Will AI replace financial advisors?
Here is an email I received recently:
I’ve been doing tests by taking the questions you and other online finance people answer and asking various AISs. Its answers are very good, very thorough, and often better than those given by human “experts” to the exact same questions.
Not only that, but I can import all of my financial documents, my personal information, and my feelings about market risk or downside, and any other thoughts I have for the AI to put together an investment plan for me—in an instant. I can then ask questions (many of which I would be too embarrassed to ask a professional) about anything and everything. Plus, I can adjust and recalibrate it whenever I want, in no time! Shows expertise in all areas—retirement withdrawals, tax implications, inheritance, etc. He even gave me information about my teacher’s pension that I didn’t know or consider before.
I know you will say that people want “face-to-face” human interaction, but financial advising seems like a perfect target for AI to take over quickly.
When you put it that way, financial advisors sound dim.
I agree that AI will make it easier for many people who have questions and don’t know where to look for other answers. Automated investor tools have never been better and AI will continue that trend.
Some may say I’m biased because I work in the wealth management space but I don’t agree that this means the end of financial advisors.
The world of advice will be better for DIYers and financial advice clients alike.
Allow me to explain.
I know a consultant who started in this business in the 1980s and 1990s. At that time the job was to select mutual funds on behalf of your clients. That’s all.
You wouldn’t be able to compete as a financial advisor today if all you did was pick funds on behalf of your client. Robo advisors do that at a fraction of the cost and are very efficient at it.
So why haven’t robo-advisors put financial advisors out of business?1
Trust is a big part of it. People like to work with other people. Finance is a service-based business that sells both tangible and intangible assets.
Some people are willing to ask the AI all the questions and upload all the statements and make a program and run that program themselves. But that’s a lot of work and some would rather get out and get on with their lives.
It is also important for other people to have a team in their corner. What happens if there is a problem with the IRS? Or lose your money when you move from one financial institution to another? Some people need accountability.
You can create the most customized workout plan you want right now. Some people still prefer to use a personal trainer. Knowledge is useless if you don’t do anything with it.
Clients will also expect more tools and services going forward.
Policy-based financial planning came after the mutual fund slingers. That’s a big part of the process but it’s also true that advisory clients rightly expect more services than goal setting and portfolio management.
Since I joined Ritholz back in 2015, we have added a tax practice, insurance services, estate planning (including in-house counsel), a family office segment, corporate retirement planning and institutional investment management. We also continue to add new tax-aware investment platforms that assist in the financial planning process.
Technology contributed to that growth but it meant more people. More customer service representatives, more salespeople, more consultants, etc., because you need someone to explain how it all works. Someone needs to work with systems to make sure they work with other systems.
In fact, one of our biggest challenges now is managing more people. We went from less than 10 employees when I joined to almost 90 now.
Will AI make our practice more efficient in the future? Definitely. There are already some approaches and we will certainly use more efficient AI-based tools in the future. But AI will not solve human problems and human problems are eternal.
Some think AI will allow advisors to serve more clients which could lead to some consolidation in the space. That happens to type A advisors. But many in the industry will simply become better advisors to the clients they already serve.
And if your work becomes more successful, you may also simply spend more time with family or relax less.
A Kitces Report study on counselor well-being found that more money improves well-being but interestingly:
A heavy client load and extra money may not be as desirable as free time.
There doesn’t have to be a zero-sum game with winners and losers.
DIY investors who may never have used a financial advisor will now have personalized advice and a better platform to ask questions.
Advisory clients will get more tools, more resources, improved reporting software and a better client experience.
And the advisors themselves will be able to better serve their client base while being more efficient in the process.
It’s a win-win-win.
I was in Miami this week for Future Proof Citywide and all the talk at the event was about AI in the wealth management space. We had a big dinner the first night in town with a bunch of people from the industry and I asked Michael Kitces about his thoughts on AI possibly taking over financial advisors.
He had very strong ideas backed up by data.
So Michael and I asked him to come to our Animal Spirits to share his thoughts on the matter:
We also had Phil Huber from Cliffwater on the show to talk about what’s going on with private credit and a bonus roast for Animal Spirits at the end of the show.
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Further reading:
My 10th year at Ritholtz Wealth Management
Now here’s what I’ve been reading lately:
Books:
1Read Josh’s piece on robo-advisors vs. human advisors here.
