Is Your Investment Advisor ChatGPT?

Here are some reasons why you should care.

Is your investment firm going all in on Open AI’s ChatGPT? The answer is likely to be critical to your wealth.

Millions by this time have experimented with the product, called the “killer application” of “generative artificial intelligence.” And anyone who has sees very quickly that ChatGPT and its imitators are capable of orders of magnitude more than a Google Search—producing volumes of information including visual images from a single prompt.

You’ve no doubt heard stories of students using ChatGPT to meet deadlines for research papers. But generative AI has also rapidly invaded the professional world. And proponents like CEO Jensen Huang of leading chipmaker NVIDIA (NSDQ: NVDA) claim it will eventually “augment” productivity in every sector.

Few industries have embraced the promise of generative AI more enthusiastically than financial services. Large firms are already shifting some customer service functions from human representatives to generative AI, utilizing past client interactions as primary data on which to base responses.

Many also envision a far larger role. Portrait Analytics is developing what it calls “an AI powered junior analyst,” which supposedly will be able to answer any question and perform the tasks typically asked of a junior analyst at a hedge fund. That includes suggesting investment ideas, building financial models and creating pitch decks and author memos.

The industry party line is generative AI will increase productivity per employee, allowing smaller firms with fewer resources to grow their businesses more easily. But there’s an unspoken reason investment firms are so ready to adopt: Generative AI may enable companies to do the same business with fewer employees, and therefore at a lower cost to the owners.

It’s no secret the investment business has been in a race to cut costs at least since the 1980s. In the early stages, discount brokers like Schwab Corp (NYSE: SCHW) took over from old school retail brokers by charging far lower commissions for trades.

Now Vanguard has accumulated trillions of dollars under management by reducing fees to levels smaller fund groups simply can’t match, especially in an era of tightening regulation with soaring legal, accounting and registration fees. And passively managed investment plans featuring ETFs managed by algorithm now offer still lower fees, inducing many investors to give up picking even their own mutual funds.

To date, most firms have retained experienced professionals to analyze and pick stocks and oversee money management. They’re now a substantial line item expense, especially factoring in performance bonuses and the like. Those who own their firms are obviously not at risk of being replaced by generative AI. But the rest will almost surely be on the chopping block if a bot can do the same job.

Investment journalism would seem to be riper still for a great replacement. ChatGPT can produce articles or even lengthy reports instantly based on a few prompts. That could allow a company to churn out individually tailored products, marketed with advertising copy also generated by AI.

Reports and advertising copy alike would invariably be well written, even tailored to specific audiences by level of grammar, vocabulary and core concepts. And so would the advertising copy, with AI able to craft specific pitches by tapping into any customer information available to firms.

Best of all for company owners, generative AI works 24 hours a day 7 days a week. It never gets sick, pregnant or needs a vacation. That means much lower and more predictable costs, and therefore higher profit even it generates no additional revenue.

That’s a lot of incentive to adopt generative AI. And at a time of rising inflation and especially employee costs, management is likely to act sooner rather than later.

The two questions every investor must ask now are (1) To what extent is their investment firm using or planning to use generative AI, including ChatGPT and (2) How does that help and/or hurt their wealth?

Even now, it can be very difficult to get through to a human being at many firms. And if you’re lucky enough to make contact, the employee may not be knowledgeable enough to answer your questions. Company websites may also not be so helpful. And keep in mind the Securities and Exchange Commission does not currently regulate the investment newsletter business, due to its defeat in the 1984 US Supreme Court case Lowe vs SEC.

At this point, several investment firms are making a point to tell the public about their use of AI, very likely to show they’re ahead of the curve on important new technology. But none are required to do so. There is pending legislation in Congress with sponsors on both sides of the aisle that would require it. And with industry supporting, it has a decent chance of becoming law.

If a company is going all-in on generative AI, I see four major concerns for investors.

The first is you can probably forget about reaching a human customer service representative again, especially in the middle of a major market event.

Second, even the best investment algorithms can only claim to be right more often than they’re wrong. That’s despite billions of dollars and years of effort expended to write the perfect formula to forecast market moves and pick the best stocks. And even the most effective have eventually worn out, becoming wealth destroyers when conditions shifted.

Third, just like decisions made by human beings, AI’s are only as good as the data it’s relying on. Early versions of ChatGPT, for example, have been notorious for producing inaccuracies. That’s because its accessible data base is all the information available on the free Internet prior to 2020, including all the mistakes and outright falsehoods.

I don’t profess to have any particular programming skills. But my bet is we’ll see billions of dollars more spent to overcome these flaws. And tightened standards for data quality and improved ability to see through Internet falsehoods and other bad information will be among the top priorities.

But there is one more fact about generative AI making investment decisions that concerns me even more. ChatGPT and its growing number of imitators can sift through, analyze and compile data and take action on it far faster than a human can check for accuracy. And unlike mere humans, AI will never doubt its own data-driven conclusions.

AI’s proponents will tout that this takes the emotion out of investing. And it’s certainly true that investors have lost a lot of money over the years by succumbing to their fear and greed.

On the other hand, investors/analysts/money managers who come to believe in their own infallibility are a long-standing Wall Street trope, think “pride cometh before a fall.” And investors who’ve put too much faith in a hot hand or a purportedly perfect system have suffered immense wealth destruction.

Generative AI is a reality. And if certain issues can be ironed out—not the least of which is the immense amount of energy needed to run all that computing power—it will likely transform the economy.

But for now, there are still many questions. And until these are answered, investors will need to keep a tight grip on their wallets, whenever an investment company brags about how generative AI is transforming its business for the benefit of customers.