The Rise of Tech and Automation in Personal Finance

The Rise of Tech and Automation in Personal Finance

August 01, 2023

Artificial intelligence has been coming for a while now yet it seems like it is still taking most people by surprise. The capabilities of programs such as ChatGPT, are paradoxically both extremely exciting on the one hand and terrifying on the other. At least one factor of this developing technology that distresses many individuals is the potential for these programs to make their jobs or industries obsolete. The financial services industry is no stranger to these concerns and doomsday predictions. As I said, this technology has been advancing for some time now and has already begun to take a foothold in the area of financial advice. It is only natural then, that many would wonder, “do I or will I even need a financial advisor if this technology can do the same job and maybe do it even cheaper?”

                As you can about imagine, this is a question that I have wrestled with in recent months. Is my job becoming obsolete? Do I need to rethink how I do business? Would my clients be better served working with a computer?! However, the more that I think back on my 10 years in the industry, the more I am convinced that the future is not a question of human advisor or technology but rather humans and technology.

                For many years now corporations have attempted to bypass the human advisor relationship by creating some sort of techy alternative. For example, many large 401(k) providers include simple retirement income calculators on their website for plan participants. These calculators are meant to steer clients in the right direction and, ultimately, invest more money. However, simple calculators such as these are limited in the depth and breadth of information that they consider. This leads to results that differ wildly from the client’s actually situation and experience. In short, online examples like this lack the ability to generate a financial plan with the same accuracy as a human advisor. Even the financial planning software that we use requires our input in order to make the data make sense for the client’s situation!

                However, what if you don’t really see the necessity of full financial planning and just want to start investing. Do you really need an advisor then? I will concede that if someone truly isn’t looking for any planning or advice that an online trading app may be what is best for them. In fact, if the individual doesn’t want my advice, then I don’t really want that person as a client. That is a relationship that can only lead to conflict!  However, I would argue that using a “free” investment app apart from professional advice has it’s own pitfalls. First of all, I would appeal to everyone’s desire that their investments make them more money! A 2019 study by ETF behemoth Vanguard, found that working with an advisor can increase your net returns by as much as 3%[i]. That may not sound like a lot but over time the impact is substantial.

                One might wonder, what causes such an increase in returns? Is it that advisors are just smarter than the rest of us? I can assure you that is not the case! The value of an advisor, in my mind, is two-fold. First, working with an advisor who does comprehensive financial planning should leave you feeling, “all set”. That is to say, working with an advisor should give you confidence that you are doing the right things and headed in the right direction financially. Secondly, your advisor plays an important role in keeping you from making, “The Big Mistake”. For anyone who has read this blog for any length of time, I probably sound like a broken record! In short, the big mistake happens when an investor buys when the market is inflated and sells when it comes crashing down and it is quite possibly one of the most harmful things that an individual can do to themselves financially! In times of heightened fear and greed it is the advisor’s job to point their clients back to the plan that they established and to remind them not to panic. This alone could easily account for an additional 3% in net returns.

                The point is, if you are in dire straits emotionally and are thinking about panic selling your portfolio, who are you going to call? Your advisor? Or a computer? Which is more likely to ease your mind and put you back on the right path? Looking for financial advice online during a crisis is a bit like checking WebMD when you have a health concern. You aren’t likely to receive the best or most realistic advice but rather the worst-case scenario! As artificial intelligence continues to improve perhaps, I will change my tune but for the foreseeable future human relationship certainly trumps cold calculation in my book.

                To wrap up, I posed the following question to ChatGPT: “I am very concerned about the financial markets and my investments have taken a huge hit. I am in my 30s and this is keeping me up at night. What should I do?” Its reply was actually pretty solid and you can read it here. However, one point in particular stood out to me: “If you're uncertain about your investment strategy or how to proceed, consider seeking advice from a financial advisor. They can provide personalized guidance based on your specific situation and help you make informed decisions.” It sounds like the AI is on my side 😊


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