How AI is transforming the financial landscape
While we’ve heard a few horror stories about the new technology, it’s already changing some things for the better.
Generative Artificial Intelligence (AI) is revolutionising the way we live, often in ways we don’t even realise.
You may have read about the negatives and be worried about the technology’s apparent ability to bend reality – for example, by creating fake videos that purport to be from a celebrity or political figure.
But many of the applications being built with AI could have a positive influence on our lives – and our finances.
Among other things, AI will reshape the financial landscape, with new products and new ways to analyse data, generate predictive insights, and create investment strategies.
Words of caution
The Securities and Exchange Commission (SEC) in the United States says AI “opens up tremendous opportunities for humanity, but also presents challenges for regulators to tackle, like conflicts of interests in the investing space”.
SEC Chair Gary Gensler recently cautioned, “If the optimisation function in an AI system is taking the interest of the platform into consideration ahead of the customer, that's a problem.” This is a reference to rules preventing brokers or advisors acting on their own behalf rather than that of their client.
In Australia, the Australian Securities and Investments Commission (ASIC) has warned, “Existing laws likely do not adequately prevent AI-facilitated harms before they occur, and more work is needed to ensure there is an adequate response to harms after they occur.”
As always, investors should be wary of investing in products, or with technologies, they don’t fully understand or where the regulatory environment is evolving.
Generative AI is likely to drive product innovation by identifying unmet needs in the market through analysis of consumer behaviour and financial data.
AI can help design personalised financial products such as customised insurance plans or investment portfolios that align closely with an individual’s risk tolerance, financial goals, and – significantly for seniors – stage of life.
AI-powered platforms can also facilitate dynamic pricing models for financial products, where prices adjust in real-time based on market conditions and customer profiles.
Investment management is poised for transformation with generative AI’s ability to simulate market scenarios and test investment strategies.
By processing historical and real-time financial data, AI algorithms can forecast share market trends, identify investment opportunities, and recommend asset allocations that maximise returns while minimising risk.
The technology can also optimise portfolio rebalancing, taking into account the costs, timing, and tax implications of trades to ensure the most efficient execution of investment strategies.
Generative AI can also significantly enhance risk management in financial institutions.
By generating simulations of extreme market conditions and stress-testing financial models, AI can help institutions prepare for potential crises, improving the resilience of financial systems.
Additionally, AI algorithms can improve fraud detection and anti-money laundering efforts by identifying patterns indicative of fraudulent activity, which might be too complex for traditional detection systems.
The application of generative AI extends to creating highly personalised financial services.
Through natural language processing and machine learning, AI can interact with customers via chatbots and virtual assistants, offering personalised insights on budgeting, investing, and saving.
This can help improve financial literacy and assist users in achieving their financial objectives.
While the potential benefits of generative AI in finance are substantial, there are challenges and ethical considerations to address, including data privacy, security, and the need for transparent AI models.
Financial institutions must navigate regulatory compliance and ensure that AI systems do not introduce bias or unfairness in decision-making processes.
As the advancements offered by new technology are pursued, considerations around ethics, security, and regulation will come to the forefront to ensure that the benefits of generative AI are realised responsibly and equitably.
Related reading: The Independent, Forbes
