By Catherine Flax
CEO, Pefin
With all the innovation that has occurred in the lives of consumers because of artificial intelligence (AI), very little has been done to meaningfully change how people manage their personal finances. As a society, we will benefit from approaching personal finance in a fundamentally different way to motivate good long-term habits. Fear of bankruptcy, hope of having enough money for retirement, inability to plan to put the kids through college, counting on the stock market rising is for many people the current – but wrong – way to address these important issues. Hope is not a strategy.
We can now impact the way we interact with money, rooted in a deep understanding of the complex equation that is an individual’s financial situation, their goals, the economy, markets, tax rules and many other factors. A new model exists for how people can have an informed relationship with their finances, and take control of this important aspect of life. A new form of information and education can be economically adopted by the public at large, resulting in the acquisition of new habits. The challenge of economic illiteracy that plagues most of society – even our most educated citizens – can be addressed with AI. Today, only individuals with substantial net worth can access the services of professional financial advisors to approximate this level of service, but even those insights are not as comprehensive or tailored as what today’s computational and machine learning power can create. A human financial advisor cannot process the hundreds of financial decisions that their clients make, let alone layer on top of that the changes occurring in state and federal tax codes, changes in inflation, the stock market and many other variables – as well as the interplay among those variables. Only advanced computational technology that can process millions of data points per client can adequately digest this web of interrelated information – and make sense of it. Because each person is unique financially, there is no “rule of thumb” or general guidelines that can give an individual the right advice for them. It must be highly tailored to have value.
Because of the transformational changes in technology (including computational power, cloud storage, smartphone and interactive browser technology), we are on the cusp of using well-known AI techniques to build remarkably low-cost, 24/7, fiduciary AI-powered financial advice for the public. Some of the important AI methodologies include:
Combining these interfaces with an AI financial advisor is a ground-breaking and important advance, because ultimately people want to receive information in a way that is familiar – as if they were speaking with a human being. Leveraging tools like Amazon’s Alexa or Siri adds a dimension of ease – and is also an important advancement for users who are visually impaired or have challenges with dexterity. Fundamentally, when people can no longer distinguish between speaking with a human or with a machine, it becomes easier for the machine to be leveraged inexpensively and with scale – and across many languages. This also allows the machine to proactively reach out when there are issues, changing the dynamic from a person having to sift through their financial accounts to ascertain whether they need to worry about something, versus a new paradigm where your computer, phone or Alexa can tell you “hey, take a look at your bank account, it looks like you may have double paid a bill”, or “those new tax laws that were just passed by Congress will have a negative impact on your retirement savings, unless you consider retiring in a more tax-friendly jurisdiction, you will run out of money sooner than anticipated”. This is the sort of “nudging” that we really need from our automated AI-driven financial advisor, and we are on the verge of this being a reality.
Advances in computing power are one of the main drivers to leverage data and to change how we incorporate AI into our lives. The advent of the cloud has enabled inexpensive and large-volume computations. It has made enterprise-grade infrastructure security standards and military-grade encryption more easily accessible, enabling companies of all sizes to have substantially higher levels of security than most people experience with their financial institutions today. It is worth noting that many large corporations must redo decades of relatively open security, while newer companies can build from the start using sophisticated encryption techniques and other methods that greatly enhance security.
How does regulation keep up with these technological changes? What many regulators are beginning to understand is that advanced technologies are the best hope of delivering unbiased, appropriate and fiduciary advice – such as what is required by the US Department of Labour (DOL) fiduciary ruling, a rule which expands the “investment advice under the fiduciary” definition under the Employee Retirement Income Security Act. Unlike humans who – even with the best of intentions – come with biases, an AI financial advisor can be programmed to be a fiduciary and must only give unbiased advice by design. This is a huge protection for the consumers of financial services, and one of the most important dimensions of how technology will impact this sector. We are not far from the day when advice given by a human advisor will be compared with what an AI-based advisor provides, and it becomes increasingly complex to justify the cost of human advice. This is like investment management, where studies have shown that over the last 20 years up to 92% of actively managed mutual funds underperform an index to which they are benchmarked.
The future lies in intelligently harnessing the power of these tools to provide AI-based, user-friendly solutions, especially for complex and expensive problems like holistic financial advice. Given the acute need for reasonably priced approaches to solve the questions that people have about their finances, it is AI and only AI that can provide this. The future of financial advice is personalized AI, and it is the power of imagination that makes the impossible happen.