Why Financial Advisors Should Embrace AI, & Understand its Potential in Investing

The potential benefits of artificial intelligence (AI) for small businesses are undeniable – from boosting efficiency to increasing revenue. A study from Deloitte and Stanford University found that a quarter of small businesses are currently using AI in some form or another. However, many smaller financial enterprises have still been slow to adopt AI, due to various obstacles such as lack of education, high cost, and a need for explainable AI.

These businesses are often reluctant to invest in AI as an operational tool because they lack an understanding of how to use the technology and fear they won’t be able to explain it to their clients. This can make financial advisors with limited resources very nervous. They need to be convinced that utilizing AI can increase operational efficiency, speed up processes, and deliver better value for their clients. While not a complete solution for trading just yet, AI can assist with decision-making and analyze data faster.

In short, if they want to remain competitive, financial advisors must develop an understanding of AI – including knowing its limits – and invest in the necessary infrastructure. While AI adoption may require notable change in an organization’s setup, there is a large productivity gap between businesses that have adopted AI to enhance operations and ones who haven’t.

Identifying relevant data-driven investment tools

Financial advisors need to stay informed about new investing technologies, like AI, so they can integrate them in their workflow and portfolios when appropriate. It is important to remember that AI has many uses other than actually investing or trading. Businesses can use AI to reach the right clients with the right information in their marketing campaigns; to help assess a client’s spending habits and risk tolerance; to onboard new clients; and to quickly get updated on market trends, analysis and sentiment. If these tools increase business efficiency they are likely worth the investment.

As far as integrating AI into actual asset-selection and trading, money managers and advisors do need to understand how it works, where it is most effective and what challenges it can solve. For example, robo advisory is an easy alternative for allocating investments using technology, similar to how advisors recommend putting money into ETFs (exchange-traded funds.) By using software to automate investment management, businesses can help reduce costs, a saving they can pass on to their clients.

Knowing the Limits of AI

But they also need to understand that such technology has limits; it does not reliably beat the market, rather it is often on par with other human-ETF allocating and investing. There are limits to other popular AI tools as well; for example, chatbots like ChatGPT and other large language models are able to give general financial knowledge and analysis, but they cannot (yet) give tailored answers to questions about when to buy or sell stocks, or how to build a portfolio. Rather they can simply help with research about recent market trends and other analysts are saying. But this is also an area where companies should use caution and double-check information produced by these LLMs, as even those who have designed these AI systems cannot guarantee they are always factually correct, and they don’t always understand how, exactly, they arrive at their answers.

Using AI to build credibility with clients

Embracing new technologies like AI and making room for them in their portfolio can help financial advisors improve their image and add value for their customers. By introducing clients to new tools and different investment approaches, advisors can position themselves as experts who are able to provide innovative solutions and offer an alternative, or an addition, to traditional investment strategies.

Explaining how and when they use AI, and how that AI works, helps build trust and credibility among clients. Ultimately, by making tools and strategies like these available, small financial advisors can compete with institutions and hedge funds that have traditionally had access to AI.

Bringing new investment opportunities to more people

Financial advisors and money managers should understand that AI can be a powerful tool in managing risk and helping with investment decisions in alternative assets, and should consider directing their clients who are interested in these types of assets to funds run by or with the help of AI. AI is driving new investment opportunities in alternative assets such as private equity, hedge funds, commodities, and crypto because they are often more volatile and have a higher degree of complexity than traditional assets such as stocks and bonds. AI can help manage this complexity by analyzing large amounts of data, identifying patterns and trends, and making predictions about future market movements.

AI is also creating new approaches to trading, including in quant funds, which automatically make trading decisions based on quantitative analysis. The role of AI in the math behind these funds (mainly hedge funds) continues to advance and offer new ways to approach risk, making them relevant to a growing number of investors.

In addition to actual investing and trading, AI can be helpful in helping financial advisors stay updated about the latest trends, possible regulatory changes and other analysis related to these assets.

Added-Value and differentiation in a world of self-service

Because self-investing in traditional assets like stocks and bonds is very accessible today, financial advisors should have a good understanding of alternative assets and investment strategies, like quant funds, in order to offer unique or different opportunities to clients that they may not find on their own.

AI can serve as an effective operational tool for small financial advisors when implemented transparently and for the appropriate use-cases. It can help advisors become more efficient, draw new business and potentially compete with bigger institutions. AI is changing the financial sector, and advisors need to make sure they are also harnessing new tech, so they and their clients will succeed in this new world.