With ever-increasing technology capabilities and automation, you might wonder what this means for the financial advisory business. Will ChatGPT be able to take the place of a human advisor? The reasons ChatGPT will not replace financial advisors include experience, intelligence, and personalized service, all of which define a successful advisory practice and which clients have come to expect. While ChatGPT may add an additional level of assistance to financial advisors, it will not replace them anytime soon.
I used to believe that financial advice was a purely quantitative field because:
- All investment risks could be modeled.
- The tax code could be easily applied.
- Investors had well-defined cash flows and stable time horizons.
Armed with my degree in engineering, I was confident that I had the skill set to excel at providing financial advice. Yet I had missed half of what makes an investment advisor truly able to help their clients.
The best financial advice combines quantitative analysis with an understanding of human psychology.
The more time I spent helping individuals design and implement strategies for their wealth, the more I realized that the best financial advice required a blending of analytics and emotions. A mentor of mine would express it as the need to focus on both the head and the heart. This is a key reason why financial advisors will not be replaced by ChatGPT.
Computers are great at calculating the mathematically optimal solution.
With wealth comes complexity. Families who have been fortunate to save a couple of million dollars are challenged to find the best investment strategy. Important factors are:
- The relative size of the taxable, tax-deferred, and tax-exempt accounts.
- Who owns each account, and who should.
- Time horizon, importance, and future cost of each goal.
- Risk, return, and correlation of each investment.
- Current income and estate tax code and potential changes over time.
The good news is that computing power to solve for these factors exists today at a reasonable price. If the software is accurate and the inputs correct, a probability of success can be calculated in minutes.
ChatGPT adds to the technology toolkit.
In the past year, the availability of large language models such as ChatGPT has facilitated access to information. By drawing upon huge historical databases, they generate the most likely response. Type in “happy”, it answers “birthday.” In essence, they are experts at sharing what is considered “common knowledge.” If you haven’t tried OpenAI’s ChatGPT, click here.
I asked ChatGPT to summarize how I should invest an inheritance. Here was the response:
- Assess your financial situation and determine your goals.
- Set aside an emergency fund.
- Diversify your portfolio across various asset classes.
- Focus on income-generating investments as you near retirement.
- Consult a financial advisor specializing in retirement planning.
- Consider tax implications and optimize tax efficiency.
- Periodically review and rebalance your investment portfolio.
Please note that these bullet points provide a concise overview, and it’s important to delve into each recommendation in more detail to make informed decisions.
(source: Chat GPT)
The above is a decent starting point but fails to capture your feelings about money, the distinction between needs and aspirations, and whether you might change the strategy at the wrong moment.
Human advisors are better at incorporating a client’s habits and attitudes toward money.
Money is emotional. Some of us spend too much, while others are uncomfortable spending beyond the essentials. Nobel Prizes have been awarded for identifying human biases in managing money. We tend to buy more of an asset as its price rises, hoping that it will continue to rise. We hesitate to realize losses. We seek patterns in random data.
For an investment strategy to succeed, an investor must have the emotional fortitude to stay the course, ignoring short-term volatility. A financial advisor is better than a computer at assessing an investor’s emotional tolerance for risk. Some firms have tried to systematize the process through risk tolerance questionnaires. They are not accurate. Individuals have difficulty predicting how they will react to large losses or gains.
Humans are also better at imagining what has not yet happened.
ChatGPT has a great memory. It remembers all the data it has been fed but has no imagination of what might occur. While our memories are faulty, we have the unique ability to imagine the unlikely. The best financial plan must balance the probable with the unlikely. Overly protecting against the rare bad event will not provide sufficient growth to achieve your goals, just as taking excessive risks in the hope of beating the odds can quickly derail a plan. A well-designed plan will assume positive investment returns in most years with moderate inflation, with sufficient, safe assets so that rare events do not create permanent losses. Here is one approach we use at our firm.
The best practice is to combine the talents of humans and computers.
Computers are great at the quantitative – running thousands of scenarios or identifying common knowledge. People are better at sensing how we may react to unlikely events. Both are important. Our head wants a mathematically correct plan. Our heart wants one we feel comfortable staying with in good and bad times.
The best teams are composed of complementary talents. You want fast computers, good software, and artificial intelligence programs such as ChatGPT. You also want experienced professionals to ensure the inputs are accurate, the recommendations logical, and the investor’s emotions are factored in. It took me years, but I now know that the optimal strategy is not just quantitatively correct, but also one that my client will believe in and stay with through booms and busts, which is why ChatGPT will not replace financial advisors.