Artificial Intelligence (AI) is impacting humans more than any of us realize. It’s being used by marketers to gain customer insights, by manufacturers to automate processes, and by many businesses to analyze data and improve efficiency.
AI’s ability to rapidly analyze large amounts of data has also given it a huge role in the financial industry, and thus can impact your retirement savings in a variety of ways. In fact, AI is being used most by the banking and securities industry more than any other, with 21% of all AI spending coming from those industries in 2021.
Here we’ll look at the role AI is playing in retirement planning and portfolio management.
Understanding AI and its Impact on Retirement Planning
AI has the ability to analyze data to make predictions for the future. In financial planning, AI can use data about your spending habits and lifestyle indicators to predict your retirement savings needs.
It can also calculate what actions you need to take to reach your retirement savings goals, in terms of setting aside money each month and the investment vehicles that are best based on your needs.
While some may balk at AI planning their future, a study shows that 53% of consumers actually trust AI to assist with financial planning.
If you’re not in that category, your financial advisor is likely using AI to generate the investment advice they’re giving you anyway. In fact, the use of AI-driven financial advice is projected to increase by 12.6% annually through 2026.
But fear not! AI tools are revolutionizing the financial planning industry. These tools can analyze your current investment data, your plans and goals, and your spending data and align that data with investment vehicles and market data predictions to create a personalized retirement savings plan.
While a human could arguably do the same thing, it would take weeks or months of research and analysis to do so, and the results would likely not be as accurate as those produced by AI.
These tools are still evolving, with new and better tools being developed by AI startups as well as existing companies every day.
Automated Investment and Portfolio Management
If you prefer to do your planning and investments online on your own, a robo-advisor tool may be an option for you. Robo-advisors use AI algorithms to automate investment decisions. Basically a robo-advisor is a digital platform that will manage your retirement portfolio automatically with little human intervention, or no intervention at all.
These robo-advisors can analyze your financial situation, risk tolerance, and retirement goals to create a personalized investment portfolio. These platforms use advanced algorithms to recommend a diversified mix of assets, adjusting the allocation over time to stay in alignment with your changing needs and goals.
As the market fluctuates and the value of different assets changes, the original asset allocation of your portfolio may change. Robo-advisors automatically rebalance your portfolio, ensuring that it stays in line with your desired allocation based on your risk tolerance and other factors.
Some robo-advisors even employ tax strategies to minimize the impact of taxes on your investments. They look for opportunities to offset capital gains with losses, reducing your tax liability and potentially increasing your after-tax returns.
All of this is done based on your personal situation. Robo-advisors allow you to set specific financial goals and assess your risk tolerance through questionnaires or other methods. Based on your risk profile, they recommend investments that align with your comfort level, aiming to strike a balance between risk and potential return.
These tools come with lower fees than a traditional financial advisor and offer convenience. Some examples of robo-advisors included Wealthfront, InteractiveAdvisors, and Betterment.
AI for Fraud Detection and Security
AI tools are also being used by financial advisors and planners to detect potential fraud and keep your accounts secure. They can analyze transaction patterns, look for anomalies, and trigger potential fraud alerts.
In fact, more than 87% of financial services companies have adopted these tools.
The tools can also help to detect cyber attacks and potential identity theft attempts.
All of this is done by analyzing historical transaction data on your accounts, doing so continuously in real time, detecting potential fraud quickly and even taking immediate action to prevent the fraud from occurring.
These tools are being used by financial services companies of all kinds and clearly are of huge value to both you, as a consumer, and the companies that adopt them.
Potential Concerns and Ethical Considerations
As with everything, the use of AI by financial advisors comes with some concerns and drawbacks.
First of all, AI does not have the ability to empathize with you as a human financial advisor can. Not all financial decisions and advice are based on data. Sometimes they’re based on a human understanding of your personal goals, fears, and needs. AI cannot replace that part of the retirement planning and management process.
Concerns have also been raised about data security and privacy. If the AI systems are not properly secured, there is a risk of data breaches and unauthorized access to confidential information.
With the use of AI in general, potential bias and lack of understanding of cultural nuances are also an issue. AI algorithms are only as good as the data they are trained on. If the data used to train the AI contains biases, the resulting financial advice could be skewed or discriminatory, leading to unfair treatment of certain individuals or groups.
Additionally, financial advisors might become overly dependent on AI-generated insights, leading to a reduced understanding of financial concepts and potential risks. This overreliance could become problematic if advisors blindly follow AI recommendations without fully understanding the implications.
Finally, AI is still evolving and it’s not perfect. If the algorithms are flawed or make incorrect assumptions, it could have a serious negative impact on your retirement savings.
The Future of AI and Retirement Savings
One thing is certain – AI is going to have a role in financial planning and retirement savings management for the foreseeable future. It’s also certain that AI tools are going to evolve and advance. As it moves forward, its ability to personalize your plan and portfolio will improve, as will its ability to analyze market trends, economic indicators, and historical data to identify potentially lucrative opportunities and manage risk more effectively.
It’s also likely that AI-powered predictive models will evolve, allowing real-time adjustments to retirement portfolios.
The use of robo-advisors is also likely to become more prevalent, which could be bad news for financial advisors. In fact, in 2021, it was estimated that well over a trillion dollars was being managed by robo-advisors.
Additionally, AI-powered chatbots and virtual assistants already exist that can provide real-time financial education, answering questions and guiding individuals on retirement planning and investment decisions. These tools are likely to advance and become used more and more frequently by financial services companies.
41% of financial services leaders think that, of all AI financial tooIs, chatbots will have the largest impact on the industry.
However, regulations on AI’s use in financial services and AI in general are already starting to emerge and will likely become tighter. The dangers and concerns associated with AI are well-recognized and leaders understand that quick action needs to be taken to ensure that it’s used in a responsible and ethical way.
But what will never change is the fact that, although AI can help manage risks, it cannot completely eliminate market uncertainties. Fluctuations in financial markets could impact retirement savings, necessitating ongoing monitoring and adjustments by humans.
AI’s future in retirement savings holds great promise in providing personalized, efficient, and data-driven solutions for individuals’ financial security. However, addressing privacy, bias, transparency, and regulatory challenges will be vital to harnessing AI’s potential while safeguarding consumers’ interests. Striking the right balance between AI-driven insights and human expertise will be key to successful retirement planning in the AI era.
In an ideal world, AI and financial advisors will work hand in hand to harness its benefits while reducing its potential negative impacts.
AI’s Impact on the Financial Services Industry
AI is already a boon for the financial services industry, which matters to the consumer because the growth of that industry boosts economic growth in general. It’s estimated that AI has the power to increase the revenue of financial services firms by 34% and economic growth by 26%.
However, it could also decrease the need for lower-skilled jobs in the industry by more than 50%.
But the fact is that financial firms must continue to use AI in order to stay competitive. AI increases the potential for firms to have above average growth compared to competitors, with an estimated average growth rate of 35%.
For that reason, you can expect your financial advisory firm to use AI when managing your portfolio for the foreseeable future, like it or not.
As a consumer, it’s important to be aware of how AI is likely affecting your retirement savings. You should also be aware that it’s likely that it’s affecting it in a good way, as the power of AI in the financial planning process is huge. If you have concerns, have a conversation with your financial advisor about how they are using AI in investment decision making.