Striking the Balance: GenAI's Promise and Perils in Shaping the Future of Financial Advice

As we stand on the precipice of the Fourth Industrial Revolution, Artificial Intelligence (AI) and, in particular, Generative AI (GenAI) and Large Language Models (LLM), have emerged as an undoubtedly transformative force across many industries. However, this rapid evolution is not without its concerns, particularly within the realm of financial advice. As we know, nothing comes for free, and with the unlimited potential these technologies bring, come potentially significant unknown risks. Leading thinkers and experts have expressed apprehensions about the speed of AI development and the lack of adequate governance to mitigate potential risks. Mo Gawdat, former Chief Business Officer at Google X, believes 'the genie is out of the bottle for our way of life' and that we are already too late in understanding the risks and threats of AI. While GenAI holds the promise of revolutionising financial advice, it also raises significant challenges that must be addressed to ensure a sustainable and trusted future for our profession.

The Need for Governance and Ethical Considerations

AI has progressed at an unprecedented pace, leaving many prominent thinkers worried about the lack of comprehensive governance mechanisms. Visionaries like Elon Musk and Stephen Hawking have cautioned against the potential dangers of unchecked AI advancement, highlighting the importance of ethical considerations and regulatory frameworks to ensure AI systems remain aligned with human values and interests. Many are concerned with what's being called 'the alignment’ of AI systems, the idea that we cannot assume, just because we as humans built these systems, those systems will therefore have our best interests at heart. The open letter 'Pause Giant AI Experiments: An Open Letter', signed by many AI heavyweights and luminaries (including Musk and Steve Wozniak, co-founder of Apple) called for AI developers to pause the training of their models so that robust AI governance structures can be developed in order that powerful AI systems are only developed once “we are confident that their effects will be positive, and their risks will be manageable”.

The McKinsey report "The state of AI in 2023: Generative AI’s breakout year" states that of the third of respondents who say their business is using AI in at least one function, only 21% of those firms have policies in place to govern the use of AI. We are in danger of letting the benefits blind us to the risks.

The financial advice profession, in particular, where we deal with individuals' wealth and financial security, demands meticulous attention to ethical guidelines and safeguards. The cost of inaccuracy or bias could have a profoundly detrimental effect not only on the lives of our clients but on the trust and reputation of our profession.

Benefits of GenAI for Financial Advice

At a high level, for me, GenAI presents several enticing benefits for the financial advice industry:

Enhanced Personalisation: GenAI can analyse individual preferences, values and behaviours, financial history, and risk tolerance to tailor hyper-personalised services and enable real-time insights like never before.

Efficient Operations: By automating repetitive tasks, AI can free up advisers' time, allowing them to focus on higher-value interactions and deeper client relationships.

Augmented Expertise: Rather than replacing human advisers (more on that later), GenAI serves as a powerful tool to augment their expertise. AI systems can handle labour-intensive tasks, allowing human advisers to focus on higher-level strategic planning and nurturing meaningful client relationships. By leveraging the technology, advisers can enhance the advisory process, resulting in more efficient and effective client services.

Closing The Advice Gap: Could it finally be the answer to the advice gap? GenAI has the potential to democratise financial advice by making it more accessible to a broader audience. By reducing operational costs and geographical barriers, AI-driven platforms can extend expert financial guidance to individuals who previously lacked access to such services.

Data-Driven Insights: Data is the lifeblood of our profession. AI-powered algorithms can process vast datasets in real-time, providing valuable insights and enabling quicker, data-driven decision-making, particularly analysing risk in real time.

But again, with great promise comes great risk, and we are in a position currently where we simply do not know what the future holds. I decided to write this after listening to two very enlightening episodes of the Diary of a CEO podcast (and because I have time on my hands!). One with the aforementioned Mo Gawdat (listen here) and one with Sam Harris (listen here) where they both speak about the future threats of AI. I highly recommend giving them a listen if you haven't. These got me thinking about what I(we) should be thinking (and doing) about this transformative technology and what it means for our profession, particularly around the subject of trust, a topic I’ll come onto in a moment.

Emerging Threats and Challenges of AI in Financial Advice

When thinking about threats and challenges, I realised some of these aren't new, only that they're taking on even higher degrees of importance. Others are ones we've never experienced before whilst some we've not seen since the last industrial revolution.

Cybersecurity and Data Privacy: The integration of GenAI into businesses introduces a new frontier of cybersecurity challenges. With access to vast amounts of sensitive financial data, financial service businesses using AI will become increasingly more attractive targets for cybercriminals (as if we aren't already!). Add to that image and audio-generating models already creating very convincing 'deepfakes', we could see unprecedented levels of identity theft. Ensuring robust encryption, secure data storage, and stringent access controls are imperative to safeguard clients' financial information.

Regulatory Compliance: As with any tech, we need to make sure it remains within the regulatory frameworks we operate within. There's a risk AI models do not follow regulations designed to protect us, our clients, and our businesses. The Financial Services industry is tightly regulated (a matter of debate) to maintain transparency and protect consumers. The rapid evolution of AI technology may outpace regulatory frameworks, and if we are not careful, could create a potential compliance gap that could expose clients and advisers to legal risks.

