The advent of generative AI is driving newfound attention among investors for a new generation of “robo-advisors.” Already, 31% of investors claim they would be comfortable taking financial advice from an AI, even without confirming the information, Forbes reports. Executives at hedge funds, private equity firms, and other financial institutions are looking upon new emerging technologies with a combination of excitement and skepticism, but also diligence as a result.
Robo-advisors in the financial services industry have a checkered history. Some industry experts praise machine learning- and AI-driven financial advisory tools for enhancing traditional advisors’ capabilities, providing more personalized investment strategies, and opening up investment opportunities to previously disenfranchised populations.
But in the same breadth, industry experts may raise concerns about regulatory issues, overreliance on algorithms, and data security vulnerabilities, among others. This combination of optimism and wariness, alongside regulatory bodies adapting to these capabilities, has been an uneasy status quo since robo-advisor technologies first emerged during the 2008 financial crisis.
In this article, we take a closer look at how generative AI is changing the landscape of financial advising and wealth management through robo-advisors and other means. We explore the opportunities, challenges, and regulatory implications that come with these advancements in AI. Finally, we make five recommendations as to what financial firms should look for in their own efforts to develop or invest in robo-advisor technologies as part of their existing offerings.
The Promise of Generative AI for Investors
Robo-advisors are designed to offer automated, algorithm-driven financial planning services with little to no human supervision. Emerging in the industry in 2008 during the financial crisis of the time, these platforms promised cheaper and more automated investing, which was well received by consumers who desired a hands-off, objective approach to investment management.
Generative AI—that is, AI that creates original content rather than relying on a set of predefined rules or models—has the potential to significantly enhance these robo-advisors’ capabilities, making them more accurate, timely, and approachable for regular people. They can aid professional advisors in their roles as well. With the ability to learn from data, generative AI can identify patterns in financial markets that humans may miss or take too long to recognize. As a result, generative AI-driven robo-advisors can provide more personalized investment strategies, potentially with the guiding hand of a seasoned professional.
Higher Rates of Personalization
With generative AI-powered robo-advisors, investors can receive tailored investment strategies that take into account their personal investment goals; but also, their risk tolerance levels, time horizons, and even their personal values. Unlike traditional advisors who may have limited bandwidth and cannot provide personal attention to each investor, robo-advisors powered by generative AI can process vast amounts of data and adjust investment strategies in real time according to market trends and investor preferences.
This level of personalization, speed, and accuracy has made robo-advisors an attractive option for investors looking to optimize the use of their time, even as they become more specialized in how they invest. Already, consumers have high levels of trust in financial advice provided by generative AI platforms: 53% of consumers trust generative AI in this capacity, Capgemini reports.
Making Investing More Equitable
Moreover, the low-cost fees associated with “generative-AI aided” or even “generative-AI only” services make them accessible to a wider audience, including young, first-time, and low-income investors. “With this added intelligence, those outside of the Wall Street bubble could begin to experience some of the financial rewards that others have been able to access for years, making a big difference to communities and those who may have felt shut out from investing in the past,” according to Forbes.
Generative AI Tools Emerging at the Top of the Industry
Now, some of the world’s largest and most respected firms are investing in and developing their own generative AI-driven financial advisory technologies. JP Morgan applied for their IndexGPT trademark in May 2023; IndexGPT will be “a ChatGPT-like software service that leans on a disruptive form of artificial intelligence to select investments for customers,” as CNBC describes.
Senior financial leaders are becoming more vocal about the potential of generative AI as a financial advisory resource for investors as well. “JPMorgan (JPM) CEO Jamie Dimon recently acknowledged the benefits of AI during the bank’s last annual meeting, calling the technology ‘extraordinary and groundbreaking,'” NASDAQ reports. “The fact that JPMorgan, the biggest U.S. bank by assets, is leading an undertaking in generative AI and Generative Pre-trained Transformer (GPT) is quite telling.”
Other firms developing or already operating generative AI-driven advisory tools include Bloomberg; Pentagon Credit Union (PenFed), one of the largest credit unions in the U.S.; Israel digital bank One Zero; and more.
