AI likely to go the way of robo-advisers in financial planning, Morningstar says


As AI hype rages on, so does the debate over which workers the technology could replace. A new paper says financial advisers are safe.

A paper published by Morningstar Inc., an investment services company in Chicago, titled “Artificial Intelligence Won’t Replace Financial Advisors,” argues the tech is unlikely to replace advisers because it fails to garner trust from humans. It also compares AI to previously overhyped innovation trends.

While tech and financial experts appreciate AI’s potential, they argue for more measured dialogue around the burgeoning technology.

“This article is a great example of our mission to ground investors in reality and be contrarian when called for,” said Lee Davidson, chief analytics officer for Morningstar. “In this case, we think that there is incredible potential for generative AI but also significant hurdles it needs to overcome to fulfill its full potential when it comes to handling the day-to-day responsibilities of financial advisers.”

The paper defines AI as the attempt to “merge person and machine” using mathematics and software. But what makes it so revolutionary is its ability to autonomously generate information. Davidson says unlike previous tech innovations, which helped human workers with rote tasks, AI is the first with the ability to work in a spontaneous “ad hoc” fashion.

ChatGPT displayed on a smart phone with a dictionary book, seen in this photo illustration. On 20August 2023 in Brussels, Belgium. (Photo by Jonathan Raa/NurPhoto via Getty Images)

ChatGPT displayed on a smart phone with a dictionary book, seen in this photo illustration. (Photo by Jonathan Raa/NurPhoto via .)

“It starts to push into that improvisational space. It’s all about that content generation and that’s why we get worried about old intonations and all these types of things. It’s because it is creating new content, new insights, it’s improvising. It’s learning as it goes,” he said.

But Davidson said that’s no reason for wealth advisers to panic.

“There’s definitely going to push the boundaries of where automation can be deployed to kind of new categories of jobs and new casual tasks,” he said. “But that doesn’t mean that jobs will go away.”

The Morningstar paper used historical precedent and human nature to push back on the notion that AI will replace human workers. In particular, it spotlighted robo-advisers, a past threat to wealth advisers, and cited the “trust hurdle,” or when people are reluctant to adopt new technologies that haven’t proved completely reliable.

Robo-advisers, which give users automated investment advice based on their portfolio, came to the fore in the mid-2010s. Robo-adviser companies like Wealthfront and Betterment raised hundreds of millions of dollars from investors who thought the tech would replace financial advisers, as the paper notes. Yet, large banks and brokerage firms ultimately acquired most robo-adviser firms and, in the process, became more efficient.

“Robo-advisers were the most recent David that was coming for Goliath,” the paper said. “Instead of slaying Goliath, it seems more like David went and worked for Goliath.”

Artificial intelligence (AI) advisor or robo-advisor in stock financial market technology. Shaking hands of male investor and 3d rendering robot. Abstract graph stock exchange background.

Artificial intelligence (AI) adviser or robo-adviser in stock financial market technology. (Photo: Getty Creative)

The report also drew a comparison between AI and autonomous vehicles. The paper cited the advent of autonomous driving, during which the co-founder of Lyft, John Zimmer, argued that such vehicles would replace the majority of his workers by 2021.

In contrast, early Uber investor and venture capitalist Bill Gurley noted that autonomous vehicles had thus far failed to make passengers feel safe. That’s because, thus far, the cars haven’t proved 100% reliable in challenging conditions like snow or rain.

The paper said that like self-driving cars, AI is unlikely to garner trust from consumers. That’s because while the technology proves effective at answering broader financial questions and assisting with asset allocation, the tech requires knowledge across financial planning, estate planning, tax planning, and insurance to successfully assist clients.

“The trust that people have to have that the machine is better than a human has to be absolute,” said David Trainer, CEO of New Constructs, an investment firm that uses AI, and who is unaffiliated with the paper. “The problem with AI is that almost all the time it’s a black box…If you know that it works 97% [of the time], that doesn’t give you a lot of comfort because you never know where that 3% that’s wrong is going to show up.”

The Morningstar paper is not the first time financial experts have raised doubts about the efficacy of AI for financial planning.

During a recent appearance on Yahoo Finance Live, Jerry Golden from Golden Retirement expressed his concerns that AI was not yet up to the task. For instance, he said that AI apps fail to analyze the performance of the market in “real time” and ChatGPT 4 is only trained on data up to 2021. He also said that AI can’t yet interact with real clients and create a plan tailored to their needs.

“They’re a very useful starting point of what somebody should think about. But they’re very far today from the end answer in terms of the plan you might adopt,” Golden said.

Still, some experts contend that AI is different from previous hype trains like NFTs or self-driving cars. For instance, Davidson, who harbors some disagreement with his firm’s paper, said AI stands out due to its accessibility. He pointed out that ChatGPT was the fastest-growing web app in US history while robo-advisers were used by a select few.

“These tools are so much more accessible now. They’re easier to use. They’re easier to understand…also more utility. I think that’s obvious to people.”

FILE - This May 13, 2014, file photo shows a Google self-driving Lexus at a Google event outside the Computer History Museum in Mountain View, Calif. Google will release monthly reports on the performance of its self-driving cars, and it disclosed summaries of the accidents that involved the vehicles. The company said Friday, June 5, 2015, as it has in the past, that its cars were not to blame for any of the accidents. (AP Photo/Eric Risberg, File)

This May 13, 2014, file photo shows a Google self-driving Lexus at a Google event outside the Computer History Museum in Mountain View, Calif. (AP Photo/Eric Risberg, File)

Scott Likens, PWC’s global AI/US innovation lead and who was also unaffiliated with the study, agreed with Davidson. He suggested that though AI was unlikely to outright replace wealth advisers, it would transform their industry. For instance, he said AI could make advisers more efficient, able to communicate with more clients at a time.

“We’re seeing a much broader impact with this AI wave. So that’s why there’s an urgency to think about this in a responsible way for financial advisers,” he said. “I think aspects of what they do every day absolutely are going to change in the way they deal with customers.”

Dylan Croll is a Yahoo Finance reporter.

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