Cost of Training and Implementation: While the benefits of GenAI are clear, the initial investment in technology, training, and integration can be substantial. Smaller advisory firms may struggle to bear these costs, potentially exacerbating existing disparities within the industry. There are some fantastic new technologies from fintech firms already heavily utilising Machine Learning and GenAI in their products ( Aveni and SS&C Technologies spring to mind), but it may only be the larger advice networks who can afford to benefit, at least for now, from AI advancements.

Addressing Bias, Discrimination, and Inaccuracy in LLMs: Just as IT reflects what's right and wrong in a business, so technology reflects what exists in society. Language models like GPT-3.5, while incredibly powerful, are not immune to biases present in the data they are trained on. AI has the potential to replicate and amplify these biases. As humans, we all have biases that affect our choices. With AI, there is a danger these leak into the models and influence their decision-making. Who remembers Microsoft's chatbot Tay, who very quickly turned into a Nazi!? It's important that we have constant monitoring and guardrails within systems to detect and mitigate biases, thereby ensuring that AI-generated recommendations are fair, equitable, and unbiased.

Inaccuracy: This is the biggest problem for AI at present and one not many businesses who use AI mitigate against. The McKinsey report showed that of the firms using AI, only 32% of these are mitigating inaccuracy. Inaccuracies or 'hallucinations' as they are known in GenAI, usually come from models either not being trained on enough data or dirty data, or the constraints and guardrails not being adequate. AI systems might lack the ability to grasp the nuances of complex financial planning or unforeseen market events. Financial advisers must exercise prudent judgment and not solely rely on AI-generated insights. Transparency is key with any AI-driven tech; we must have source traceability (the what and why) if we are to build trust. Doing so will foster a symbiotic relationship between our human expertise and AI-driven analytics.

Workforce displacement: The one everyone is worried about, right? Is a machine going to replace me? Will jobs disappear? In many professions, I'm sure the answer is yes. As mentioned above AI will herald a new way of living and working. But I don't think we'll all be put out of work by intelligent Tesla robots. I think it's more likely jobs will evolve to use AI in order to be more proactive rather than reactive. Focusing on the future and value add rather than the reactive mundane day to day. I for one will be very glad when my AI co-pilot can read and respond to the hundreds of emails I get every day. In the near future, it is highly unlikely AI is going to take your job; it will more likely be taken by someone else who uses AI to upskill themselves to work faster, more efficiently, more creatively and more accurately. Don't say I didn't warn you!

The Role of Trust in the Evolution of Financial Advice

Money, as an inherently emotive subject, demands trust. Clients entrust their financial security and aspirations to advisers, seeking personalised guidance and reassurance from experts. While GenAI has the potential to enhance financial advice, the challenge lies in building and maintaining trust in these AI-driven systems.

For clients to embrace AI-based financial advice, it is essential to address the previously mentioned risks comprehensively. Clients need assurance that their data is secure, their privacy is protected, the outputs are accurate, and the AI systems are ethically governed. Transparent communication about the capabilities and limitations of AI, coupled with robust cybersecurity measures, will be paramount in building this trust.

However, for me, this is where a dilemma emerges. On emotive subjects, we as humans want a metaphorical arm around the shoulder from an expert to tell us we're doing the right thing, especially when it comes to money. Currently, that trusted expert is a human financial adviser. But as we move into the near future and clients grow accustomed to AI's reliability and efficacy, there will be a point where these systems are trusted as much, if not more, than the human adviser. It is at this tipping point that the traditional role of the financial adviser/planner will be challenged the most, and when we could see the highest levels of job displacement. The once-central figure in financial decision-making could diminish in significance as clients increasingly depend on AI systems and gain greater education through the information made available by AI. Will clients continue to pay a human financial adviser for services when a system could provide the same (or better!) outcome; undoubtedly quicker and more cost-effectively? What does the role of the human adviser become? Ultimately, is there still one? These are questions we need to face into.

I think for the near future (5-7 years) advisers will remain crucial in explaining complex strategies, interpreting AI insights, and providing a human touch in a more collaborative partnership with the increasingly better financially educated client. It still feels like it will be some time before everyone trusts machines with financial decisions (some people still don't use ATMs). I do however think we are only 2-3 years away from seeing fully comprehensive, hyper-personalised, low-cost, AI-driven, digital only advice services.

What next?

You tell me! The financial advice profession stands at a crossroads, where the promise of GenAI's benefits intersects with the challenges it poses. Thoughtful governance, ethical considerations, robust cybersecurity, and clear communication are essential to harness the potential of GenAI while mitigating its risks. As we, as an industry, navigate this transformative journey, the emphasis on trust remains paramount. Financial advisers/planners will transition from being the sole decision-makers to working in tandem with AI systems, creating a collaborative partnership where both human expertise and AI-driven insights contribute to shaping sound financial strategies and hyper-personalised services. This evolution (or revolution?) I hope, reflects a shift towards a harmonious collaboration between advisers and AI, maximizing the benefits and outcomes for clients and advice businesses, and adapting to the changing landscape of not only financial advice but the world around us. If not, let me be the first to salute our almighty machine overlords....

Craig Barraclough, August 2023