Will AI Replace Financial Advisors?

A reader asks:

Technology has made investing easier (indexing, direct indexing, robo advisors, etc.). With AI in vogue right now, what does the RIA space/ financial planning look like in another 20-30 years? Will there still be a human need to hold hands/talk you off a ledge, or will the only human interactions be those maintaining the tech behind the scenes?

No one knows for sure how AI will transform our lives but speculation is running rampant right now because the possibilities seem endless.

ChatGPT is the first breakthrough technology in a long time where anyone using it gets it immediately.

It’s still early days but you can already get a feel for the potential even if we don’t know exactly how it will change our lives, how businesses will use it and how it will evolve from here.

I’m going to skip over the Terminator end of days scenario where the machines try to kill us all and focus on how this technology could work in the realm of financial advice going forward.

One of our loyal viewers has a YouTube channel called OpenAI for Finance that’s looking into some of the ideas here.

He put out a video recently that uses ChatGPT to essentially create a Portfolio Rescue question and answer engine that blew me away:

The software stuff is over my head here but the ability to search through the archives and pull out answers based on questions we’ve gone over on past episodes to essentially create a depository of answers to financial questions is fascinating.

And the thing is we’re still in the early days. This stuff is still in its infancy and is only going to get better.

So will everyone have their own AI advisor that creates and executes a financial plan on their behalf?

It wouldn’t surprise me if that existed someday.

Do we need John Connor to go back in time to save the financial advisor profession from this technology?

I’d actually go the other way here — if AI lives up to its promise it’s eventually going to become a commodity that everyone has access to.

That only increases the value of human advice. Howard Lindzon likes to say there is no such thing as information overload, only filter failure.

Well if AI ends up becoming the subtotal of human knowledge then the best advisors are going to be the ones who are able to filter out the right information for clients in concert with that technology.

I see it as a complement where the best advisors will use new technology to be more efficient. It will allow them to focus on the stuff that really matters.

The thing about financial advice is there are few decisions where the answer is black or white, right or wrong.

Many of the biggest financial decisions exist in a shade of gray.

What’s the right asset allocation? It depends.

What’s a safe withdrawal rate for my portfolio? It depends.

Should I invest this extra money or pay off my mortgage? It depends.

What’s the right type of insurance for my needs? It depends.

Do we have enough to buy that vacation home? It depends

Can I retire early? It depends

Given my financial situation, am I going to be OK? It depends.

Good financial advisors know how to mix probabilities, statistics and financial data with common sense, empathy and behavioral psychology.

The value of a good financial advisor comes from things like trust, effective communication, setting realistic expectations, having a deep understanding of your clients, diagnosing a problem before providing a prescription and clarifying life goals.

Good advisors know when to talk and when to listen. They ask the right questions at the right time.

They help clients work through the birth of a child, the death of a spouse, divorce, retirement, the loss of a job, big purchases, market crashes, recessions and everything in-between.

Navigating those decisions requires compassion, education, and a level of trust that is difficult to establish with a piece of software.

AI will likely be able to help with most of the technical financial variables going forward. But there is a huge difference between textbook or spreadsheet knowledge and the management of client relationships.

Financial plans can be complicated because life can be complicated.

Improved technology will only make the human element more important in my estimation.

Listen, it’s almost silly to predict what’s going to happen with AI. Most of the forecasts people are making right now are going to look silly with the benefit of hindsight.

There will always be a place for financial advisors. The best ones have always known know how to mix the best human elements with the best elements of technology.

I don’t see that changing anytime soon.

We talked about this question on the latest edition of Portfolio Rescue:

Barry Ritholtz joined me as well to discuss questions about how well the market prices in risks on the horizon, how we became a bailout nation, inflation vs. banking crises and how to get started with a new blog.


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