The potential for AI to enhance and democratize financial services, especially financial advice, is enormous
However, is the regulatory landscape prepared for artificial intelligence to take center stage in the financial industry?
Although it is a crucial component of money management, many people cannot afford financial advice. The potential for artificial intelligence (AI) to alter that is real.
Three quarters of UK financial advisers anticipate integrating AI into their advice process within the next five years, according to a January study by Benchmark Capital, Schroders' financial advisory division. Financial advisers see AI as an opportunity rather than a threat.
How soon would you expect to use AI-based technology applications in some capacity within your advice process?
Financial advisors' answers to the question, "How soon would you anticipate incorporating AI based technology applications in your advice process in some way" are displayed in the chart.
Digital wealth managers or so-called robo-advisers have gained popularity as a straightforward financial planning tool that is accessible to the majority of users.
The Investing and Saving Alliance (TISA) policy executive Phil Turnpenny states that "AI is already changing the financial services landscape and as it continues to evolve it will fundamentally reshape how consumers interact with their money and financial products." "The revolutionary potential of artificial intelligence (AI) can enable millions to make wiser financial decisions and have a prosperous financial future by fostering innovation.
The Bank of England reports that 75% of financial services companies are currently utilizing AI, and 10% more intend to do so in the upcoming three years.
Although the use cases are diverse, one area of emphasis is on how AI might close the advice gap and make financial advice more accessible to all.
Financial services using AI.
It is obvious that AI will play a significant part in financial services. The use of artificial intelligence (AI) in finance dates back decades, if we include more conventional types of AI like machine learning (ML) or natural language processing (NLP) in our definition.
In terms of practical applications, generative artificial intelligence (genAI) is a relatively recent development. Public awareness of it began with ChatGPT's November 2022 launch. The type of AI you're probably most familiar with is this one; it can produce text, pictures, or videos in response to predetermined inputs, or "prompts."
Between the two, there is a significant difference. While traditional forms of AI are mostly built on "deterministic" models (meaning they typically return the same answer every time), genAI is mostly built on "probabilistic" models, which incorporate a degree of uncertainty. GenAI answers are merely the model's estimation of the most likely response to a given prompt.
That might contribute to the "hallucinations" that genAI experiences. It is intended to continuously generate original answers to a given prompt rather than reciting the same answers to questions.
Therefore, there is a clear degree of risk involved in using AI in the financial industry. In particular, GenAI isn't as well-suited to delivering accurate information as many people believe.
That being said, it excels at some things. Tasks like summarizing documents or combining information from various sources are usually lower risk.
However, when implemented correctly, AI can help close the "advice gap" by expanding access to financial advice.
Is an AI financial advisor something I would want?
It is unfortunate that not everyone has access to financial advice. Significant obstacles to access exist, and although they are mostly associated with wealth, this also means that secondary factors like age begin to exhibit significant disparities.
Seventy-four percent of financial advisers will only advise clients with at least £50,000 in assets, according to the 2024 Schroders Financial Advisers Survey. Nearly a quarter (24 percent) will only advise clients with more than 200,000 in assets, and more than half (51 percent) will only advise clients with at least 100,000.
The minimum asset size required by financial advisors for new clients.
This chart displays the minimum asset size required of financial advisors for new clients.
Based on data from the Building Societies Association, the average person has 16,232 in savings. The average British person between the ages of 35 and 44 has an average total net worth of 195,612 according to ONS data, though this doesn't include other types of wealth that might be included in that 50,000 level, and it can be difficult to compare precisely. The majority of financial advisors would not include property or tangible wealth in the calculation, which makes up more than half of this.
Put another way, half of financial advisors won't even consider working with the typical individual under 44. A clear age gap results from that. Only 7% of advisers have clients who are 50 years of age or younger on average, according to a Schroders survey.
Clients of financial advisors are generally older.
The average age of financial advisors' clients is displayed in the chart.
In summary, many people are not receiving financial advice. Just 11% of adults have paid for financial advice in the past two years, according to MandG Wealth Advices' 2023 Wealth Gap report.
Financial advisors aren't being frugal here. The average cost of client service is £800 annually. 53,333 in assets are required to break even if an adviser charges 0.5 percent of assets. Even though these are the people who need financial advice the most, it simply isn't cost-effective for advisers to serve lower-wealth clients given the inputs needed.
In what ways does AI apply to financial advice?
It is hoped that by lowering the cost of financial advice, AI will contribute to closing this advice gap.
