Should I Use an AI Financial Advisor? Pros and Cons

As artificial intelligence (AI) advances, it’s quickly reshaping the financial advisory sector. From robo-advisors to AI-powered investment platforms, these tools offer quick, low-cost, and automated guidance.

So, how do these tools stack up against traditional, human financial advisors? And is an AI financial advisor right for your financial situation?

In this article, we define AI financial advisors, examine their popularity, and break down their pros and cons. We also help you determine whether a digital tool is sufficient or if your financial situation requires a human advisor’s expertise.

What Is an AI Financial Advisor?

AI financial advisors, often called robo-advisors, are digital platforms that use algorithms and machine learning to manage investments. They’re most popular among people who are new to investing, have small portfolios, or want a low-cost, “set it and forget it” solution.

When you sign up with a robo-advisor, it will ask you basic questions about your:

• Investment goals
• Income
• Risk tolerance
• Time horizon

Based on your responses, the AI advisor will assign you a pre-built, diversified portfolio, usually made up of low-cost index funds or exchange-traded funds (ETFs). After that, it will automatically manage your portfolio, rebalancing it as needed and adjusting allocations as market conditions evolve.

Read More: Active vs. Passive Investing: Which Approach Fits Your Goals?

AI Financial Advisors: Some Notable Statistics

While the first robo-advisors hit the market in the 2010s, advancements in AI have made modern versions more intelligent, responsive, and accessible. Additionally, a growing number of investors are using generative AI tools like ChatGPT to research investment ideas and plan out their personal finances.

Just take a look at these statistics from Experian:

• 67% of surveyed Gen Zers and 62% of surveyed millennials use AI tools to help with their personal finances.
• 60% of these AI users say that it helps with their saving and budgeting, while 48% use it for investment planning.
• 98% of Gen Zers and millennials report positive experiences using AI software.
• In contrast, only 41% of Gen Xers and 28% of baby boomers use AI finance tools, highlighting a significant generational gap.

While younger investors are leveraging AI at high rates, many still recognize the need for human oversight. According to CFP Board research, only 31% of surveyed participants feel comfortable following financial advice from an AI tool, but that number jumps to 52% when a human advisor reviews AI’s recommendations.

The Pros of Using an AI Financial Advisor

Now that you understand how AI financial advisors work, let’s explore their major advantages:

• Low fees – Robo-advisors typically charge lower fees than traditional advisors, with average costs ranging between 0.25% and 0.5% of assets under management (AUM). In contrast, most human advisors charge 1% to 2% AUM fees.
• Accessibility – Traditional financial advisors typically require new clients to invest at least $50,000 to $500,000. Thus, AI financial advisors may be more accessible to investors with smaller portfolios, making them an appealing option for beginners, younger investors, or people with limited funds.
• Automation – AI advisors automate everything from portfolio construction to rebalancing and tax optimization. Once your profile is set up, the system will handle the rest, eliminating the work involved in manually buying and selling investments.
• Objectivity – Unlike human beings, AI doesn’t get emotional about market fluctuations. Thus, it won’t panic sell during downturns or get greedy during bull runs. Instead, it follows algorithms rooted in historical data and statistical modeling.
• 24/7 access – AI platforms aren’t limited to nine-to-five business hours. As a result, you can check your portfolio, modify your goals, and review your returns at any time.
• Helpful planning tools – If you choose an AI platform with extra features, like budgeting tools and retirement calculators, you can use them to guide your financial strategy, whether you’re saving up for a down payment or compiling your first emergency fund.

As you can see, AI advisors offer an affordable, user-friendly way to manage investments. For investors just starting their financial journeys, they can be an upgrade from a DIY approach. However, they’re not a suitable solution for everyone.

Read More: Financial Advisor Fee Structures: Comparing Flat Fee and AUM

The Cons of Using an AI Financial Advisor

Despite their convenience, AI financial advisors have significant limitations you should be aware of, particularly if you have a high net worth or more complex needs. Their cons include:

• Limited personalization – Most robo-advisors rely on basic risk assessment questionnaires to build your portfolio. While your responses will personalize your portfolio to a degree, these AI advisors can’t factor in nuances about your unique situation, charitable goals, or estate planning requirements.
• Lack of emotional support – When your financial security, future retirement, and legacy are on the line, it’s easy to get emotional about market shifts. Left to your own devices, you may impulsively update your robo-advisors’ preferences in ways that hurt your returns. A human advisor can serve as a trusted sounding board during turbulent times and prevent you from making costly mistakes.
• Lack of education – A good human advisor doesn’t just manage your portfolio. They also take the time to explain market trends, clarify key financial concepts, and walk you through the reasoning behind their recommendations. This personalized guidance helps you understand core investment concepts and make more informed decisions. In contrast, robo-advisors rarely provide detailed education and offer little to no context for their choices, depriving you of the ability to develop greater financial literacy.
• Lack of holistic financial planning – Most AI tools focus primarily on portfolio management. However, your financial success requires more than just investing. You may also benefit from personalized retirement planning, tax strategy optimization, insurance suggestions, college funding tactics, and wealth transfer advice. Only human advisors can construct these types of coordinated, comprehensive financial plans.
• Limited responsiveness – After signing up with a robo-advisor, your financial situation may change over time, whether that’s due to the sale of a business, inheritance, divorce, or a medical emergency. If you forget to update your robo-advisor’s inputs, it won’t adjust your strategy to reflect your new reality, leaving you with an outdated plan.
• Lack of expert judgment and empathy – AI may be highly intelligent, but it isn’t wise. It can only analyze past market trends and generate predictions. Meanwhile, a human advisor can use their intuition to ask deeper questions, clarify grey areas, and adjust their advice to subtle life nuances, all while providing emotional support along the way.
• Security concerns – While most robo-advisors employ robust encryption and cybersecurity protocols, some AI tools may not offer the same protections. Sharing your detailed financial data with these tools can put you at risk of data breaches and identity theft.
• Lack of transparency – Many AI advisors operate as a “black box,” which means that they don’t clearly disclose their underlying algorithms or decision-making processes. As a result, it can be difficult to determine why the AI advisor chose a particular investment strategy or recommendation.

