The future role of AI in finance

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Author: Nicholas Otieno, Features Writer


February 1, 2022

The general consensus seems to lean towards the idea that artificial intelligence can replace the role of human financial advisors and therefore industry players must adapt or risk being left behind. But before jumping to that conclusion, it’s worth exploring some important questions: what’s next, what’s needed, and who needs it? And, perhaps crucially, whether AI will ever remove the need for human advisors in the financial industry.

AI is transforming the financial sector
Business leaders revealed that the use of technology, including AI, plays an important role in closing gaps in financial services offerings. Jim Pendergast, senior vice president and general manager of The Southern Bank’s AltLINE, said AI can improve the consistency of financial advice. “AI is inherently consistent, so it can provide a much closer picture of what will work and what won’t based on previous information. When it comes to investing, having this level of consistent understanding of the market can help investors make the right choices. »

Cliff Auerswald, president of All Reverse Mortgage, said in a recent interview that AI could solve questions about potential financial problems and solutions. “While human financial advisors have some of the best options for financial solutions based on past experiences, AI can provide more research-based insights into how people can achieve financial success,” Auerswald said. It is clear that with technological advances, even the financial sector has become less dependent on humans. Personal mobile apps powered by AI and machine learning algorithms have started to thrive in the market, providing additional value over traditional approaches.

Use cases of AI in finance
As pointed out by Pendergast and Auerswald, the rapid expansion of AI application areas is having a huge impact on the environment in which companies operate, both externally and internally (see Fig 1). Externally, AI enables tasks to be completed faster and at lower cost. Internally, AI shapes companies’ relationships with their customers, other companies, and society as a whole. Pendergast said some of their clients rely on AI to improve their finances. “We work with small and medium-sized businesses, so we often recommend software that will help them track their finances successfully,” he explained.

Auerswald mentioned that his own company occasionally uses AI for financial advice. “We don’t know of any large organization that relies solely on AI. Other organizations should give it a try, as they can likely improve their metrics and customer experience over time.” Of course, the pandemic has further accelerated the digital transformation in the banking sector, with several financial companies rushing to adopt cloud-based technology to offer a much better service to their customers.A growing number of financial companies are using different technologies to offer digital services in line traditionally provided by stalwarts of the financial industry.According to Pendergast, many financial services companies are using AI to detect fraud, predict cash events, create invoices, refine credit scores, perform cost analysis and benefits, as well as creating accounts and setting goals. s include investment recommendations, portfolio rebalancing and retirement planning, communication between users for mutual investments, as well as trading and investing in stocks, bonds and ETFs.

The robo-advisory helps to simplify the user experience for clients and make advisory services accessible to both high net worth clients and investors with lower investment amounts. Robo-advisors increase investment activity, especially with the low-budget investor, who typically does not have access to investment advisors.

Continuous 24/7 accessibility, automated rebalancing and monitoring differentiate robo-advisors from traditional investment advisory services. Clients can access their accounts through user-friendly websites or smartphone apps and make adjustments to their portfolios at any time of the day and recalibrate their investments.

Robots cannot replace human interaction
There has been a lot of hype around AI and its potential application in the investment advisory process, but the implementation of such a service model must be evaluated in strict terms that take into account the issues ethics of transparency and accountability. Pendergast and Auerswald admitted that the use of AI for personal finance and planning is growing in popularity and considered more accurate as a forecasting tool. However, when it comes to things close to people, they revealed that financial companies still prefer human financial advisors – this includes buying a house, buying a car and planning for retirement.

Pendergast asserted that AI will probably never really replace financial advisors. He said financial advisors have tools to help increase finances and often explore avenues that most people don’t consider, and AI often won’t have the ability to make those distinctions.

Auerswald seems to agree on this point, explaining that human advisors are better at adapting than AI, although machine learning is closing this gap. “Even with all the AI ​​research, human intelligence can make decisions that aren’t based on previous market activity, which makes them invaluable,” he said. In other words, industry experts do not believe that AI can replace the role of human financial advisors. They agree that human financial advisors continue to play an important role in advising individuals on managing expenses based on their income and on ways to increase their savings for better investments.

For example, Pendergast said technologies like AI are better suited to managing day-to-day functions like opening an account or executing trades rather than giving advice to customers. AI advisory systems are currently based on products that require little or no active portfolio management. An example of this is ETFs, which do not require active decision-making by portfolio managers, making their cost structure more manageable. Despite the cost savings that AI services offer customers, these services seem to struggle with customer adoption.

Clients seem to prefer hybrid models where they can search for information and compare products online, but are still able to contact human advisors before finalizing the final investment. Artificial intelligence consulting services have a certain value, and the proof of this is measured by those who want to test a robotic consulting service when they discover that one exists. They are simply unwilling to use it to make real investments through online platforms. Pendergast and Auerswald agree that this is an area where more work is needed in order to design the AI ​​so that the end result is more accessible to customers.

AI can support the success of human advisors
For now though, industry experts believe that human financial advisors will still be needed alongside AI, now and in the future. Pendergast said AI is much more efficient than most other techniques and can therefore help financial advisors save a lot of time. Auerswald agrees that backlogs in market analysis can be solved with AI. “One of the problems with the traditional way of working is the time it takes to analyze the information. AI can make information more reliable, but resources will be easier to see overall,” he said.

Generally, a financial advisory role is quite a hectic job. Accounting for clients’ income, expenses, loans, taxes and investments is not a simple task for a financial advisor. The calculations, and therefore the results, can sometimes be imperfect. All of the above shortcomings can be easily overcome using an AI-backed mobile app. In other words, financial advisors should be supported by technology – AI could be used to make sense of research and other data that advisors don’t have time for. The best technology is one that acts as a natural complement to our lives. That’s what AI can do, because breaking down a variety of product options is a daunting task that we’re not necessarily the best equipped to do.

Auerswald reported that AI is likely to take over many organizations as many people may choose this option over a paid financial advisor as it is much easier. He mentioned, however, that people who don’t know how to make the right financial decisions are doomed to fail, even if they use AI metrics. “Remember that AI is not exact, so it will become more popular, but pairing it with human financial advisors will continue to be the future of artificial intelligence,” he said. .

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