Should You Trust an AI Financial Advisor?

You’ve probably seen the headlines about AI technology revolutionizing business practices in logistics, healthcare, and manufacturing. Based on these success stories, you may be tempted to try one of the new ‘robo’ financial advisors or even to ask a generative AI model for suggestions about your finances.

While it’s true that AI has come a long way in the past few years, there are still areas where it struggles to keep pace with humans. So, before you trust your retirement plan to an AI advisor, be sure to clearly understand the types of advice available and the limitations of current technology.

Types of AI in the Financial Industry

There are many applications of AI in the financial services industry, and each has its own blend of benefits and drawbacks. Three of the most common types are statistical analysis models that leverage machine learning, robo advisors, and generative AI.

Many financial institutions use statistical analysis models to analyze large quantities of data quickly – such as stock prices, economic data, and risk, and in recent years machine learning has proven valuable in making these tasks more efficient. This type of model is generally very accurate but not usually accessible to the public. Instead, it is used by fund managers, investment advisors, and other specialized financial companies to aid in decision making.

Robo advisors and generative AI are accessible to the general population, but they often lack the sophistication of the internal models used by businesses. Additionally, these types of AI have the added task of translating complex financial data into language that can be understood by the end user.

Current Capabilities and Limitations of AI in Financial Advice

The hallmark of current AI is its ability to analyze extremely large quantities of data in a short amount of time and identify patterns. This data, and the predictions based on it, can be very valuable to professional financial analysts and advisors. In some cases, it can even help individuals select appropriate investments based on specific criteria.

If you’ve ever used an AI chat bot, then you are likely aware of the limitations of current AI technology. Even the best AI models struggle to follow logic, replicate emotion, or understand contextual nuance. Since these activities are vital to financial planning, AI often struggles to replicate the value of a financial advisor.

Risks of Using AI Financial Advice

There are certain risks inherent to all types of AI. These risks are easy to ignore when you only want to generate a funny image, but they can have devastating consequences when applied to your financial plan.

The International Monetary Fund pinpointed three areas of concern related to AI in finance:

• If the data in an AI model is biased toward one group of people or a particular outcome, the results of the AI model are also biased.
• AI models are difficult to understand and explain, which can lead to a disconnect between user expectations and outcomes.
• AI is vulnerable to new cyber risks like threats that manipulate data to exploit the limitations of the algorithm.

The Securities and Exchange Commission [SEC], North American Securities Administrators Association [NASAA], and Financial Industry Regulatory Authority [FINRA] also expressed concerns about the growing popularity of AI in personal financial planning. These organizations issued a joint warning to investors which said, “be cautious about using AI-generated information to make investment decisions…AI-generated information might rely on data that is inaccurate, incomplete, or misleading…Even when based on accurate input, information resulting from AI can be faulty, or even completely made up.”

Should you trust AI with your financial plan?

AI technology is advancing rapidly and one day the models may be sophisticated enough to provide sound financial advice on a consistent basis, but we have not reached this point yet. For now, AI models can regurgitate financial guidance given by professional advisors in the past, but they lack the sophistication to consider the nuances of an individual’s unique financial situation.

Consider this example where an individual sought guidance from a generative AI model about her homebuying goal and then verified that information with an experienced financial planner. The investor said, “while ChatGPT generated a lot of the same advice as [the experienced advisor], the process of working with a CFP to craft a financial plan toward homeownership provided greater value, which experts say isn’t a shock. When working with CFP, I was able to ask specific questions about how my plan might change over time and how to balance competing goals.”

As this investor learned, the true value of working with a human advisor is their ability to bring your entire financial picture together into one individualized plan. A human can hold a conversation with you to understand your vision of financial success. Then, they can consider all the factors needed to turn that vision into a reality including saving, investing, insurance, taxes, and even estate planning.

Brookstone Wealth Management: Combining Technology with Compassion

At Brookstone Wealth Management, our advisors do what AI cannot – we connect with you on a personal level to uncover your financial goals and attitude toward investing. Our compassionate team then creates your Financial Fingerprint™, a comprehensive financial plan that acts as a road map to your True North. We call this Financial Navigation Made Simple and it’s what you’ll experience when you partner with us.

Our team leverages state-of-the-art technology to choose investments and forecast how they could perform in various market conditions. With the combination of our experience and technology, you get the best of both worlds for your financial plan.

To learn more about wealth management with Brookstone, contact us today.