Due to these drawbacks, AI advisors can be useful for basic investment management, but they can’t replace the insight, expertise, or empathy of a skilled financial professional.

Who Should Use an AI Advisor?

AI financial advisors are sufficient for people with simple investment needs who prioritize cost-efficiency. For instance, you may want to opt for an AI financial advisor if you:

• Are brand new to investing and want a low-cost, low-maintenance option
• Have a small portfolio
• Are saving for a specific goal (buying a home, paying down debt, etc.) with a clear timeline
• Don’t yet require in-depth estate planning, tax strategy, or risk management support

In other words, AI advisors can help you start your initial investment journey. However, it’s important to rethink your strategy as your wealth grows and your financial picture becomes more complex.

Who Should Use a Human Financial Advisor?

AI financial advisors can handle basic investing needs, but they can’t replace the nuanced guidance of a human advisor. Here are five scenarios where working with a human advisor is essential:

• You’re wealthy or have multiple accounts – As your net worth increases, so does your finances’ complexity. Thus, you must take a more strategic approach to your taxes, stock positions, and cash flow management. A human advisor can offer tailored strategies to ensure you preserve and grow as much of your hard-earned wealth as possible.
• You have multiple accounts – If you use a combination of brokerage accounts, retirement plans, 529s, or trusts, managing these accounts requires careful coordination. A human advisor can help you optimize your finances across the board, as opposed to operating within a single portfolio.
• Your finances are becoming more complex – Do you own a business, invest in real estate, or support children in college? Situations like these add layers of complexity to your financial situation that generic software can’t handle. With a human advisor’s oversight, you can explore your estate planning, charitable giving strategies, multi-generational wealth transfers, and succession planning options with confidence.
• You want emotional support and guidance – As we mentioned earlier, many investors fall prey to their emotions in volatile markets. Fear and greed can cloud your judgment, and AI isn’t capable of coaching you into rethinking your impulsive decisions. Human advisors, on the other hand, are well-versed in navigating market swings. In turn, they can help you see the bigger picture, talk through your concerns, and convince you to stick to the right plan.
• You’re facing a major life event – Whether you’re navigating a divorce, planning for retirement, or relocating across the country, major life changes can disrupt even the best-laid financial plans. A human advisor can help you adapt your plan in real time and adjust your investment strategies to keep your finances on track.

The Best of Both Worlds: Human Advisors Who Use AI

If you’re drawn to the benefits of AI and traditional advisors, there’s good news: you don’t have to choose just one or the other. Many modern financial advisors are blending the best of both worlds by leveraging AI tools to deliver more personalized, relationship-driven service. For example, they may use AI to automate the following tasks:

• Portfolio construction and optimization
• Rebalancing and trade execution
• Risk tolerance assessments
• Cash flow analysis and tax projection
• Performance report generation and distribution
• Compliance documentation

AI can complete these routine tasks behind the scenes, enabling advisors to focus more on their clients’ complex needs. Financial advisors who employ AI can listen more attentively during meetings, understand the nuances of your goals, and proactively reach out to ask about major life milestones.

This hybrid approach elevates your client experience, combining the speed and precision of AI with the empathy, intuition, and strategic insight of a trusted human advisor.

Read More: The Role of the Modern Financial Advisor: How Technology is Shaping Their Success

The Verdict: Personalized Planning Still Reigns Supreme

AI financial tools are fundamentally changing the financial advisory landscape. However, they won’t ever be able to fully replace human advisors.

If your financial needs are simple, AI advisors can be a cost-effective place to start. But as your financial picture evolves, you’re better off leveraging the nuance, coordination, and compassion of a human advisor.

The best results come from strategically using technology while working with a human advisor who truly understands you. This hybrid approach can provide a level of confidence and peace of mind that no algorithm can match.

Get the Best of Both Worlds with Alden Investment Group

If you’re interested in working with a financial advisor who leverages innovative technology, Alden Investment Group is here to help. As a Registered Investment Advisor (RIA) and broker-dealer, we partner with experienced advisors across the country and provide them with access to the cutting-edge tools they need to deliver exceptional service.

By blending high-tech tools with high-touch service, our advisors are able to:

• Build smarter, more responsive financial plans
• Generate more accurate risk and cash flow models
• Automate time-consuming admin work
• Provide more attentive service

Ready to experience smarter financial planning services? Reach out to Alden Investment Group today!

Sources:

Experian. Experian: Americans are embracing Gen AI to make smart money moves.
https://www.experianplc.com/newsroom/press-releases/2024/experian–americans-are-embracing-gen-ai-to-make-smart-money-mov

CFP Board. The AI Gap: Clients and Advisors Feel Very Differently About Artificial Intelligence.
https://www.cfp.net/news/2024/04/the-ai-gap-clients-and-advisors-feel-very-differently-about-artificial-intelligence

Nerd Wallet. How Much Does a Financial Advisor Cost?
https://www.nerdwallet.com/article/investing/how-much-does-a-financial-advisor-cost

Smart Asset. The Minimum Investment for a Financial Advisor.
https://smartasset.com/financial-advisor/the-minimum-investment-for-a-financial-advisor

Jolt Digest – Harvard. AI Comes to the Board Room in a Black Box: Are the Personal Assets of Directors at Risk in AI-Related Claims?
https://jolt.law.harvard.edu/digest/ai-comes-to-the-board-room-in-a-black-box