Risks to Consumers
Despite the rapid pace of development, regulators and industry leaders are raising concerns about compliance, oversight, and potential damage to consumers. That’s because regulators in the financial services industry have yet to fully grasp how these generative AI tools will impact the market and investors.
“To reduce costs, many financial institutions are integrating artificial intelligence technologies to steer people toward chatbots,” said Rohit Chopra, Director of the Consumer Financial Protection Bureau (CFPB) in a June 2023 CFPB article. “A poorly deployed chatbot can lead to customer frustration, reduced trust, and even violations of the law.”
Even when compliance issues aren’t a concern, consumers—especially those not accustomed to investing—can suffer from bad advice. Human advisors have a personal stake in the success of their recommendations, whereas humans are always once-removed from their customers’ interactions with generative AI tools. Generative AI tools that use natural language can easily perpetuate dubious advice or damaging behaviors in a “voice” that sounds trustworthy and knowledgeable to unacquainted or first-time investors.
5 Things Firms Should Consider Before Investing in Generative AI
Firms must practice due diligence in considering these factors before implementing or investing in generative AI-powered robo-advisors. Indeed, these tools can quickly become a boon to firms who use them strategically and responsibly; on the other hand, they could lead to irreparable reputational damage or unsatisfied customers that could devastate their business. Here we consider five key factors that executives at financial firms should take into account when evaluating generative AI-driven robo-advisor tools.
Train AI with the Right Data… and Values
Securing relevant data and incorporating the core values of the firm are pivotal steps to maintaining integrity and yielding accurate results in financial advising. The right data ensures that the AI has a comprehensive understanding of market trends and nuances, enabling it to provide sound financial advice. Incorporating values in this training process ensures that the AI not only adheres to regulatory standards but also upholds ethical practices, thereby promoting customer trust and satisfaction. Firms can prioritize transparency and accountability in this process to help build consumer trust and avoid potential backlash.
Prepare Human Advisors for Cooperation with Generative AI
Going “all in” on generative AI as a standalone product may be an option for some firms. For others, they may opt to use it as a tool in their existing financial advising process. Regardless of the approach taken, firms will need to prepare their human advisors and staff on how to work alongside generative AI tools. Adequate training should be provided so that advisors can leverage AI-driven insights and complement them with their own expertise, creating a seamless and successful customer experience.
Establish Barriers and Guardrails
As discussed, generative AI runs the risk of perpetuating bad advice, running afoul of regulatory concerns, or otherwise damaging customer trust and satisfaction. To mitigate these risks, firms should establish clear boundaries and guardrails for their generative AI tools. This includes regular audits and reviews of the technologies, as well as clear guidelines for when to escalate a customer interaction to a human advisor. Firms may wish to train AI to identify moments in interactions with clients where the tool can recommend communicating with a human advisor for confirmation, affirmation, and support.
Even when generative AI-driven robo-advisors work properly and fairly, consumers using the tools independently may not know when they have the right advice or enough guidance before they make important financial decisions. Educating consumers on how their tools before they begin using them can help. This includes informing customers of the limitations of the technology and how it complements human advising. Firms may wish to “quiz” consumers on their instructions and recommendations before consumers proceed as well.
Transparency goes hand-in-hand with educating consumers about generative AI-driven robo-advisors. By keeping clients informed about how their personal information is being used and how the AI makes decisions, firms can foster a sense of trust and transparency.
Having an open dialogue with customers about the technology, its capabilities, and its limitations can help to build stronger customer relationships and mitigate any concerns about data privacy or ethical practices. This transparency should extend to third-party partnerships as well, ensuring that clients are fully aware of any shared data or cooperation with other financial firms.
A Bold and Inevitable Step
The incorporation of generative AI into financial advising isn’t just a promising development—it’s an inevitable evolution of the industry. With careful planning, continual education, and open dialogue with customers, financial firms can harness this technology to offer unparalleled service, while maintaining trust and regulatory compliance.
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