Artificial Intelligence (AI) is being integrated evermore in the financial advice space, and while there are benefits – there are also risks. We’ve all seen “Terminator” and know what happens when robots get too smart – they rise up and become a threat to humanity while promising they’ll be back.
In reality, the AI we use in today’s world is very different from the AI imagined in the 1990s blockbuster. AI is less about humanoid robots and more about systems and processes that can (if trained correctly) perform tasks faster and often more accurately than humans, often referred to as machine learning.
That’s of course dependent on how well the AI has been created and trained – AI is capable of making mistakes and failing. Some common AI failures we see every day include a GPS giving inaccurate directions or a transcription program incorrectly transcribing audio content.
Other AI failures can have more significant and disastrous consequences, like in 2015 when a robot designed to grab auto parts grabbed and killed a worker or in 2016 when a self-driving car caused a deadly accident.
There’s no doubt AI benefits us in many different ways, but we need to be aware of potential AI shortcomings. As AI becomes more integrated into the processes of financial advisers, we need to try and offset any potential risks it might pose to our practice as much as possible.
The benefits of AI in the financial advice space
We’ve written about the benefits that AI and machine learning capabilities can bring to financial advice practices. Robo advisers, previously considered to be a potential threat to adviser longevity, can be harnessed to help advisers tailor their service offerings and find more clients with long-term investment ambitions.
The emergence of AI-powered fintech solutions has allowed IFAs to incorporate more digital tools into their existing tech stack, automating repetitive, time-consuming tasks and allowing advisers to focus their efforts on building better client relationships.
We should mention here that Commspace offers multiple smart capabilities that allow financial advisers to track multiple commission streams with ease, gain insight from data visualisation and analytics, and take action from advanced reporting.
Some AI-backed financial planning software such as financial planning software, risk assessment and forecasting tools and portfolio management and rebalancing programs. These tools allow advisers to provide a faster, more automated service and appeal to a younger, wider client audience.
What risks does AI pose to the financial adviser industry?
While AI offers a number of benefits that can help us improve our existing services and processes, it isn’t infallible and can make mistakes – sometimes they’re hilarious but can also have serious consequences. On top of this, performance failures can also put your practice’s integrity at risk, particularly if you are handling sensitive client data and information.
As with all AI-backed tools, there’s a chance that it will misread data it collects and make incorrect decisions based on this data which could impact the quality of your service to clients. There’s also a possibility for bias in AI which could again influence the decisions or recommendations it makes for a particular client whether it’s investment advice or portfolio recommendations.
How to mitigate potential risks in your practice
Connectivity and integration
When looking at what AI tools you’d like to implement in your practice, a key focus should be integration ease. You need to consider your existing IT tech stack, processes and programs before rolling out an AI-based software or tool to ensure it will integrate into your existing processes and work efficiently.
Existing legacy systems that don’t talk to each other or an AI tool can cause data silos to form, which will impact an AI tool’s ability to access the data it needs to make accurate forecasts and decisions.
Using a cloud-based AI tool in your practice does mean there’s a chance that hackers could attempt to break into the software to steal customer data or even insert bad data into the system (known as data poisoning) in an attempt to influence the decision-making abilities and output of the AI system.
Before purchasing any AI software or tool, it’s essential to discuss its security policies with the service provider. Other important questions you can ask include:
- How does the tool protect valuable data against potential cyber-attacks or security breaches?
- Does the software use encryption technology for data?
- What security regulation standards does the service provider adhere to in their products and services?
The service provider should be prepared to share all information with you regarding their security processes, which you should review with an expert to ensure that there are no security gaps.
Before committing to any AI software, make sure you understand which part of the answers it provides are arrived at via machine learning (because these typically are a “best guess”, probabilistic answers) to prevent misunderstandings from happening between you and a client. If a client has questions about what the tool is doing with their data you need to be prepared to answer them comprehensively to ensure full transparency.
Despite its potential risks, advisers shouldn’t be put off from utilising AI in their practices to improve their services. It’s impossible to prevent any and every risk from becoming a reality, but you can work to minimise and manage these potential risks as much as possible to preserve your practice’s integrity and maintain a high standard of client service.