MIT researchers say that AI is ‘inherently sociopathic’ — but that it can be trained to give ethical financial advice

Soon generative AI may have the power to fulfill a financial advisor’s most important role: giving people trustworthy money advice.

While the uptake of ChatGPT and other large language models has been swift across industries including fashion and marketing, financial services have hit regulatory roadblocks.

But MIT researchers believe there’s a clear path to training AI models as subject-matter experts that ethically tailor financial advice to an individual’s circumstances. Instead of responding to “How should I invest?” with generic advice and a push to seek professional help, an AI chatbot could become the financial advisor itself.

“We’re on our way to that Holy Grail,” said Andrew Lo, a professor of finance at the MIT Sloan School of Management and the director of the Laboratory for Financial Engineering. “We think we’re about two or three years away before we can demonstrate a piece of software that by SEC regulatory guidelines will satisfy fiduciary duty.”

Fiduciary duty refers to the set of legal responsibilities that implore financial and investment advisors to act with the highest degree of care when handling a client’s money. It’s the gold standard in financial planning, and it has so far proved difficult to replicate in direct-to-consumer AI tools.

AI is ‘inherently sociopathic’

Financial advisors often develop client recommendations through a behavioral-finance lens, as research suggests that people don’t always make rational or unbiased financial decisions but are error-prone and emotionally driven.

An average investor, for instance, might panic when the stock market plummets and decide to sell their stake in a mutual fund rather than wait for the market to recover, as it almost always does.

Knee-jerk reactions like this can often be avoided or corrected under the guidance of a skilled financial advisor whom the investor trusts. Lo said that trust can be developed in part through empathy and small talk.

Advisors can toggle between a list of strategies to measure the effects of various decisions on the client’s estate and goals, such as claiming retirement benefits at different ages.

Mark McGrath, a financial planner and portfolio manager at PWL Capital in Canada, said the software saved him time and provided clients with better financial plans than he could create manually.

“I’ve been doing this for a long time — I assure you, no financial planner is going into that level of depth and spending that amount of time on optimization,” McGrath said. “That means clients are not always provided with an optimal financial plan.”

He added, “The analogy I’ve used in the past is that with Conquest, I’m driving a professionally tuned Ferrari, while my competition is getting around on a pair of roller skates.”

Lotocki estimated that Conquest’s software is used by 50% to 60% of the financial-advisor market in Canada through partnerships with banks and independent advisory firms. The software is available in the US on Pershing X’s wealth-management platform, Wove.

While it’s sophisticated, the software isn’t a direct-to-consumer solution. Lotocki and his associates hope to help make financial-advisory AI accessible to people across the wealth spectrum, perhaps free of charge.

Financial planning 3.0

Many financial advisors are eager to use generative AI as an assistant, but few are ready for it to replace them.

Lo said he believes that a world in which people rely on AI advisors rather than human advisors is within view. But he said a smooth transition would require retraining advisors for new careers, possibly with government support.

“What I worry about, and what I think policymakers need to be really focused on, is if a large body of human employees become displaced in a very short period of time. That could cause tremendous social unrest and dislocation,” Lo said. “So the speed of the displacement is something we need to pay attention to.”