AI and your Financial Advisor

Although still in its infancy, AI is being widely used, including the financial services industry. Here are five things to consider when working with your Financial Advisor:

Your Advisor is likely already using it – Currently, many Advisors have a love/hate relationship with AI. It simplifies our tasks and deepens our research, while at the same time is a looming threat to our business. However, our use cases are growing and at least in the near term we are adding more value than ever. Advisors using AI is a good thing so long as our clients understand how we are using it.

Don’t hide your use of AI from your Advisor – Advisors also know that our clients are probably using AI too. What we do not know is how they are using it and what they want to know. Are they simply looking for ideas, or second guessing their portfolio? Either way, presenting this information to your Advisor is a great way to begin a useful conversation.

Form your query for better understanding – There is an old saying in the computer business “garbage in, garbage out”. AI needs your input to get started so the better the question the better the result. Clients should be as specific as possible, ask the same question in multiple ways, and ask responses to be easy to understand.

Consider the source – Most clients use the free AI that now comes with their browsers. These models are general in nature and use many sources available on the Internet. Unfortunately, not all of those sources are reliable. Clients should always consider where the information came from when looking at the result. For this reason, some Advisors use specialized AI subscription services that use only verified and reliable sources.

AI is not human – Since Advisors cannot predict the future, the value we provide extends beyond portfolio management. We also serve as the knowledgeable conduit between your money and the markets. AI is an important tool, and hopefully your Advisor is taking the steps to become an AI craftsman.

Q4 Investor Checklist

Am I Diversified?

When it comes to investing we are taught to have a “diversified” portfolio.  This concept grew in importance back when companies gave employees company stock in their pensions. Unfortunately, not every company continues to thrive and if the stock loses value there can be little left for retirement.  Thus the concept of portfolio diversification gained traction as a simple way to keep from having “all your eggs in one basket.”

Statutory Guidance

As a fiduciary for several ERISA based retirement plans (i.e. 401(k)’s), portfolio recommendations are guided by the Uniform Prudent Investor Act (UPIA).  Enacted in its current form in 1995, the UPIA places a primary duty of suitability, requiring investments be suitable for the purposes of the trust.  Section 3 specifically creates the Duty to Diversify, which is why investment options in a retirement plan are likely a series of mutual funds which by their nature are diversified.

Studies have shown that a portfolio of just a handful of stocks creates diversification benefits.  This is why it is a good idea to select multiple funds or a target date fund in a retirement plan. Further, the past decade has seen the rise of passive index funds, where a single fund will mimic an index hundreds of stocks like the S&P 500 or the Russell 2000.

Multiple Baskets

But even if your proverbial eggs are spread amongst multiple baskets further diversification may be beneficial. In investing parlance, this means looking for asset classes that are “non-correlated” to stocks that move differently over time.  In retirement plans this means a mixture of both stocks and bonds, with a higher concentration of stocks (which are considered riskier) earlier in life, and shifting to more bonds (considered safer) as one gets closer to retirement.  This is exactly how the target-date funds in a retirement plan work.

Alternative Investments

Todays retirement plans and investment accounts can hold a broader array of asset classes than ever.  These assets include precious metals, minerals, real estate, currencies, commodities, mortgages, private equity and even Bitcoin.  Through mutual funds and ETFs, all of these investments are possible without owning or possessing the physical asset.

Physical assets also provide further diversification and the benefit of tactile enjoyment.  The most common is owning a home, which for many is the largest asset on their balance sheet.

Wealthier investors also use collectibles such as art, jewelry and classic cars as investments to diversify a portfolio.  Social media in particular has significantly expanded the market for collectibles, minting millionaires from collections of everything from sneakers to Pokemon cards and video games.