Like many other industries, the wealth management industry has incorporated artificial intelligence where possible, including chatbots and financial modeling. However, fully automated, AI-powered financial advisors, known as robo-advisors, are starting to have such an impact that there is speculation that they could eventually replace traditional wealth managers.
An example is the PortfolioPilot platform, which manages $20 billion in assets through its automated system PortfolioPilot has gained 22,000 users in its two years of existence. In an interview with CNBC, Alexander Harmsen, co-founder of PortfolioPilot’s parent company Global Predictions, said the AI platform offers a more personalized service than many human wealth managers.
“AI clearly has a critical role to play in the wealth management industry,” said Greg O’GaraSenior 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 (assuming many self-directed investors also use a financial advisor).”
A holistic approach
Hybrid AI advisory combines AI tools, such as generative AI, with human expertise. It empowers investors with advanced tools and provides advisors with resources such as predictive AI for scenario analysis, reporting, financial planning, and client workflow management.
“While PortfolioPilot is showing solid growth, it will face increasing competition from advisory models that create a human safety net (i.e., the advisor) for autonomous technologies,” O’Gara said. “Additionally, investment portfolios are just one part of a larger financial layer that requires long-term financial planning. The interconnection of these advisory elements, including estate planning, is complex.”
The growing number of accounts, investment types, and income sources can quickly complicate a portfolio. This complexity is one of the main reasons why high-net-worth individuals are turning to wealth managers.
Furthermore, wealth management services encompass much more than portfolio management. Many wealth managers now take a holistic approach to their clients’ finances, taking into account the financial situation of the whole family.
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 manages $4.4 trillion in assets through its traditional wealth management services, dwarfing the $1.2 trillion managed by the firm’s self-directed advisory tool, which functions like PortfolioPilot. PortfolioPilot targets users with $100,000 to $5 million in investable assets, with the median PortfolioPilot user having a net worth of $450,000.
Unlike many traditional wealth management firms, automated financial advisors don’t take custody of their clients’ funds. Instead, these platforms provide users with advice on how to optimize their portfolios. However, that model could soon change. PortfolioPilot’s Harmsen said that in the coming years, the platform could be enhanced to take custody of funds and execute trades for its clients.
“We’ll give you very specific financial advice, like, ‘Buy this stock,’ or ‘Here’s a mutual fund you’re paying too much for, switch to this one,’” Harmsen told CNBC. “It could also be much more complex advice, like, ‘You’re overexposed to changing inflation conditions, maybe you should consider adding exposure to commodities.’”
Current AI Challengers
There are still some regulatory hurdles that automated financial advisory platforms will have to overcome. PortfolioPilot was recently fined $175,000 by the U.S. Securities and Exchange Commission for advertising itself as the first regulated AI financial advisor.
The company has since pulled its position, but that hasn’t stopped investors from pouring in: PortfolioPilot raised $2 million in funding in the last month alone. As automated financial advisors continue to gain users, some believe the wealth management industry is about to see a shakeup.
“Ultimately, AI as a self-directed investment tool will challenge the advisory model, but that challenge can only serve to increase client engagement,” O’Gara said. “And it will force advisors to demonstrate their value. Advisors who don’t embrace it will struggle to stay in business as new AI competitors emerge.”
