The Impact of Artificial Intelligence on Financial Advisors and RIAs

Technology has been exponentially growing since the 60s, doubling every one and a half to two years.[i] Each technological innovation expands the world of possibilities while concurrently increasing efficiency. As a recent example, Artificial Intelligence (AI) tools can learn to solve problems and answer complex questions within seconds – faster than any human could. While it is true that rapidly advancing technology like AI will continue to shape the future, the exact impact is yet to be seen.

Projected Impact of AI

The power of AI presents many opportunities and, at the same time, several challenges. One of the most obvious challenges is AI’s impact on the labor market – many jobs are subject to become newly automated or to change fundamentally.[ii] According to the World Economic Forum, by the year 2027, 23% of the current workforce will be affected by job movement, with the largest losses in the clerical sector and the largest gains in the digital commerce sector.[iii]

However, with the use of AI, the world is also opening up like never before. The implementation of AI-based translation software has evaporated language barriers, enabling markets to expand, international trading to improve, and new competition to arise.ii

The main constraints on AI development are its electrical consumption and the availability of computer circuitry – which AI is already outgrowing its current capacity. AI has already impacted the stock market this year, and data suggests that it will continue to do so. With the buzz surrounding AI, the tech sector and the semiconductor industry have benefitted tremendously and shown sizeable year-to-date (YTD) returns, with some tech companies such as Nvidia even seeing triple-digit YTD returns.ii This has led many to question if Artificial Intelligence will become an entirely new sector of the market. However, there is still cause for concern, as the mania surrounding AI is reminiscent of that which preceded the .com bubble.ii

Robo-Advisors: Here to Stay?

With AI bringing change to many industries, when it comes to the world of finance, the big question is: Will robo-advisors replace human advisors? A robo-advisor is an interactive, AI-based technology that creates investment strategies for clients by gathering and measuring financial data, cash flow needs, and behavioral analytics. Typically, robo-advisors use automated algorithms, with no human intervention, to invest in low-cost passive funds.

Robo-advisors are becoming more widespread with increasing assets under management (AUM) every year. By the end of 2023, robo-advisors are projected to hold $2.76 trillion under management.ii While this number may sound staggering, when put in perspective, it actually only makes up a small percentage of the market as a whole, with the latest data showing a global equity market capitalization of $108.6 trillion.[iv]

This innovative technology has opened the door for investors with lower asset levels who would be turned away by traditional wealth managers (the average account balance at robo-advisors is $92,000).ii With no human involvement, robo-advisors can significantly drive down costs for investors, with fees typically ranging from 0.25% to 0.5% as compared to fees of 1-2% charged by most wealth managers.ii Thus, robo-advisors are attractive to many investors who are just starting out or have less complex needs. Additionally, this automation allows for greater control and compliance, such as being programmed to avoid unsuitable investments.

While there are many upsides to using a robo-advisor, it can have significant drawbacks. For example, robo-advisors are only capable of doing things that they are programmed to do; therefore, they have narrow investment choices with limited flexibility. Combined with the fact that they typically invest in passive funds, this means that robo-advisors are not usually going to outperform their human counterparts in return on investment (ROI).ii Another significant downside is their inability to process or consider the often emotional elements of investing and financial decision-making. Awareness of behavioral finance and establishing trust within the client relationship are crucial aspects of traditional financial advice that robo-advisors will never be able to offer.

Advisor & AI Collaboration

Despite the common notion that AI will eventually dominate, technology should not be viewed as our enemy or competitor, as it has greatly improved the efficiency of humans and is unlikely to ever completely replace us. Looking at other industries for reference, it was initially thought that tax software would replace CPAs; however, that was not the case. CPAs are still relied upon by many and are actually one of the main users of tax software.ii Similarly, AI can be utilized to free up advisors’ time, allowing them to focus on what really matters – the client. It can also help advisors with assessing risk, optimizing portfolios, algorithmic trading, sentiment analysis, fraud prevention, gathering data, and countless other aspects of financial planning.

In conclusion, it seems that the combination of artificial intelligence with human oversight allows for the best of both worlds. The speed of AI matched with the emotional intelligence and flexibility of human advisors can optimize the client experience. The adoption of some AI is required to stay competitive but should not be solely relied on, as there are some human qualities that simply cannot be replaced. So, for the time being, it looks like human advisors are here to stay.

Wealthspire Advisors is the common brand and trade name used by Wealthspire Advisors LLC, Private Ocean, LLC, and Heron Financial Group, LLC, separately registered investment advisers and subsidiary companies of NFP Corp. © 2023 Wealthspire Advisors

[i] https://www.zippia.com/advice/how-fast-is-technology-advancing/

[ii] College for Financial Planning’s Webinar: Artificial Intelligence – Financial Advisors’ New Top Competitor & What To Do About It presented by Michael Angell, MS, CFP, EA, https://www.kaplanfinancial.com/wealth-management/resources/events#:~:text=Artificial%20Intelligence%20%E2%80%93%20Financial%20Advisors%E2%80%99%20New%20Top%20Competitor%20%26%20What%20To%20Do%20About%20It

[iii] https://www.weforum.org/reports/the-future-of-jobs-report-2023/in-full/3-jobs-outlook#3-jobs-outlook

[iv] https://www.sifma.org/resources/research/research-quarterly-equities/#:~:text=The%20U.S.%20equity%20markets%20are%20the%20largest%20in,equity%20market%20cap%20in%202023%2C%20or%20%2446.2%20trillion

Madelyn Oemig

About Madelyn Oemig

Madelyn is an advisor associate in our Milwaukee, WI office.

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