Advisor Perspective

Prompting critical thinking and conversations around issues in our industry.
Not intended as personal financial advice.

Should I Rely on AI for Financial Planning?

In today’s digital age, artificial intelligence (AI) has transformed how we shop, communicate, and manage our finances. From budgeting apps to automated bill payment systems that track spending patterns, AI tools provide convenient ways to monitor and organize your financial life. We have recently seen an increase in the number of clients attempting different degrees of financial planning using AI platforms. The reflex to use it is logical, as it brings impressive capabilities combined with a fast and simple way to get answers to questions that might be on your mind. However, we have seen firsthand that it falls significantly short of replacing the comprehensive value a human advisor provides in the realm of Financial Planning.

A core problem we see is the assumption that AI is actually thinking and asking us good questions. The reality is that AI products excel at analyzing numbers and identifying patterns but not actually problem-solving. This is confusing because sometimes it does prompt the next great question in our minds. However, if you accept that they are data analysis tools, then you understand that it is just reorganizing indexed information that is a combination of fact and fiction.

That doesn’t mean that AI can’t produce calculations and help solve mathematical problems, which are an element of financial planning. You must feed the AI all the correct assumptions and you are responsible for training the system to correctly address the financial planning problem you’re trying to solve. This inherently relies on you having enough knowledge to train the system. If you have the knowledge and you put in the effort to train the system, AI could function like financial planning software. To us, this begs the question of why not just use financial planning software to start with?

The center spoke of our financial planning process is to work together to create a comprehensive list of realistic assumptions. If you miss an important assumption with AI, it simply is not part of the calculation. In a simple example, if you tell an AI platform to use an investment rate of return assumption, it can’t help you understand if the rate you used is realistic for your portfolio. It also won’t automatically include an inflation factor or prompt you to consider adding one. This will lead to the AI producing an outlook that is materially incorrect. Some planning assumptions simply require detailed thought and discussion.

We work with various Social Security optimization programs that help our clients think about the relative value of different claiming strategies, and determine what is “optimal” based on assumed longevity. For a couple, our conversations can often lead to them taking a different approach than what is “optimal” because they consider the scenario in which they both live long healthy lives and the scenario in which one of them doesn’t. Optimal math doesn’t always lead to an optimal decision.

While AI can help you validate the tax savings of living in one state over another, it won’t prompt you to think about the other implications of relocating. We have discussed a scenario in which a client planned to relocate to Florida and correctly assumed that their income taxes would be reduced by $5,000. However, they incorrectly assumed their living expenses would be the same between the two states. As an avid golfer, the cost of an equivalent golf course membership in Florida is 4-5 times what it is in Connecticut, driving their expenses up by more than twice the tax savings. This one disconnect alone serves to invalidate the financial planning exercise that was done using AI. The point is, proper financial planning is a highly customized project, even though we’re all searching for quick and simple answers.

Financial decisions aren’t just about analyzing numbers and identifying patterns. These decisions are also tied to our values, goals, and families. Fear, greed, and overconfidence can cloud our judgment. A major problem with AI is that it is unlikely to ask us tough questions and see our emotions. This is also true of even the best financial planning software. These are important conversations supported by software but not decided by software.

It is also important to consider what personal information you are feeding the AI. AI tools that handle sensitive financial information are potential targets for hacking and data breaches. They are also using your personal information to train the tool. We recommend you take steps to safeguard your personal information when engaging with AI platforms.

We now live in a society where we are all conditioned to expect quick results, including answers to big questions. AI seems to be an appealing and simple way to tackle this, but the risk of reaching the wrong conclusion is extremely high.

We hope you find this perspective helpful, and as always if you have questions about your personal situation, please feel free to reach out.