Will AI Replace Financial Advisors?

By Michael Lieberman, Partner

Previous technological advances have typically come for the jobs of blue-collar workers.  For decades, machines have replaced humans on the assembly line.  But this time seems to be different.  Generative AI is coming for the jobs of white-collar workers.  Contract writers, editors, marketers, code writers, and so many other careers are staring down the barrel of a technology that is rapidly redefining the concept of productivity.

Focusing on the sector in which I operate, I spent some time thinking about financial advisors and the risk they too could be replaced.  Can AI work with the financial needs of people, trusts, corporations, and charities to help with understanding risk, investment decisions, income analysis, financial planning, and the like?  Who better to ask than ChatGPT itself?  So that is exactly what I did.

In one paragraph, explain why AI will replace financial advisors:

AI has the potential to replace financial advisors due to its ability to process vast amounts of data, identify patterns, and make precise predictions. With advancements in machine learning and natural language processing, AI can analyze a client’s financial situation, goals, and risk tolerance to provide personalized investment recommendations and financial advice. AI-powered algorithms can continuously monitor market trends and adjust investment strategies accordingly, while also considering factors such as tax implications and regulatory changes. Additionally, AI-powered chatbots can provide instant customer support and address basic financial inquiries, enhancing accessibility and efficiency. As AI continues to evolve, it has the potential to provide cost-effective, unbiased, and highly accurate financial advice, making it a compelling alternative to traditional financial advisors.

In one paragraph, explain why AI will NOT replace financial advisors:

AI will not completely replace financial advisors due to the inherent complexity of financial planning and the importance of human judgment in making critical financial decisions. While AI can analyze large amounts of data and provide recommendations, it lacks the ability to understand the nuanced emotional and personal factors that influence individual financial goals. Human financial advisors possess the skills to build trust, establish personal connections, and empathize with clients, providing tailored advice that considers unique circumstances and long-term objectives. Furthermore, financial advisors offer a holistic approach that encompasses various aspects of a client’s life, including estate planning, retirement strategies, and tax optimization, which require human expertise and adaptability. Ultimately, while AI can enhance the efficiency and accuracy of financial advice, the value of human insight, empathy, and adaptability ensures that financial advisors will continue to play a vital role in assisting individuals with complex financial decisions.

After reading these two paragraphs, my thought process kept turning back to the word “human.”  It is the human element of investing that accounts for the consistent underperformance of the average investor against their benchmarks, and even more importantly, their failure to achieve their goals over long-term time frames.  Everything from herd behavior to familiarity bias sways the average investor’s ability to make healthy long-term decisions. So much of what financial advisors do is based around behavioral finance – the psychological influences that affect investors and have the potential to negatively impact outcomes. 

Confirmation bias is of particular concern.  It is the tendency to seek information that supports a person’s pre-existing beliefs.  If the stock market is falling, a pessimistic investor may go out and find specific information as to why it will continue to fall.  This information may not be accurate, but it fits the bias narrative and the investor will use it to reinforce their own thought process and invest accordingly.  It is possible, or even likely, that they would sell after their portfolio values have already fallen.  Looking back at how I asked ChatGPT the questions about AI replacing financial advisors, the answer effectively confirmed the question asked.  Both for and against, it enforced the bias of the question being asked.    

While AI may eventually be able to help analyze a client’s financial situation, goals, and risk tolerances and the AI powered algorithms will be able to adjust holdings, I view these AI tools to make a financial advisor more efficient.  I believe in the importance of human judgment, or intervention, in making critical financial decisions.  When left to their own devices, the human element of psychological influence is too destructive to financial planning.  A knowledgeable financial planner and advisor must mitigate these counterproductive tendencies.  I question if AI will save investors from their own long-term harmful biases or a simply provide a feedback loop to reinforce them. 

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.