AI is taking over the financial advice industry and killing back office jobs

Despite the broad market’s fears that Artificial Intelligence tools will replace financial advisors, AI will be a boon for financial advice firms of all stripes, from mega broker-dealers to humble one and two advisor RIAS.

Costs are likely to plummet for firms due to AI replacing back office workers. That means greater profits for broker-dealers and registered investment advisors, many of whom are controlled by private equity managers.

Private equity is money, and money has no soul. That’s bad news for the lower salaried data and phone workers behind the scenes at PE-controlled firms.

Financial advisors are not going anywhere, at least not in the near future. They control the clients, the wealthiest of whom are over 60 years old and not about to switch to using a machine for financial advice.

Indeed, financial advisors could see a boost in the profession in the coming years as AI reshapes work.

While many in the industry run around with their hair on fire crying about an impending doomsday shortage of advisors, the Bureau of Labor Statistics last year projected 375,900 financial advisors to be employed by 2033. That would be a 17.1% increase of the 2023 total of 321,000, among the highest increases for jobs to feel the impact of artificial intelligence.

But AI is bad news for the lower paid and salaried employees of financial advice businesses.

Chatbots and the like are replacing the labor of back office workers who oversee the transfer of accounts from one firm to another when a firm recruits an advisor; it’s replacing the tedious task of filling out forms when clients buy specific products like annuities, still the bread and butter for many large broker-dealers.

While this means a significant cost saving for many firms, it also means that behind the scenes workers will lose their jobs.

Take recruiting; home office employees spend hours each weekend moving clients’ accounts from an advisor’s old firm to the new.

Not so with the flick of a switch to turn on AI.

“We had a very large office come into us in July last year, and we needed to work very quickly to move that business efficiently and effectively, so we relied on AI,” said Colleen Bell, president, innovation and experience, at Cambridge Investment Research Inc.

“We worked with an outside partner to build a new process at the home office level for work that our associates had done behind the scenes,” said Bell, who spoke last week on a panel addressing AI in the industry in San Diego at the annual Financial Services Institute conference.

The result for Cambridge? The work that a team would have done, moving tens of thousands of accounts, was completed in just 17 minutes using computer learning, Bell said.

More sophisticated, smarter AI means thousands of less phone calls per month to the home office as clients are getting questions answered online, she said. That’s another significant cost saving for firms that will translate into fewer jobs.

Cambridge Investment Research is privately controlled and not owned by private equity money, so the firm is still thinking about how its staff will evolve, Bell said.

“What do we need to do as firms to make sure we’re making those changes to stay ahead of this and prevent the job loss of our own associates,” she asked.

“Think about the industrial revolution. It was the same problem,” said another panelist at the FSI meeting, Robert Coppola, chief technology officer at Sanctuary Wealth. “We were losing types of jobs for other types of jobs.”

“I think the reality is the market straightened it out,” Coppola said. “It’s scary to hear about a 20% reduction in jobs, but there’s another side – when you spend billions or a trillion dollars and you’re a big tech company you kind of have to eliminate jobs because you’re a public company and have an earnings dance to do.”

Meanwhile, the share prices of financial advice companies appear vulnerable to the broad market’s speculation about the effect of AI on such businesses.

Altruist announced on Tuesday a new tax planning tool, and investors dumped shares of the top financial advice companies in the industry; LPL Financial Holdings Inc.’s (Ticker: LPLA), share price dropped 8.3% and the Charles Schwab Corp.’s (Ticker: SCHW) declined 7.4%.

The market has it wrong. Financial advisors drive revenue, either through smarts like portfolio management, or social skills, via invitations to dinners or rounds of golf.

AI won’t replace an advisor’s personality, intelligence, or plain old gusto.

But when a private equity manager needs to boost the profitability of a broker-dealer or RIA it owns to sell it to another investor, it will simply replace workers with AI and computer learning.

Many in the industry don’t want to admit that loyal employees who’ve worked with advisors will lose their jobs in the coming years, but it will happen.

The bottom line dictates it.