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  • Writer's picturePatricia A. Stewart | CFA

How Is Artificial Intelligence Impacting the Financial Sector?

Artificial Intelligence (AI) is the new buzzword on Wall Street. But AI isn’t exactly new. It’s just taken a while for the early transformative promises of AI to make an unprecedented impact on our daily lives.

How Is AI Changing the Financial Industry?

What Is Artificial Intelligence?

First introduced in the 1950s, AI has evolved from a program that can play chess to today’s super computers that can take massive amounts of data and teach themselves to organize, analyze, and make predictions.

Today, AI is used in everyday applications, including Tesla’s autonomous vehicles, AI robotics, smart cities, and investing. With major advancements in machine learning, data analytics, deep learning, and natural language, AI is revolutionizing sectors such as healthcare, transportation, entertainments and finance. It’s tough to think of an industry that AI is not making an impact.

AI reached viral status ever since ChatGPT, a chatbot, was first released by OpenAI in late 2022. ChatGPT uses machine learning to generate creative and human-like responses to text prompts. In addition to machine-generated texts, ChatGPT can also create stories, poems, unique content, as well as codes.

With the rapid adoption of ChatGPT and other recently launched chatbots, many are wondering how they will be used to transform various sectors and industries.

How Is AI Impacting the Financial Sector?

Artificial intelligence has been a boon to the financial sector, with AI and machine learning being used to predict consumer behaviour, understand how they pick stocks, and detect fraud. It’s also being used to help businesses cut costs, streamline operations, and enhance creativity.

That doesn’t mean individual investors are on board with letting AI do all the heavy lifting. A majority (66%) of investors say they are somewhat or very unlikely to use an AI financial advisor. Nearly half (46%) don’t trust AI to advise them on finances. Only 20% of investors said they were very likely or somewhat likely to turn to AI for investing advice.

What most investors don’t understand, though, is that AI is already widely used on both the federal and banking levels and by personal management tools including Mint and NerdWallet. AI also powers a growing number of robo-advisors.

Even investment fund managers tap into AI to sort through massive amounts of data, helping them discover stocks or assets that fit certain criteria. Specifically, AI helps improve speed, augment computational tasks, and provide objective data driven information. However, the actual trades are done by person.

How Is Artificial Intelligence Impacting the Financial Sector?

Are There Challenges to Using AI for Investing?

That said, there are some challenges with using an AI chatbot like ChatGPT for all your investing needs.

For example, the New York Stock Exchange (NYSE) is the world’s largest exchange that lists more than 2,575 companies. The NASDAQ is the second largest exchange in the U.S., with 3,788 listed companies, while the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) lists 3,502 domestic and international companies. On top of that, there are thousands of different exchange traded funds.

Suffice it to say, it would take days for an individual investor to build a portfolio. In this case, an AI chatbot like ChatGPT or Chatsonic might help. They can both generate a unique portfolio in seconds.

But research has shown that they don’t replace a wealth management professional. AI doesn’t provide the background as to why it chose the stocks it did. Another issue with AI-generated investing ideas is that they tend to focus on larger, more well-established stocks, as opposed to equities focused on niche strategies that could add untapped value to a portfolio.

For now, what AI is good at is processing massive amounts of information instantly and generating a portfolio which investors can use as a springboard for additional research.

It seems that even a chatbot understands this. ChatGPT will actually tell you to consult a financial professional for personalized investing advice and to do your own research.

Will AI Replace Financial Advisors?

The simple answer is no. AI can complement advisors' efforts by increasing their efficiency and allowing them to concentrate on important matters. But the fact of the matter is that financial decision-making often involves shades of gray, rather than clear-cut answers.

Determining whether to invest surplus funds or pay off a mortgage, for instance, depends on each individual’s unique situation, as does deciding if they can retire early or afford a vacation property.

Skilled financial advisors blend financial data, statistics, and probabilities with behavioural psychology, empathy, and good judgment. An exceptional financial advisor provides value through trust, open communication, insight into their clients' lives, realistic goal setting, problem analysis before prescribing a solution. They have the ability to ask the appropriate questions at the appropriate time—all traits in which AI lacks.

Sharp Asset Management for Your Retirement Planning

Artificial intelligence is transforming the financial sector, helping everyday investors analyze and choose stocks and ETFs. But it has its limitations. If you live in Mississauga, Toronto, or the GTA and want an asset manager with portfolio management expertise to help you create a balanced portfolio aligned with your objectives, speak with an investment counsellor at Sharp Asset Management.

Sharp Asset Management Inc. is an independent Portfolio Management firm that is 100% owner operated. We are not affiliated with any financial institution, securities firm or mutual fund company. As a result, our investment decisions are unbiased.

All of our investment counsellors are charter financial analysts, the highest level of achievement, and have over 10 years of experiencing managing portfolios. To learn more about investing with Sharp Asset Management, contact us today.

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