GenAI is already widely used by financial advisors to increase productivity. An upcoming survey from Schroders' financial advice division, Benchmark Capital, indicates that 45% of businesses are already utilizing it.
Although recording and summarizing meetings is by far the most popular use case, other common use cases include responding to clients, creating suitability reports, and even identifying clients who may be financially or emotionally vulnerable but haven't disclosed it.
Gillian Hepburn, Benchmark Capital's commercial director, tells BFIA, "I've also heard of AI being used to train younger advisers coming through." In order to determine where the junior planner is not asking the same kinds of questions, the AI can record a meeting between a more seasoned planner and their client as well as one between someone who is just starting out in financial planning.
Financial products with an external focus are also incorporating AI. According to the Bank of England, 55% of AI use cases in financial services involve some level of automated decision-making, so many of these are already making decisions for us.
Robo-advisers are a good example. These provide pre-made portfolios according to risk tolerance and a certain amount of AI-powered portfolio management (such as automated rebalancing). Moneyfarm, eToros Smart Portfolios, IG Smart Portfolios, and InvestEngine are a few well-known suppliers.
However, some businesses go further. By enabling a more comprehensive service, Octopus Money, for instance, is aiming to democratize financial advice through AI.
As stated by Tom Francis, head of digital advice at Octopus Money, "the majority of financial services firms have decided to concentrate their efforts solely on aspects of personal finance rather than the full process of optimizing all aspects of somebody's finances."
The Octopus Moneys platform, which is presently undergoing testing and is scheduled to launch in May, uses a hybrid model in which a highly skilled human adviser still handles a large portion of the work, especially any tasks that require direct customer interaction. However, technology handles a large portion of the labor-intensive analysis and recommendations.
This reduces the amount of time advisors must spend with each client, allowing them to focus on more human-specific tasks. This reduces expenses and expands the audience for financial advice.
"The implementation of democratizing financial advice is extremely challenging due to several factors. Francis claims that while technology can effectively address some of these issues, it cannot address all of them.
To what extent do AI financial advisors have accuracy?
Knowing the precise accuracy of the source you're using is crucial if you're using AI to advise you on finances.
Steer clear of general generative AI platforms such as ChatGPT.
If you were entrusting ChatGPT with your investments, you wouldn't want it to answer one out of every three questions about finance and investing incorrectly, according to a study from Investing in the Web.
GenAI tools not only frequently provide inaccurate responses, but they also usually lack access to the most recent data on topics like share price fluctuations.
Pedro Braz, CEO of Investing in the Web, states that while ChatGPT search is a useful tool that can save us a lot of time, it can also lead us astray if we are not careful when using it. "Overuse of AI can have a major negative impact when the topic is as serious as personal finance.
Braz suggests using ChatGPT for financial advice relatively early on in the process "to help shed light on a general topic or clarify terms."
It is a good idea to ask your generative AI tool for a list of sources so that you can fact-check its response. "Using it to ask more personalised questions is where the risk of miscommunication comes into play," he says.
Accuracy checks should be integrated into specialized financial advisers. To create its recommendations, Octopus Money, for instance, employs a sophisticated algorithm that is essentially a massive decision tree.
"This guarantees that the guidance we offer is scalable, impartial, and consistent, allowing anyone (regardless of financial status) to obtain it," Francis says. "Assisting clients in creating precise and comprehensive financial plans that our digital logic can subsequently interpret is something we take very seriously.
In order to make sure the algorithm is operating as intended, Francis adds that tech checks are performed against customer data once a month and following each tech update.
In summary, AI is capable of offering reliable financial advice, but you should only rely on it if it originates from a customized, sector-specific source. Unorthodox genAI systems, such as ChatGPT, might not be accurate enough to be trusted.
AI-generated financial advice must be regulated.
Because genAI is prone to errors, its application in financial advice is clearly fraught with risks. Industry associations caution that in order to safeguard consumers, the technology must be subject to regulatory oversight.
"AI is not all created equal," Turnpenny asserts. "Search engine-based artificial intelligence (AI) tools are being used more and more to provide financial advice, frequently without supervision, accountability, or transparency.
"This has led to a wild west scenario and presents significant risks, especially for customers who are more susceptible to being duped by information that sounds confident but is actually false.
To safeguard consumers, TISA is advocating for the Financial Conduct Authority and His Majesty's Treasury to include genAI search engines under financial regulation.
According to Turnpenny, "our research demonstrates that appropriately designed and regulated AI has the power to improve financial access and outcomes, especially for underserved groups." "We have to distinguish clearly between tools that are designed with consumer protection at their core and those that are dangerous and unregulated.
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