This article originally ran in InBusiness Greater Phoenix

Key considerations to discuss with your qualified professional.

By Jim Cannon

Reader’s note: AI was not used in the creation of this article.

Just like all industries grappling with the breakneck pace at which artificial intelligence is permeating business as we know it—and how best to leverage it—it’s changing the game for financial advisors and their clients. Advisors must consider what AI does well—and doesn’t. Concurrently, clients must consider a new wave of security concerns as their detailed personal information and financial data could be exposed.

In the context of wealth management, AI is a fascinating idea to explore—one that’s coming up in my conversations with advisors on a regular basis. One that I believe we’re not far enough along in its evolution to fully know just how deep AI will go as a financial planning and advice tool. Combined with a qualified financial professional, how will it help you reach your long-term, holistic financial goals? Will it eventually understand the psychology of money—what truly motivates your investment decisions?

As in most cases with investment management, history can provide us with some valuable clues.

Enter Robo-Advisors

We need only rewind to 2008, when the earliest robo-advisors emerged. As defined by Investopedia, a robo-advisor is a digital platform that provides automated, algorithm-driven financial planning and investment services with little or no human supervision.

Highly investment-centric, robo platforms use online forms to ask the user, i.e., “client,” about their financial situation and future goals. Client data is then collected to generate recommendations and automatically invest, typically using traditional investment management principles and modern portfolio theory.

In the digital age, robo-advisors have afforded a convenient, frictionless user experience, giving clients an easy way to set up their investments and presto! You’re off to the races with no big picture strategy or advice for the long term that considers your unique changing life circumstances.

Despite the evolution and accessibility of robo-advisors as an inexpensive barrier to entry requiring low balances to start investing, they remain primarily a passive investment strategy. More importantly, they don’t take into account many of the typical financial and planning considerations that most investors encounter such as estate planning, charitable giving or tax planning strategies for high-net-worth individuals.

Moreover, robo-advisors have been notoriously criticized for their lack of empathy. While it may synthesize a client’s information rapidly to build and manage a balanced portfolio, it doesn’t take into account clients’ attitudes, how they were raised, that have shaped their decisions around how to invest and use their money.

Spotlight: Generative AI

In the broader context of the many platforms and apps that use some type of artificial intelligence, programs that create generative AI like ChatGPT have captured the spotlight and are gaining popularity. Generative AI centers on “deep learning” models and can be used to create original content or data, including text, images, audio or other types of media. Rather than simply processing or analyzing existing data, generative AI chatbots can assimilate information quickly and draw conclusions.

Essentially, generative AI provides the ability to work smarter and faster. Financial advisors are using it to assimilate a lot of client and market data, saving time and automating tasks from creating client proposals to processing meeting notes and identifying recommended action steps. Further automation includes the client review process with the notion that over time, generative AI can be trained to a client’s specific circumstances.

Regulatory Client Protection 

Though there are clearly potential benefits to advisory firms leveraging AI for multiple operational efficiencies, we must also take into consideration the regulatory aspect. The U.S. Securities and Exchange Commission (SEC) has proposed new requirements to address risks to investors, particularly conflicts of interest associated with the use of AI by investment advisors.

The SEC’s latest proposed requirements augment the rules already in place for firms’ use of robo-advisors. In short, advisors need to disclose if there’s not a human behind the scenes.

So, if you’re working with a financial advisor, or thinking about it, here are some key considerations to discuss with your qualified professional:

• Data Protection: Has your advisor requested assurance that the application used protects your private information? How will your information be used by third parties, if at all?

• Conflicts of Interest: Has your advisor tested the application to ensure that it doesn’t have a bias towards certain categories of investors or clients, and to ensure the output from the application doesn’t favor a recommendation that’s more beneficial to your advisor?

• Accuracy of Information: Has your advisor tested the application in a variety of scenarios to ensure the output of recommendations are consistent with the recommendations of a human, manually generated analysis?

• Customization of Recommendations: Are the recommendations based upon your individual circumstances, e.g., risk tolerance, tax considerations, time horizon, long-term financial goals, etc.? Or is the algorithm based on general circumstances?

AI, combined with a qualified financial professional, can help clients make decisions and meet their long-term financial goals. However, like it’s robo-advisor predecessor, it has the logic but lacks the emotion that goes into the financial decisions that occur throughout our lifetime.

Investors need to exercise caution when deciding to replace human advice with a machine.

After all, when you ask ChatGBT the difference between a Roth I.R.A. and a SEP I.R.A., while a lot of information gets thrown at you fast to answer the question, the chatbot does suggest working with a financial advisor.

Jim Cannon is the founder and Chief Executive Officer of Phoenix-based Dynamic Advisor Solutions, a professional services provider for independent wealth advisors nationwide to deliver exceptional client experiences. For more information, visit DynamicAdvisorSolutions.com or to find a Dynamic advisor, visit DynamicWealthAdvisors.com.

Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.

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