As institutions increasingly rely on artificial intelligence (AI) to support their investment decision making, so too do their underlying investors.
Research from the UK’s Financial Conduct Authority (FCA) found that 56 per cent of 18- to 40-year-olds who own or are considering investments trust AI tools, more than TV and radio (47 per cent), press (46 per cent) or social media influencers (29 per cent).
Such confidence in the technology is not supported by knowledge of the regulatory framework overseeing such tools, however.
Almost half (44 per cent) mistakenly believe AI-generated financial information is regulated, while around a third (32 per cent) wrongly think would be compensated by the Financial Services Compensation Scheme or Financial Ombudsman Service if that advice proved incorrect.
Professional advisers have been quick to jump on the research, highlighting the risks to which investors expose themselves when relying on automated investment advice.
David Ogden, Compliance Officer at wealth manager Sparrows Capital, says: “That tech-savvy younger generations are increasingly turning to AI for investment guidance is no surprise. In many ways, it’s a natural evolution as we shift toward crypto and tokenised ecosystems. The FCA research raises some fascinating points though, particularly regarding the gap between consumer trust and actual FCA protection mechanisms. While AI tools can be extremely helpful for preliminary research and jargon-busting, they lack the proactive diagnostic capability of a professional financial adviser.”
Ogden says that information provided by AI is only as reliable as the original data source, essentially pointing to the adage ‘rubbish in, rubbish out’.
“AI works only with the information provided to it. A human personal financial advice service provides value precisely by asking the crucial questions an investor might not have thought of or thought relevant. Neither does it have a personal client relationship that can greatly inform the direction of advice linked to specific goals, which can be extremely nuanced,” Ogden says.
James Priday, CEO of financial adviser P1 Investment Services, says investors’ reliance on AI for advice could be preferable to that available from influencers, who are often unregulated and lack requisite knowledge.
“Well, who wouldn’t trust an entity imbued and trained on every bit of written human wisdom and knowledge, from Buffet and Lynch to Keynes and Friedman,” Priday says. “I’d suggest the more worrying take is that just under one in three take investment advice from social media influencers.”
However, he adds: “Using AI in investment management can be a constructive exercise, but we believe it stops at research and building research tools to assist in a structured investment process, not as the actual decision maker. The thing to remember with AI is that it is trained on all past knowledge, and when queried its outputs are probabilistic interpretations of this knowledge. This means it is inherently vulnerable to investing’s most common risk warning: past performance isn’t an indicator of future returns.”
