It’s natural for us to believe that our work holds unique value, and that a software application could never truly replace it. The idea of an AI-powered tool taking over our jobs can be unsettling.
However, if an AI-powered application is able to deliver better outcomes at a lower cost, it’s inevitable that the profession in question will face disruption from AI technology. One such profession on the brink of transformation is financial advising, particularly in the realm of retirement income planning.
Why would I suggest that an AI-driven advice firm could outperform a human adviser? Simply put, the key outcomes that matter will see significant improvements:
- Increased after-tax, after-fee income
- Larger future inheritances
- Enhanced retirement security
The driving force behind these improvements is lower fees. Currently, most financial advisers (not being paid by commissions) charge their clients an asset under management (AUM) fee, with 1% being the industry standard. My research – set to be published this summer in The Journal of Retirement – indicates that this 1% fee reduces yearly retirement income by 15.38% when using a safe withdrawal rate methodology to calculate the income that can be safely generated.
Lower fees also lead to higher future inheritances for heirs, longer-lasting portfolios, and thus ultimately, greater retirement security.
Advancements in fintech software are already benefiting human advisers by streamlining tasks such as crunching numbers, generating plans, minimizing taxes, and allocating investment portfolios. Once AI-driven firms become operational, there will be less reason for consumers who understand the true cost of paying high AUM fees to rely on traditional financial advisers. Rather, more of the financial advice will become automated and consumers will pay for human advice only when they feel they need it and at a flat rate per hour or per project.
I believe AI-powered advice firms will eventually, on average, outperform their human counterparts as they will possess even more accurate – and a much higher volume of – information about tax codes, estate planning rules, and industry best practices, etc.
While having a personal concierge doctor dedicated to addressing my questions and concerns would be ideal, the cost is simply too high for my needs. Eventually, more consumers will think this way about their financial planning needs in retirement as AI driven alternatives become available.
We will see how it plays out. But, at a minimum, AI-driven firms will provide lower costs and better outcomes for a number of consumers. This also means that financial planning becomes more affordable for more individuals. In our 401(k) world, that’s a very good thing.
Decoding the Successful Retirement Journey: Vol.2, No.4
