AI Won’t Replace Financial Advisors, But It’s Transforming the Industry

Many industries are apprehensive about the rise of artificial intelligence (AI), fearing that automation could render human roles obsolete. For instance, Hollywood experienced a five-month shutdown as writers' and actors' unions sought safeguards against AI's encroachment into TV and film production. In contrast, the financial services sector is largely embracing AI, with professionals striving to remain at the forefront of technological advancements.

It's important to note that AI won't be joining us for a round of golf to discuss investment strategies. However, the technology is already revolutionizing the financial advisory landscape, aiding in client acquisition and asset management.

Enhancing the Advisor's Toolkit

Currently, AI serves as a tool to augment, rather than replace, human advisors. Ken Lotocki, Chief Product Officer at Conquest Planning, likens AI to the transition from a hand-crank auger to an electric drill in carpentry—the expertise remains with the user. This perspective suggests that the 38% of advisors who, according to an Accenture survey, fear AI may surpass their capabilities can find reassurance in its supportive role.

In financial services, AI primarily functions as an administrative aid, manifesting in various applications:

• Document Summarization: Wealth.com's Ester product swiftly condenses legal documents pertinent to estate planning.

• Client Interaction Analysis: Tools like Jump record client conversations, extract key data, generate to-do lists, and draft follow-up emails.

• Compliance Assurance: Saifr evaluates marketing materials to ensure adherence to compliance guidelines, streamlining a traditionally time-consuming process.

"AI today is very firmly in the co-pilot stage," notes Danny Lohrfink, co-founder and Chief Product Officer at Wealth.com. "It's automating manual and tedious tasks under advisor supervision."

As AI systems process increasing amounts of data, their proficiency is expected to improve. Lohrfink anticipates that tools like Ester will enhance their understanding of estate planning documents through continued use, effectively learning over time. He envisions a future where "co-pilot review is no longer necessary because the accuracy rate is going to be so high while the margin for error is so low."

AI as the Advisor's Assistant

Beyond handling routine tasks, AI is evolving into a direct support system for advisors. Conquest Planning's Strategic Advice Manager (SAM) exemplifies this role. While not a generative or predictive AI, SAM assesses clients' financial plans and alerts advisors to potential actions. Lotocki describes SAM as "the caddy and the user is the golfer," emphasizing that it "knows the course and the clubs" but doesn't execute the shots.

For instance, if a client's cash flow changes, SAM might recommend that the advisor suggest a stricter budget. Conversely, an influx of funds could prompt SAM to advise maximizing 401(k) contributions.

The growing demand for such AI-driven tools is evident as firms seek to remain competitive and attract more assets:

• Approximately 9% of advisors currently utilize AI tools, but over half plan to adopt them within the next year, according to a BlackRock report published in September.

• Wealth managers anticipate increasing their IT budgets for AI from 16% to 37% within the next 3-5 years, as reported by Wipro last month.

• AI integration is projected to drive 52% of revenue growth in the financial services industry over the next five years, according to a Seismic report.

Appealing to Younger Generations

AI's role is also pivotal in attracting younger clients. With an estimated $84 trillion set to transfer to younger generations over the next two decades, advisors must align with the technological expectations of Millennials and Gen Z. These digitally native individuals prioritize instant access to information. Lohrfink emphasizes that for them, "instant access to information isn’t just nice to have, it’s a must-have." Advisors lacking a robust technological infrastructure risk losing these clients during the wealth transfer.

Navigating Regulatory Landscapes

Despite the critical nature of financial advising, specific regulations governing AI's role are currently lacking. The Securities and Exchange Commission (SEC) has identified AI as a top priority for 2025, yet no definitive guidelines exist regarding its use by advisors. The focus remains on ensuring fair and accurate client representation.

In 2022, the SEC proposed rules to address potential conflicts of interest associated with predictive data analytics. However, these proposals have faced criticism for their ambiguity and potential burden:

• Even basic tools like Excel spreadsheets with embedded formulas could fall under the proposed regulations, as noted by Bloomberg Law.

• The rules would require advisors to catalog all uses of covered technology and assess potential conflicts favoring firm profitability over client portfolios, a task that could become Herculean and costly.

The timeline for implementing these regulations remains uncertain. In February, Senators Ted Cruz (R-Texas) and Bill Hagerty (R-Tenn.) introduced a bill to block the proposed rules. Additionally, with potential changes in the White House, the SEC's stance may evolve.

The Indispensable Human Element

While some industries integrate AI as a central creative force—such as the AI-generated children's cartoon "Warren Buffett's Secret Millionaires Club"—the financial advisory sector recognizes the enduring value of human insight. Lohrfink highlights that humans can recall personal client details, such as a dream home discussed years prior, and ask pertinent follow-up questions. AI can remind advisors of past conversations, but it's the human element that probes deeper.

Investors continue to seek the assurance of human advisors for quality advice. Ritik Malhotra, CEO of Savvy Wealth, observes that people are often "unwilling to make decisions for themselves" and prefer consulting another person, even in personal matters.

In summary, while AI is transforming the financial advisory industry by automating tasks and providing data-driven insights, the human touch remains irreplaceable in fostering trust and delivering personalized advice.

Christopher Frazier
Expert Marketer & Founder, The Christopher Frazier Newsletter