We find ourselves in the early stages of a technological revolution: the era of artificial intelligence. But the promise of AI is now accompanied by sobering warnings from regulators. Securities and Exchange Commission chairman Gary Gensler this year warned the financial services industry against “AI-washing,” overpromising and underdelivering for consumers. In this case, Gensler is not wrong. Like most burgeoning technologies that have come before, AI holds tremendous promise to change our industry for the better. Yet, if leveraged improperly, Gensler’s warning shot holds tremendous weight and validity and should be heeded by all across the industry.
According to many outlooks, AI stands to reshape the global economy and, along with it, how those of us in the financial services business operate. According to McKinsey, generative AI stands to add upwards of $340 billion in value across the financial services sector alone. However, the widespread adoption and incongruous use of AI have left the financial services industry—and consumers—vulnerable.
In addition to the SEC, the Consumer Financial Protection Bureau and other key federal entities have already targeted improper use of AI, which, in many cases, means unchecked reliance on the technology. According to a report from Venable LLP, federal agencies’ concerns with AI stem primarily from the lack of human interaction with it. “While automation can improve efficiency and accuracy, the federal partners are concerned that it can also lead to unintended consequences if not properly monitored,” the report states.
For the RIA industry to remain relevant, it must methodically embrace the potential of AI, without going overboard. By harnessing its power, RIAs can drive efficiency and accuracy in data analysis and risk assessment, enabling firms to make more informed investment decisions and identify potential opportunities. Or, to help advisors automate mundane and time-consuming tasks, streamline operations and improve overall efficiency.
However, heeding regulators’ warnings, it is crucial for RIAs to strike a balance between utilizing AI to improve business operations and taking into account the pitfalls associated with AI.
For one, AI is still in its early stages, and the models on which AI is built can consist of incorrect or outdated data, resulting in inaccurate responses. Take, for example, Google’s earlier AI chatbot iteration, Bard. In an advertisement debuting the chatbot, incorrect information was provided in the demonstration of the platform, costing Google’s parent company, Alphabet, $100 billion in market value just hours after launch.
Google has since rebranded the service to Gemini but has only seen its reputational and operational issues deepen. Google’s CEO recently issued a public apology after its Gemini technology generated racist and insensitive images. The controversy has led some on Capitol Hill to call for Google’s breakup.
Google’s experience, combined with regulator warnings, underscores the importance of humans—not AI —in the driver’s seat of critical decisions.
As humans, we prefer actual humans to make decisions, so there is a sense of accountability with every action. There is no precedent or protocol, for instance, if an AI makes a trading decision that costs a client thousands of dollars or miscalculates a client’s financial risk because it does not have the most up-to-date information.
In the RIA industry, human interaction is at our core. The unique expertise, empathy, and personalized touch that RIAs bring to the table are invaluable and cannot be replicated by a computer model. Financial advisors often double as financial therapists, providing emotional intelligence and understanding that AI will never be able to replace.
An AI system is not capable of understanding the motivations and personal goals that factor into people’s money decisions. It does not understand the sacrifice that goes into accumulating enough savings to send your child to college or the gut-wrenching feeling when you learn that you have been affected by corporate layoffs. But financial advisors do.
This piece is not meant to imply that AI should not be embraced by our industry. Instead, it should be strategically leveraged to augment our capabilities and expertise and drive efficiencies. By striking a balance between individualized, human-centered financial advising and the advancements of AI, we can unlock new levels of financial growth for our clients.
Brad Genser is co-founder and Chief Technology Officer at Farther