AI is here to stay so investors should get ahead of the game

Just what will the future of financial advice look like?

Artificial intelligence is the new shiny thing that has taken speculative interest away from cryptocurrency which has been relegated to yesterday‘s news.

The key advantage of AI is its practical application, whereas the common person on the street struggles to understand how crypto works and why it exists.

The financial services sector in particular has been an early adopter of AI and investors should take note of what is coming just around the corner and its potential benefits. AI is not headed down one particular path and is being used in a wide variety of applications. It will affect several aspects of both financial service companies and individual investors.

Bloomberg has already built a finance version of ChatGPT called BloombergGPT. It has taken 700 billion word fragments and trained itself on financial news and data going back decades.

Only available at this stage through a $35,000-per-year Bloomberg terminal, BloombergGPT assesses market trends, undertakes risk assessment of stocks and markets, analyses financial statements and provides real-time trading insights.

Predominantly used by stockbrokers and fund managers, a knock-on effect of rapidly developing technology like BloombergGPT is that it is only a matter of time before the work currently being done by human finance analysts gets replaced by AI.

JPMorgan Chase is another company developing a similar tool. The JP Morgan AI engine aims to gain an edge over other sharemarket traders by predicting US Federal Reserve policy changes. It does this by drawing from 25 years’ worth of central bank speeches and data, and analysing the tone and sentiment of each statement and the resulting federal reserve action.

But you can do plenty by yourself for free just be experimenting with ChatGPT. Testing its capabilities, I copy and pasted sections of BHP’s 2022 annual report into ChatGPT and asked it to run various financial ratios in the areas of liquidity, leverage and profitability, and benchmark it against industry averages.

ChatGPT can use economic theory to predict the price movement of certain investments. Picture: AFP

A limitation is that ChatGPT only has data up to September 2021, but it was able to provide some interesting general insights around the financial health and performance of BHP benchmarked to peers.

For the individual investor, there are many start-ups that offer AI technical trading tools. They analyse stock trading patterns and trends, and provide predictions on the best time to buy and sell.

ChatGPT can also use economic theory to predict the price movement of certain investments after you provide it with a specific set of assumptions.

For instance, when asked what would happen to the capital value of a 10-year Australian government bond if the RBA official cash rate decreased from 4.1 per cent to 3.5 per cent, it calculated the value of the 10-year bond would likely rise by 6 per cent – as it would be worth more to investors compared with a future 10-year government bond offering a lower interest rate.

Similar forecasting can be undertaken on ChatGPT by using assumptions about inflation, unemployment, GDP and so on to predict the impact on various investments such as gold, property trusts, banking stocks or even US technology stocks.

As is the case with AI technical trading tools, ChatGPT should not be used as a sole trading indicator. But if you have a particular set of data that you would typically analyse before making an investment decision, ChatGPT can likely help speed up and add more rigour around your process.

Professional financial advisers are also seeing a revolution due to AI and I see this in our own self-licensed practice. In finance, almost everything is about numbers and efficiency, so if a computer can do something faster and more accurately than a human, that is generally a good thing.

Of course nothing will replace the human to human relationship, but AI will be able to help with quite a few things in the background.

Post Covid-19, a high percentage of business meetings are now held using video communication tools such as Zoom and Teams. In the old days a notepad and paper would be taken into physical meetings to take notes, and if you were lucky you would have an assistant to take those notes for you.

Today, platforms such as Microsoft Teams have the ability to not only transcribe the full audio recording from video call, but also uses AI technology to summarise main talking points and action items which can then automatically be sent to your database.

Digital advice is another area that is showing signs of promise for the average mum-and-dad investor. Speaking to industry participants, it is understood that at least one of the big four banks is investing millions of dollars into AI advice capabilities.

The outcome? Rather than see a human financial adviser, investors will be able to go to a banking website, fill out a questionnaire and receive personal financial advice covering tax planning, cashflow advice, retirement advice and specific investment advice. It’s not for everyone, given the rising cost of financial advice but there is going to be a place for this type of service for people just starting out who need advice on how to form good financial foundations.

Although we are not likely to see a paradigm shift of AI robots and programs replacing humans in the world of finance and investing any time soon, investors should have an open mind and keep an eye out for developments in this sector to see what tools and services might be able to assist them enhance their decision making process.

James Gerrard is principal and director of Sydney financial planning firm www.financialadvisor.com.au