Investors, Planners And The AI Factor

Artificial Intelligence (AI) has a material impact on most things that we do today. And it will soon impact everything we do. This is no different when it comes to investing and financial planning. Most investors today use AI when managing their money. AI is also starting to play a role in the way financial planners impart advice. Therefore it is important for both parties to understand how AI impacts them. And this is going to be the focus of today's post.

AI And Investors

AI has a material impact on DIY (Do It Yourself) investing today. AI has effectively replaced search engines like Google or Bing. AI can organise and analyse vast volumes of information before throwing up an answer. This is unlike typical search engines which only throw up a list of links related to the search term entered. The quality of answers given by AI would only improve with advancements in AI and prompt engineering. Moreover AI apps are extremely easy to access and understand.

So DIY investors can have their questions answered by AI. Therefore DIY investing today is essentially AI assisted at some level or the other. AI is and will continue to be able to give detailed, insightful answers. This may give rise to the perception that DIY investors can now do without professional help. But this is not entirely true.

What Investors Need To Keep In Mind

AI is definitely a great tool for today's investors. But it still has a few shortcomings. To begin with, AI doesn't say 'I don't know' or 'I can't say' when asked a question. In other words AI does not give open ended answers. When asked a question, it almost always gives definitive answers. The most it does in terms of open ended answers is ask the user to add more data in the question for a more specific answer.

Getting definite answers is usually a good thing for users. But there are some aspects of money management where an open ended answer would be the more responsible one. Let me explain with an example. Consider the following answer given by an AI platform to the question 'Does Indian equity beat inflation over the long term?'

There is nothing much that is fundamentally wrong with this answer. Return figures mentioned are quite realistic. The presence of volatility and underperformance has also been acknowledged. There is is just one issue. Investors tend to fixate on the numbers given in such answers. And the fact that the answer comes from AI sees them place more faith in it. This would lead to the perception that equity always beats inflation over the long term.

But this need not always be true. There is no asset class where long term returns are foolproof and consistent. A more responsible way to answer this question would be as shown below.

Yes Indian equity has historically beaten inflation over the long term. It has been shown to deliver 3-4% more than inflation on a post tax basis. Over 20-30 years there is a reasonably high probability that equity as an asset class will at least match or beat inflation. But there is also a material probability that it will fail to beat inflation. This is true for equity anywhere across the world. So there is no guarantee that Indian equity will beat inflation over the next 20-30 years.

It would be easier to place more faith in AI once it offers more nuanced answers like this one. Until then investors must realise that AI is not perfect. There are still gaps that can be found in answers offered by AI platforms. Also there may be specific parts in such answers that are not relevant to the needs of the user. Investors must check to see whether they possess the insight and maturity to identify these gaps. If not, they would be better off seeking professional help.

AI And Financial Planners

Financial planners are definitely going to be impacted by AI. So planners must prepare themselves to embrace AI sooner rather than later. All this seemingly points to the fact that planners who adopt AI the earliest stand to gain the most. But this not entirely true. Vanguard, the American advisory giant is on the cusp of introducing AI capabilities into the Vanguard Digital Advisor. This is the name given to their homegrown robo advisor. The current head of Vanguard Mr Salim Ramji confirmed this at a recent conference.

Mr Ramji went on to add that Vanguard is now using AI internally for research and portfolio optimisation functions. He even went as far as to say that the AI tools are ready to be rolled out for use by clients. But most importantly he concluded by saying that the tools would be made available to clients only late this year or early next year. This is because Vanguard wants to be doubly sure that their tools are virtually foolproof and viable for client for client use. He emphasised that their clients are not meant to be guinea pigs on whom the tools would be tested. And this is exactly what financial planners looking to adopt AI should take away.

What Financial Planners Need To Keep In Mind

The goal for financial planners should not be to become the earliest adopters of AI. It should actually be to become the most responsible adopters of AI. This is because planners aspiring to incorporate AI into their core advisory process with clients will have to do so responsibly. They cannot hide behind AI if things go wrong. Clients will still hold their planners accountable. This is because any AI tools impacting client experience or decisions would be developed and/or offered by the planner. Planners would therefore do well to pay heed to this timeless quote.

This means that individuals with significant ability, influence, wealth, or knowledge are implicitly obliged to use their advantages for the greater good. A competent planner would possess significant amounts of knowledge and technical ability. AI in the hands of a planner would therefore be a great power. The planner is therefore obligated to use AI to drive the right experience and outcomes for clients.

Planners must also remember that no AI tool or platform can replace the human element in the advisory relationship. The biggest value add that planners can offer their clients going forward is the ability to connect on a human level with them. This just requires a few simple things to be done well. Reassurance about the future when markets are going haywire. A timely check when clients are about to do something they shouldn't be. Personalised wishes for major occasions in the client’s life.

Basically anything that makes the client feel seen, heard and valued. These little things may seem insignificant. But they would go a long way to improving client experience and retention. It would show the client that the planner is never unavailable when it matters most. Of course, clients too need to bring a basic level of effort and commitment to the table. After all every advisory relationship is a two way street. But it is only when planners exhibit effort and commitment themselves that they can command it from clients.

Final Takeaways For Both Parties

DIY investors who use AI must remember that AI is not foolproof. Blind reliance on AI would therefore not do them good. Unless they can discern gaps in output from AI, they are better off working with professionals. AI will progressively become indispensable to financial planners. Therefore they had an implicit obligation to use it responsibly when working with clients. At present planners have value to offer clients in terms of filling gaps created by AI in their understanding of money management. But this will lose relevance in the future with advancements in AI and prompt engineering.

The human element of the advisory relationship can never be replaced or replicated by AI. The core value add for planners in the age of AI is therefore to focus on the human element of the advisory relationship. Planners can therefore use AI to automate repetitive and draining back end tasks. This would also improve back end efficiency for the planner. They can then focus entirely on the human aspect of the relationship with AI pitching in wherever required. Dealing with AI in such a manner would ensure that both investors and planners derive optimal value from it.