AI-powered financial advisors impact wealth management industry

Like many other industries, the wealth management sector has integrated artificial intelligence where applicable, including in chatbots and financial modeling. However, fully automated AI-powered financial advisors, known as robo-advisors, are beginning to make such an impact that there is speculation they could eventually displace traditional wealth managers.

One example is the platform PortfolioPilot, which manages $20 billion in assets through its automated portfolio and has gained 22,000 users in its two years of operation. In an interview with CNBC, Alexander Harmsen, Co-Founder of PortfolioPilot’s parent company Global Predictions, said the AI platform offers more personalized service than many human wealth managers.

“AI clearly has a critical role in the wealth management industry,” said Greg O’Gara, Lead Wealth Management Analyst at Javelin Strategy & Research. “However, the deployment and adoption of AI tools and business models will reach an equilibrium, falling into two main segments: self-directed investors and hybrid AI-advisory relationships. PortfolioPilot falls into the former (with the caveat that many self-directed investors also use a financial advisor).”

A Holistic Approach

Hybrid AI advisory combines AI tools, like generative AI, with human expertise. It empowers investors with advanced tools and provides advisors with resources like predictive AI for scenario analysis, reporting, financial planning, and client workflow management.

“While PortfolioPilot is demonstrating solid growth, it will face increasing competition from advisory models that create a human backstop (i.e., the advisor) for autonomous technologies,” O’Gara said. “Moreover, investment portfolios are only a piece of a larger financial strata which demands long-term financial planning. The interconnection of these advisory pieces, including estate planning, is complex.”

The increasing number of accounts, investment types, and revenue streams can complicate a portfolio quickly. This complexity is one of the main reasons high net-worth individuals turn to wealth managers.

Additionally, wealth management services encompass more than portfolio management. Many wealth managers now take a holistic approach to their clients’ finances, considering the entire family’s financial situation.

A Booming Industry

The wealth management industry is booming and remains dominated by big names like Morgan Stanley and Bank of America. Morgan Stanley alone has $4.4 trillion in assets under management in its traditional wealth management services, dwarfing the $1.2 trillion managed by the company’s self-directed advisory tool, which operates like PortfolioPilot. PortfolioPilot targets users with $100,000 to $5 million in investable assets, with the median PorfolioPilot user having a net worth of $450,000.

Unlike many traditional wealth management firms, automated financial advisors don’t take custody of their customers’ funds. Instead, these platforms provide users with advice on optimizing their portfolios. However, this model could change soon. PortfolioPilot’s Harmsen indicated that within the next few years, the platform might be enhanced to take custody of funds and execute trades for its customers.

“We will give you very specific financial advice, we will tell you to buy this stock, or ‘Here’s a mutual fund that you’re paying too much in fees for, replace it with this,’” Harmsen told CNBC. “Or it could be much more complicated advice, like, ‘You’re overexposed to changing inflation conditions, maybe you should consider adding some commodities exposure.”

Incumbent AI Challengers

There are still some regulatory hurdles that automated financial advisor platforms will need to overcome. PortfolioPilot recently drew a $175,000 fine from the U.S. Securities and Exchange Commission for billing itself as the first regulated AI financial advisor.

The company has since retracted that billing, but it hasn’t stopped investors from pouring in—PortfolioPilot raised $2 million in funding in the past month alone. Because automated financial advisors continue to gain users, some believe the wealth management sector is due for a shake-up.

“Ultimately, AI as a self-directed investment tool will challenge the advisory model, but the challenge may only serve to create greater client engagement,” O’Gara said. “And it will force advisors to demonstrate their value. Advisors who fail to adopt will be hard-pressed to stay in business as incumbent AI challengers rise.”