by Franklin J. Parker, CFA
The Summary
- The big news last week was the stellar GDP growth for last quarter: 4.9%. This was much higher than most analysts expected and adds to the conflicting data this economy is putting out. Of course, it is not unusual to have a strong economic growth just before it contracts. I think of this like a car engine that is sputtering: you get jolts of power here and there until it finally stops. Similarly, the conflicting data in the economy may be because the economy sputtering out. This quarter’s figures will be key, and I am watching unemployment, consumer spending, and consumer debt. The US consumer is holding the economy afloat, and weakness there is likely to lead to a wider problem.
- Corporate earnings have been among the conflicting data we have seen. For three quarters in a row, companies have reported a decline in earnings relative to the year before. With about half of the S&P 500 companies having reported earnings, it appears this quarter may see a break in the trend, with large US companies reporting an increase in earnings of 2.7% over the same time last year.
- This week is Fed week. Markets do not expect a change in the Federal Reserve’s policy rate, but Powell’s press conference will be a key moment to watch. Investors are very keen to understand when the Fed will declare victory over the inflation battle, and indicate a “peak rate.” Interestingly, bond markets have completely repriced expectations, with yields on the 30-year US treasury racing from 3.5% just a few months ago to over 5%. This has cascaded into higher borrowing costs throughout the economy (notably in mortgages), and has led to a considerably more restrictive credit environment. Not to mention, putting considerable strain on banks. As I have done most every week since this summer, I am reiterating my view that caution is warranted. Until the data shifts, markets are in a no-man’s land of sorts, with no firm catalyst to move higher or lower, but the dominant risk is to the downside.
The Details
The Wall Street Journal had an article in their Sunday edition: “Can ChatGPT Replace Your Financial Advisor? Not Yet. But Wait.” Here’s my take. (I also asked ChatGPT to summarize the article, see below).
“ChatGPT, Please Summarize This Article”
“The article discusses the potential of AI in replacing human financial advisers. It outlines five essential qualities for effective financial advice and evaluates how AI currently performs in each aspect:
- Debiasing: Human advisers excel at helping clients avoid costly mistakes caused by behavioral tendencies. AI, however, exhibits similar biases and tendencies, which could lead to costly mistakes. To improve AI performance, metarules (rules governing other rules) need to be created to help the software override these biases.
- Empathy: AI, like ChatGPT, excels at empathy, which is crucial for reassuring and supporting investors during market turmoil. Studies have shown that AI can provide empathetic responses comparable to or better than human advisers.
- Accuracy: AI currently struggles with accuracy, sometimes providing incorrect information. This issue can be mitigated by integrating AI with reliable financial databases and plug-ins to ensure accurate recommendations.
- Best interest: Advisers must act in the best interest of their clients, and AI, in theory, should be less likely to have conflicts of interest. However, there’s uncertainty about how well AI will perform in this aspect, and it’s important for AI architects to audit the recommendations of digital advisers.
- Consistency: Good financial advice should be consistent across different advisers. Research suggests that human advisers often struggle with this, but AI has the potential to achieve consistency by providing the same advice to clients with similar financial needs and preferences.
The article suggests that while improvements are needed, AI will play an important role in the future of financial advice. A potential model is a hybrid approach where humans collaborate effectively with AI, similar to how doctors work with smart software in the medical field. This hybrid model could increase access to financial advice. The author believes that human advisers can use AI to enhance their services rather than worry about job replacement.”
There is lots of discussion around AI and what it may or may not do for humans in the future. I am certainly not qualified to wade into the big picture discussion, however I do know the financial advisory business, so this is one AI topic I feel qualified to discuss.
I agree with Dr. Benartzi, the author of the WSJ article, in almost all respects. Because AI is trained on past data (and past financial data is riddled with human biases), AI has human bias “hard-coded,” so it is not particularly helpful with overcoming them. AI also lacks empathy and understanding, and, of course, it often simply makes things up (and its fictions tend to be indistinguishable from fact). Not to mention, current AI models tend to give almost comedically simplistic advice. For example, as an experiment I have repeatedly attempted to use ChatGPT to help me write one of these weekly updates, but its treatment of the topics is so trite and shallow that I would be embarrassed to associate my name with such work.
What Dr. Benartzi does not account for, however, is the rapid improvement of AI (and specifically language models). There are empathetic AIs now in development. Also in development are hallucination-free AIs that can ensure correct and consistent information on various topics. These developments will go a long way to seeing AI more rapidly adopted by the financial sector, and specifically financial advisors.
All that said, I am not yet convinced that AIs will have any ability for creative solutions. I cannot count how many times normal, everyday human conversation and connection led to an solution to a client problem that was nowhere near “textbook”. Will AI have such insights? Even if we grant the creativity component, will people interact in a human-enough way to even trust AI with the problem in the first place?
Time will tell. But I do agree that AI will be an important tool in the financial advisor’s toolbox very soon.
Chart of the Week
This week’s chart is a breakdown of US economic growth. First, it is worth noting that a high growth quarter can precede a contraction, which is what happened in Q4 of 2021. This quarter’s growth was higher than even the most optimistic of predictions, and was driven mostly by consumer spending (and business inventories helped, as well). It is an odd fact that companies have been making less money for a year now, despite the economy expanding — we would typically expect the opposite to occur. That lends to the general sense that something has to give: either the economy stalls out (and earnings were a precursor to that), or companies begin to grow again.
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