Artificial Intelligence Will Replace Your Financial Adviser - And That's A Good Thing (2024)

The 2019 Consumer Electronics Show featured all sorts of new and cool stuff, from big and beautiful televisions that roll up from a box to all sorts of voice-activated home comfort and security devices. Flipping switches, pushing buttons, and even typing inputs now all seem to be just a few years from oil lanterns and hanging clothes on a line.

Oh, there were a few throwback items scattered about, such as old-timey phonographs that plug into your home theater via bluetooth, and apparently Pong is trying to make a high-tech comeback although I have my doubts as to whether anybody seriously missed it in the first place. But these exhibits were very few and very far between and, oh, and if you are curious then I'll advise that I didn't see any wireless 8-track players (don't forget the matchbook) or hints that Intellivision is about to make a high-tech comeback.

There were also a lot of exhibits for something that couldn't be seen, because it simply doesn't exist in any hard physical sense, and can be gauged only by its uses. These were the artificial intelligent (AI) exhibits, which were abundant if sometimes difficult to understand other than by their functions. If nothing else is clear about artificial intelligence, it is that many trillions of dollars and other currencies are being pumped into the worldwide artificial intelligence sector. If you want to know what the "next internet" is, you need to look no further than artificial intelligence.

Artificial intelligence is something that science fiction writers have talked about since, well, there was science fiction. Suffice it to say that a wide gulf exists between the public's perception of artificial intelligence and what it really is. Bear with me while I attempt my explanation.

Computers are simply machines that follow instruction sets known as algorithms, and which is popularly referred to as software so as to distinguish those instructions from the physical computer that actually runs the instruction sets which is the hardware. The instruction sets are drafted by an alleged species of humans known as programmers, and the computer can do no more than what the programmers draft the software to do. In other words, the software has no ability to do anything like learn or intellectually grow by itself, and even slight changes require some human input.

But what if the software designed by the humans enabled the computer to draft and run its own programs so as to take into account new conditions and events? Once the computer gains this capability, you have artificial intelligence. Some artificial intelligence programs are quite simple and have an almost insect-like intelligence: They can learn very basic tasks by themselves -- such as a self-driving car learning to move around objects -- but in the big scheme of things are quite limited in how far they can engage in self-programming.

Other artificial intelligence programs are quite sophisticated and can self-draft their own programs to where they learn in a very human-like way. But there is a enormous difference: Computers with artificial intelligence can access and download huge amounts of data error-free in a way that it would take a human literally years to learn. For instance, an artificial intelligence computer could access literally every medical text every written, analyze symptoms and offer a prognosis, and suggest the best medicines and treatments. If you think this is some sort of future fantasy, you're wrong.

That is as far as I am going to stray into the technology, which is not the point of this article. What I am going to talk about is how artificial intelligence is posed to take over the financial advisery sector in the very near future.

The job of a financial adviser is to take the client's information, and then come up with a financial plan that is based on the adviser's knowledge of the economy and markets as applied to the client's needs. This is exactly the sort of thing for which it is relatively easy for artificial intelligence to do much better.

The quality of the financial adviser's advice will depend to a significant extent upon how well the financial adviser can keep up on economic factors and market data. Here, the financial adviser has the standard limitations of a human: He can only take in so much data to begin with, and read only so many financial newspapers and look at so many computer screens on a given day. By contrast, artificial intelligence can easily digest all financial historical data, determine historic trends, and access each and every current source of information to have an up-the-second understanding of the markets. Here, simply stated, the human financial has no chance against artificial intelligence.

Where the financial adviser has a chance today against artificial intelligence is being able to meet with clients, get to know them socially, and get a feeling about what their real needs are. For instance, a client may say that they want to maximize the amount of money that they give to their kids, but really they are worried about having sufficient assets to get them through retirement without having to consume cat food. As we sit here today, artificial intelligence cannot yet equate with the financial adviser in understanding those purely human nuances.

However, because artificial intelligence learns so quickly, and learns from a bunch of humans at once, that gap in understanding those peculiar human nuances is closing fast.

To illustrate the speed of this learning, consider something that happens with self-driving vehicles: If a teenage driver has an accident while driving, only that particular teenage driver learns from her mistake. By contrast, if a self-driving vehicle has an accident, then every vehicle in the fleet learns from that mistake.

Because artificial intelligence learns so much faster than humans, it is simply a matter of time before artificial intelligence can read human nuances and have an emotional intelligence quotient that exceeds those of most humans. When that happens, in the next few years, financial advisers will have a hard time competing based on personal relationships.

For clients, the benefits of their financial adviser being artificial intelligence will be enormous.

Most financial advisers meet with their clients no more than every six months, and maybe have a few telephone calls in the interim. By contrast, AI is always on. If there is a financial issue that is keeping you up on a particular night, AI is there and immediately available to chat no matter the time.

Along these same lines, AI will manage financial matters instantaneously. For example, assume that a client has an asset allocation of X% into large-cap stocks. If necessary, AI can rebalance the portfolio to stay close to X% on a second-by-second basis if needed. By contrast, a financial adviser might not even look at a particular client's portfolio until the next six-month review, at which point it might be more costly to rebalance the client's large-cap stock holdings.

AI can also keep instantaneously up-to-date with the last economic data showing certain expenses. Have a 529 plan set up to send little Tommy to college? Your AI adviser can instantly keep up on projected tuition and other expenses and alert you when you are contributing too little or too much. The same will be true for retirement plans. Contrast this with human financial advisers, too many of whom take a "fire and forget" approach to such planning, i.e., the assumptions made on Day 1 of the plan are the assumptions that will remain the same for the next 20 years.

Another area where AI will excel is in the area of tax efficiency. AI can quite easily hold the entire Internal Revenue Code in its mind, and perform instant calculations on whether things are held in the most tax-efficient vehicle, such as a Roth IRA, etc., and make suggestions based on tax efficiency. By contrast, this is an area where financial advisers struggle to keep up with just the most basic rules and changes to those rules, and too often give outdated advice.

Perhaps the greatest benefit for clients will be in the elimination of human faults. Financial advisers are not completely immune from the twin killers of investors known as despair and euphoria: Despair when the market is going down, and euphoria when the market is going up, both of which can quickly destroy investment discipline. Financial advisers may not be as susceptible to these emotions as their non-professional clients, but it is probably impossible for them to completely clear their minds as to what is going on in the markets. AI will not suffer from either despair or euphoria.

The worst human fault, though, is simple greed. Far too many financial advisers make commission-driven decisions, putting their clients into loaded but mediocre-performing funds and driving them into high-commission life insurance and annuity products. Suffice it to say that AI doesn't have much interest in a golf junket to Scotland for big producers, or in putting clients into whole life insurance products because they pay twice as much commission (around 80% of first year's premiums) as UL products (around 40% of first year's premiums). Nor will AI embezzle client funds and then take off for Costa Rica.

There is a risk, of course, of built-in bias in AI of which the base program is drafted by humans. But there is also the possibility of giving AI the power to self-police itself against such bias by instructing AI to create its own programs to root out, identify, and eliminate such bias. We'll have to see how all this develops, but suffice it to say that I don't expect security regulators to be in the forefront of AI financial adviser development.

All I can say for now is that AI financial advisers are already here in some small part, and are quite likely to take over the sector entirely within the next decade.

And that's a very good thing for clients.

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