Can you trust AI with financial advice?

Tech has been a part of investing for decades

Arguably, technology has already infiltrated the financial industry. A company called Betterment was the first robo-advisor, founded in the U.S. in 2008. Robo-advisors emerged in Canada in 2014. These online investment platforms use algorithms to rebalance and maintain a portfolio based on an investor’s goals and risk tolerance. Human interaction is minimal, especially in the U.S., where robo rules are a bit less stringent.

Canadian robo-advisors are estimated to have less than 1% of the market share of Canadian investment assets. They definitely have a place for investors who are hesitant to manage their own investments but believe in low-cost index investing. It seems fair to say, though, that they have not displaced full-service Canadian investment advisors in droves. 

ETFs: A lesson on the adoption of AI-based financial advice? 

Exchange-traded funds (ETFs) have been available to Canadian investors for over 30 years. In fact, the world’s first ETF was a Canadian one, introduced in 1990. An investor can use ETFs to build a low-cost portfolio without an investment advisor. That said, investment advisors definitely have not been replaced. In fact, many advisors use ETFs as part of their portfolio management. 

Perhaps this is a lesson for how AI will impact the industry for consumers and advisors. It may become a tool to be used by both parties, as opposed to a full-scale replacement. 

Investment analysis, for example, could be expedited using AI. Trading could also be quicker and more efficient. The more interesting use for AI could be to access more comprehensive financial advice. 

I have tried asking AI models questions about retirement or tax planning to see what sort of output would be generated. I admit to being surprised that much of it was technically accurate. However, some answers that were meant to be Canadian were clearly derived from U.S. sources and included nuances that did not apply to Canadians. 

The issue of personalization with AI

AI may not be able to personalize financial advice. Everyone has different considerations and circumstances. As a planner, I find this tends to cause my advice to differ even when the facts of two situations are similar. It is kind of like asking AI for advice about what toppings to put on your pizza. Depending on tastes, allergies and other factors, the best toppings might change. There really is no “right” answer for what to order on your pizza. 

I also find that only half my job is based on facts and figures; the other half, on the emotion and psychology of money. It is about helping people interpret what money means to them and, if applicable, to their spouse, children or grandchildren. This is currently hard for an AI model to do, but who knows what the future holds?

I think AI could empower consumers to ask better questions to their advisors. I see it as a potential educational tool. It is no different than a search engine, which is a common source for advice on anything. AI tools can find information more quickly, though, and that has value.

Financial advisors may benefit from AI as well. It may help them with recommendations, oversight and efficiency. It may help them spend more time advising and less time investing. 

AI for investing: A tool, rather a one-stop solution

I think the best application of AI in the financial advice industry may be to expand access to financial advice to more investors, including those with less money to invest, young people starting out, and self-directed investors who are on their own. 

To summarize, I think consumers can trust that AI financial advice:

1. Will be pretty good but may contain subtle inaccuracies
2. May be applicable to some but not all users
3. Could have biases or flaws

Frankly, these considerations could apply to human advice as well. But AI may not be able to personalize advice like a human. 

Just like how ETFs have turned into tools for investors and investment advisors, consumers and the financial industry can expect AI to continue to impact financial advice. Those who use it to their advantage may be more successful but may not be able to rely on it wholeheartedly.

Read more from Jason Heath:

• How to invest as a teenager in Canada
• How to start investing with ETFs in your 20s
• Should you accelerate your mortgage payments—or invest?
• Tax planning for Canadians who invest in the U.S.

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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