The rise of Artificial Intelligence (AI) has prompted some investors to turn to the technology for financial advice. But can you trust AI to give you the best investment advice? To find the answer to this question, we will take a look at how AI is revolutionizing the traditional finance sector, along with its advantages and disadvantages.
Is AI Recommended for Financial Advice?
We tried testing two AI tools, ChatGPT and Google’s Bard, to get answers to the above question. We requested the tools to help us diversify our investment portfolio. Here is the statement we wrote on both platforms: “As a finance expert, please help me optimize my portfolio with an investment fund of $20,000. I need the funds to be allocated to crypto ETF, bond ETF, global equity ETF, and commodities ETF.”
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Bard generated this response within a few minutes: Global equity ETF: 60%, bond ETF: 20%, Commodities ETF: 15%, and crypto ETF: 5%. The AI tool stated that it allocated the most funds to global equity ETF since it produces the highest returns in the long term and set aside the least funds for crypto ETF because it is highly risky.
ChatGPT provided a similar explanation after allocating 50% of the $20,000 to global equity ETF, 35% to bond ETF, 10% to commodities ETF, and 5% to crypto ETF.
However, it is worth mentioning that an asset class like crypto ETF, in which the two AI tools have allocated the least funds, could perform better than global equity ETF if market conditions favor it.
The Rise of Artificial Intelligence in Finance
AI is changing how the financial sector operates through its ability to process tons of data quicker than human beings. However, like any other technology, AI has its own highlights and lowlights. Therefore, before using any artificial intelligence tool for investment or financial advice, it is essential to understand the bad and the good attached to it.
Benefits of Using Artificial Intelligence for Financial Advice
One of the advantages of relying on AI tools to make financial decisions is their ability to make thorough analyses using financial data available on the internet.
Secondly, unlike human advisors who operate during office hours, AI tools are available throughout. This means you can get financial advice at any time without even booking an appointment.
Moreover, AI tools get rid of emotional bias. This is important, given that most people make financial decisions based on emotions. But as for AI, the financial advice offered is based purely on data.
Lastly, artificial intelligence is more cost-effective than human advisors. You can even use a free AI tool to obtain finance advice.
These benefits could be the reasons AI is gaining Investor confidence. A report released in August 2023 by the CFPB (Certified Financial Planner Board) indicated that 30% of American investors are willing to follow financial advice generated by AI without using other sources to verify it.
Disadvantages of Using Artificial Intelligence for Financial Advice
Among the major disadvantages of AI tools is that they may not understand investor’s unique financial goals or situation. That’s because they use historical data to generate financial advice, which sometimes doesn’t align with investors’ needs.
Another lowlight of AI tools is errors. Artificial intelligence systems can experience glitches, which may cause them to produce inaccurate advice that might lead an investor to make wrong investment moves.
Moreover, unlike human advisors who provide emotional support, AI tools don’t. Such support is essential, especially when an investor is overwhelmed and just needs someone to talk to.
Factors to Keep in Mind Before Using an AI Tool for Financial Advice
Emotional Needs – If you need emotional support when handling financial matters, then AI is not for you. Instead, seek the services of a human advisor.
Cost considerations – If you are on a tight budget, AI tools could be the right option for financial advice.
Risk tolerance – When making financial decisions, factoring in your risk tolerance is key. Unfortunately, AI may fail to consider this crucial aspect. So, human advisors become a better option.