Can robots become financial advisors?

How artificial intelligence is being used to help customers manage their finances.

In a world in which personal budgets are coming under increased strain, many financial institutions are making greater use of robots. The question is: how effective is the advice and will customers embrace or reject the idea?

Here come the robo advisors

Many of us could do with a bit of financial advice in our day to day lives. The cost of living is on the rise and our wages are not always growing to keep up. At the same time, we’re being presented with a host of new financial services which can be difficult to understand.

We need answers to basic questions: such as the best way to manage a tax return, to save money or to have a comfortable retirement, but getting trained advice is expensive. As a result, many of the people who need the most help have to go without it and the results of that can be severe.

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Lack of financial education represents a £3.4bn drain on financial resources every year (source: MoneySavingExpert)

The need to improve the access to financial advice drove entrepreneur Ramya Joseph to launch a new fintech company called Pefin, which bills itself as the world’s first artificial intelligent financial advisor. The system takes three months of your spending information to help it tailor a personalised financial plan specially. The more time you spend working with the system, the more it gets to know you, and the more personalised the information it provides can be.

It’s a big step forward against other automated advisors which do little more than offer automatic advice with no personalisation involved and widens the scope of financial advice to help people manage their finances more effectively.

Automated advice

Robo-advisors are growing quickly across the spectrum especially in the wealth management sector where the need for higher returns is driving financial institutions to make greater use of AI technology. These advisors can work with clients and help them manage their funds and make investments. A host of these online services have cropped up over the past few years such as Nutmeg which helps its clients manage their portfolios. The system may deliver a simple online risk profile questionnaire which it uses to suggest a range of suitable investments.

Financial advice for everyone

The systems are becoming more popular because they are easy to access, affordable and the technology is becoming more sophisticated. However, there are some areas of misunderstanding. People can struggle to tell the difference between the regulated financial advice in which an advisor actively helps people to manage their funds and pick stocks, and this more passive option in which people are offered guidance and given passive investments.

The next stage is to close the gap between the robo advisor and the human advisor – to produce something which can offer more tailored advice and answer simple questions such as ‘how can I retire early?’ The success of these systems can make advice which was previously off limits to all but the wealthiest available to everyone.