident, according to policy executive Phil Turnpenny of The Investing and Saving Alliance (TISA). He notes that AI will reshape the way consumers interact with their finances and financial products. By fostering innovation, AI has the potential to empower millions to make better financial decisions and enjoy a prosperous financial future.
Significantly, robo-advisers or digital wealth managers have emerged as popular avenues for accessible financial planning. AI could play a critical role in bridging the so-called "advice gap," making high-quality financial advice more accessible and democratic.
In the financial services landscape, AI solutions such as machine learning (ML), natural language processing (NLP), and more recently, generative AI (genAI), have already transformed many aspects of the industry. GenAI, first brought into public consciousness with the launch of ChatGPT in November 2022, is notable for its ability to generate text, images, or videos in response to specific inputs. However, it is essential to recognize that genAI models focus on the most probable answer to a specific prompt, as opposed to repeatedly answering questions in an identical fashion.
With traditional forms of AI leveraging deterministic models for precise, identical answers, the application of genAI to finance raises concerns about its suitability for accuracy. AI may not be as effective as many think in providing accurate information, especially for high-risk scenarios. Emily Prince, head of analytics and chair of the AI working group at London Stock Exchange Group, warns that genAI may not be well-suited for use in such critical areas.
Despite these concerns, genAI can excel at tasks such as summarizing documents or consolidating multiple information sources. Completed appropriately, AI can help bridge the advice gap and make financial advice widely available.
One question remains vital: why would one seek an AI financial adviser? As financial advice is not available to everyone, numerous barriers to access exist, primarily relating to wealth, but also to factors such as age. Schroders' financial adviser survey 2024 revealed that 74% of financial advisers will only advise clients with at least £50,000 in assets, while half will only advise those with £100,000. Moreover, nearly a quarter will only serve clients with more than £200,000 in assets, a level that is unattainable for many.
On average, the typical person possesses £16,232 in savings, falling short of the minimum threshold for many financial advisers. In contrast, those aged 35 to 44 have an average total net worth of £195,612, but much of this consists of property or other physical wealth that advisers may not take into account in their asset calculations. Consequently, half of financial advisers refuse to work with individuals below the age of 44, resulting in an obvious age disparity.
Only 11% of adults have sought paid financial advice in the last two years, according to M&G Wealth Advice's 2023 Wealth Gap report. The high cost of servicing clients averages £800 per year, making it economically unfeasible for advisers to cater to lower-wealth clients who need financial advice most. AI may hold the key to addressing this dilemma by cutting costs and allowing financial advice to reach a broader audience.
Advisers are already embracing AI for services such as recording and summarizing meetings, drafting suitability reports, responding to clients, and identifying vulnerable clients who may not disclose their emotional or financial condition. Additionally, AI is being incorporated into external-facing financial products, with approximately 55% of AI use cases in financial services involving a degree of automated decision-making.
Robo-advisers offer no-frills financial planning based on pre-determined risk appetites as well as some level of AI-led portfolio management. Some popular options include InvestEngine, eToro's Smart Portfolios, IG Smart Portfolios, and Moneyfarm. Others, like Octopus Money, aim to democratize financial advice by offering a comprehensive service to a broader audience. Tom Francis, head of digital advice at Octopus Money, discusses the hybrid model, in which human advisers still interact directly with clients, while AI handles much of the analysis and recommendations. This results in reduced client engagement time for advisers, freeing resources to help more people.
When seeking financial advice from AI, it is crucial to consider the accuracy of the source. Unspecialised generative AI platforms such as ChatGPT may provide incorrect information on finance and investing, which could have unfortunate consequences. Pedro Braz, CEO of Investing in the Web, recommends using such tools to clarify terms or shed light on general topics in the early stages of the financial planning process. However, for personalised advice, he suggests factoring in potential miscommunication by asking the source to provide a list of sources for verification.
Specialised financial advisers like Octopus Money use complex algorithms to generate their recommendations, ensuring consistency, impartiality, and scalability, making financial advice available to all regardless of wealth. This algorithm undergoes regular checks to maintain its proper functioning. In summary, AI can offer sound financial advice, but users should only trust this advice from bespoke, industry-specific sources that prioritize accuracy and transparency.
Regulatory oversight is essential to protect consumers from potential risks that may arise with the use of unregulated, unspecialised AI tools. TISA is advocating for the Financial Conduct Authority (FCA) and His Majesty's Treasury to extend financial regulation to genAI search engines. Turnpenny emphasizes the importance of drawing a clear line between risky tools and those that prioritize consumer protection in their design. The goal is to create a safer environment for those seeking quality financial advice and assistance.
- AI may revolutionize personal finance by empowering individuals to make better financial decisions, reshaping the way consumers interact with their finances and financial products.
- AI can play a critical role in bridging the 'advice gap' in the financial services industry, making high-quality financial advice more accessible and democratic.
- AI tools like generative AI (genAI) can excel at summarizing documents or consolidating multiple information sources, helping bridge the advice gap and make financial advice widely available.
- When seeking financial advice from AI, users should only trust advice from bespoke, industry-specific sources that prioritize accuracy and transparency, and should verify the accuracy of the information provided.
