Will AI soon replace human financial advisers?

Bionic man

01 Apr Will AI soon replace human financial advisers?

The financial adviser industry certainly had a beginning in the UK – could it come to an end?

With the rise of artificial intelligence and specifically “robo-advisers”, some people seem to think so. Certainly, robo-advice has grown enormously in recent years – with $10 billion of assets under management in 2013 to over $100 billion in 2016.

Yet accompanying this growth is a steady increase in the numbers of human financial advisers in many regions of the world. Indeed, research by EY projects that the industry will likely experience around 32% growth over the next ten years.

How do we make sense of all of this, and will artificial intelligence (AI) eventually replace the need for financial advisers?

As a digital and creative agency serving this important market, it’s an important question for us to answer – and certainly one which is of keen interest to our clients.

Let’s take a closer look at the situation, and see if current trends and data can shed any light on the future of human financial advisers in the face of technological innovation:

 

The relentless pace & power of technology

Technology is amazing. One of the most bewildering aspects of it is the sheer pace of innovation and advancement which has occurred in technology, even in the last few years.

Consider for a moment that computer processing power increases, on average, by about 100% every 18 months. Think about that. For most of human existence, we could look ahead to next year and even the next fifty years with a high degree of confidence about what technology would be like, and how it would affect the world around us.

Today, we can no longer hold such certainty.

The implications for this are certainly big for financial services, and particularly for financial advisers. Under current projects, the robo-adviser industry will likely be worth $5 trillion by 2020 – up from just $10 billion in 2013. That’s a huge pace of change.

Financial advisers and investment firms have not necessarily resisted this change. Indeed, about 14% of them currently use AI to provide wealth management services, and as many as 63% are planning on using this technology within the coming years.

Why are people drawn to AI when it comes to investing? A huge reason is the elimination of emotions from investment decisions – a virtue which practically all experienced investors endorse as an important component within a wider investment strategy.

AI is able to rapidly analyse years and decades’ worth of data – far more quickly than a human – and offer recommendations to the investor.  Not only that, robo-advice also makes investing itself more accessible to people who previously were excluded due to their lower wealth.

Whilst many IFAs will charge perhaps 1% of a client’s portfolio as a management fee, a robo adviser can do it for as little as 0.25% or even 0%. Again, this is very hard for human advisers to compete with.

 

The value of human financial advisers

At this stage, it might look like the case is closed. Not only is robo-advice arguably faster and more efficient than your typical, human active fund manager, it is almost certainly cheaper as well.

However, the case certainly isn’t closed and there are definite advantages to human financial advice which suggest it anything but dead in the water. One of the main reasons is due to emotions.

For most people, investing is not simply a number-crunching game. People do not dispassionately invest their money – they care about what happens to it and often need a sounding board to feel confident that they are doing the right thing.

It is difficult to see – at present – how this “human element” to financial advice could be replaced by AI. Perhaps one day (maybe even sooner than we think), technology could advance far enough that a robot could easily pass for a human – offering sympathy, an attentive ear, heartfelt reassurance and so forth. However, we are not there yet and the best minds think that is still some way off and maybe impossible.

 

Where are things likely to go?

Across the world, both human advisers and robo-advice is on the rise. What is the likely outcome to be? Will one eventually supplant the other?

It’s hard to definitively say, but it seems reasonable to conclude that whilst robo-advice could replace human advisers in theory, this is unlikely to happen. Rather, a more likely outcome is that both elements increasingly come together to combine their respective strengths.

In other words, in the nearby upcoming years, it seems reasonable to predict the rise of a “hybrid adviser”. Here, a financial adviser firm can leverage the processing and predictive power of AI to power their investment management, whilst providing the “face-to-face” human advisory experience which most clients seem to fundamentally desire.

Some people are calling this possible development the rise of the “bionic adviser”. Human advisers within the firm can deal with customers with regards to their risk tolerance, emotions and other subjective variables which are crucial to a client’s customer experience. The mundane investment and administrative tasks of portfolio management, however, can be assigned to AI.

To conclude, then. Perhaps the rise of robo-advice is not something necessarily to be feared by human advisers. The two are not necessarily exclusive and are not pre-determined to go to war with one another.

Indeed, the rise and incorporation of AI into financial advisory businesses could even be a good thing. Whilst robots can take over the computational tasks involved with providing financial advice, human advisers can devote more time to creating value for clients – perhaps by taking on a more “coaching” role.

Who really knows for certain? Nobody. Yet we live in remarkable times. Perhaps robots will one day fully be able to replace human advisers in all respects – including the emotional aspect of financial advice.

Yet if that day does finally come – where humans are fully replaced by machines – then the demise of the traditional financial advice sector will probably be the least of humanity’s worries!