The buzz around artificial intelligence has reached fever pitch—truly everyone in business is talking about it. However, as we look back at the history of technological advancements, we find a recurring theme of companies solving for the wrong problems. This begs the question: What is the right problem that financial advisors should be striving to solve and how can AI help (or hurt)?

When we delve deeper and ask clients what they want, we discover a consistent emphasis on the behavioral components of their interactions with advisors. In fact, according to one Accenture Study, the top three qualities clients look for in an advisor are: someone who gets them, someone they share values with and someone they can hang out with socially. 

It’s also worth evaluating the current state of affairs to ensure we as an industry are adequately addressing the appropriate concerns. Unfortunately, we’re not. According to the Edelman Trust Barometer, the financial services industry is ranked low in trustworthiness, only above social media platforms. Additionally, a significant percentage (64%) of financial planning clients report having no one to talk to about their money problems. Clearly, something is amiss if the majority of people with advisors don’t think they have a person in their life they can trust with their financial concerns and goals. Given these insights, the question then becomes: How do we strategically implement AI in the advisory domain to build trust, not further corrode it?

Applications Of AI

One Kitces study indicated that advisors spend less than 20% of their time actually solving for the right problem—via time spent with their clients. Instead, they’re spending the majority of their days consumed with back-office tasks. These functions of the business are undoubtedly essential, but they don’t move the needle when it comes to building greater trust between advisors and the very people they serve.

This reality provides a compelling backdrop for the potential benefits of AI lending an assist. By leveraging this technology thoughtfully, advisors can offload repetitive, laborious and time-consuming tasks such as asset allocation, tax alpha, product allocation and rebalancing. This, in turn, will allow them to redirect their attention and energy toward the aspects of their role that create the most impact—building and nurturing interpersonal relationships with clients.

Wherever there is a need for systematizing a process, technology is likely going to win. However, when it comes to empathy, prospecting, and idea generation, behavioral finance takes the lead. These elements are linked to the relationship component of financial advisory, which hold significant importance for clients when selecting and sticking with an advisor. Considering this information, advisors might want to think about leveraging AI to offload tasks that can be executed more efficiently by technology. In doing so, they can reclaim valuable time to work on the relational elements of their business.

Clients are drawn to advisors who invest time in building relationships, empathizing with their unique experiences and seeking a deeper understanding of their needs. These services are inherently human and cannot be replicated by technology.

AI And Behavior Change

A successful advisor-client relationship thrives on education, ensuring that clients possess the necessary knowledge and comprehension. It involves creating an environment with the right asset allocation and investment strategy tailored to the individual's goals and risk tolerance. Most importantly, it requires the nurturing hand and guidance of an advisor to offer encouragement and support throughout the journey.

Although AI can certainly support and systematize elements of these three factors, in particular education, the decision-making process and behavior change itself are deeply rooted in the complexities of human nature. AI can provide information and analysis, but it lacks the nuanced understanding of individual needs, motivations, and emotions that a human advisor possesses.

Consider the example of sugar consumption. Despite overwhelming evidence that excessive sugar intake is detrimental to our health, it continues to be a prevalent habit. Why? Because it tastes good, and we are only human. The decision to change behavior goes beyond mere knowledge; it requires a comprehensive approach that addresses the educational, environmental and motivational aspects of the individual. And so it goes with investing—if it were easy to invest in our best interest, we wouldn’t need financial advisors.

In the ongoing debate between AI and behavioral finance (BeFi), it becomes evident that while technology has its merits, and can help streamline a variety of advisors’ day-to-day tasks, the emotional component provided by human advisors remains essential. AI has a very important home in the advisor’s toolkit, but without the human touch needed to address and balance human irrationality, advice delivered solely through AI will fall short.

Financial advisors play a pivotal role in helping clients make informed decisions, navigate complex financial landscapes and achieve their long-term goals. Their ability to connect on an emotional level, understand clients' aspirations and fears, and guide them through both rational and irrational decision-making is what sets them apart. This is the right problem that advisors should be focused on solving: leveraging AI to enhance their ability to address clients' behavioral needs and provide unparalleled personalized service.

We should be using AI to help advisors focus on tasks that are unique to them. It’s not “either or”; it’s “both...and.” No matter how advanced our technology becomes, there are—and always will be—some things that can never be automated away, and that is where we should be spending our time improving our skills of empathy and influence.

LeackStat 2023