Financial adviser Juanita Wrenn and other experts are weighing in on the increasing use of artificial intelligence (AI) as a tool for financial guidance. Clients are already going to AI platforms like ChatGPT for investment advice. This trend is deeply concerning, resulting in hazardous assumptions being made about the accuracy, reliability, and harm of these technologies.
As more people look to AI for their financial education, Wrenn has seen a stark difference in her clients. Increasingly, “all of them” are using these models—which predict the impact of various factors on bond prices—to help them make their investment decisions. She warns that AI should be a tool to improve knowledge-building. It can overestimate or underestimate important technical details that are key to effective financial forecasting.
Philipp Winder, a Geneva based financial technology expert, refers to most AI platforms as “black boxes.” He focuses on the lack of transparency in how these systems produce their guidance. “You have no expectations about what flows in there and how they arrive at these findings,” he says. “With a little system like that, trusting these kind of really opaque systems with these huge monetary choices would be dicey,” Winder mentioned.
The Limitations of AI in Financial Decision-Making
AI’s ability to make financial education less intimidating is part of its promise. Simplicity, Winder says, is attractive because it lowers the barrier of entry into the often intimidating world of finance. He remains cautious about its limitations. Clearly putting some funding behind something makes a difference, obviously, says Georgina Doll. She used generative AI to learn about home loans and stresses that it’s not just learning information, but rather hinaus.
During her decision-making process Doll discovered that AI offered her the level of insight she needed. So when I chose my mortgage loan product, I plugged in a dozen or so different interest rates. This meant I could easily see the impact on the repayments as I changed things. If she were looking for investment advice through an AI model, she would want the model to be more on the side of caution. When starting to put together a plan, this shortchanges budgets the majority of the time. It violates the right assumptions,” she adds.
The Australian Securities and Investments Commission’s MoneySmart program cautions that AI-generated content can look very tailored to you. It does not operate under the same ethical code as licensed financial advisers. The spokesperson cautions that “AI is not bound by the same rules as a licensed financial adviser who has a duty to consider your circumstances before offering personal advice.”
The Findings of Recent Research
A recent study conducted by the University of St Gallen in Switzerland assessed the investment advice given by three popular large language models (LLMs). Our findings indicated that these models almost always overfit to favor US-based stocks. They further suggested portfolios with about 58 basis points higher expense ratios than typical benchmarks. Moreover, these models were particularly partial to favoured, non-core sectors – often at the moment, technology.
These results call into question the reliability and appropriateness of AL-generated investment strategies. But as Wrenn points out, a significant portion of clients use AI as a tool to educate themselves before coming to professionals. “Mostly they’re using it to get more knowledgeable before they come to us, so they’re asking questions that they may not be completely familiar with,” she explains.
While advances in these technology offer promise, Winder cautions against becoming too reliant on these systems. He explains that they all show medium to high levels of assertiveness. In a nutshell, they challenge you and instill an incredible confidence in what they are telling you to do. This level of assertiveness may encourage users to place undue reliance on the information provided by AI, putting their financial health at risk.
Cost-Benefit Analysis of Financial Tools
For those looking to use more complex financial tools, such as offset accounts, knowing the cost-benefit analysis can save you thousands. Even an offset account that offsets only a $10,000 balance means saving interest on that amount, or about $600 a year. With the cost of maintaining the account costing $180 per year, the overall benefit becomes $420 each year.
Experts recommend that the break-even point at which it makes sense to pay offset account fees is usually well over $10,000 in account balance. Potential users will need to consider these numbers seriously against their own long-term fiscal objectives.
