AI Might Finally Level the Playing Field for Advisors, Brokers

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Artificial intelligence has begun to transform how financial advisors operate and, more importantly, how they serve and interact with clients. Clients already expect even better, faster, more comprehensive, and more personalized services from their AI-enabled human advisors.

Yet, while the advisory world is mainly focused on the myriad opportunities for operational and service enhancement, AI may have a less obvious but even more pervasive and important impact.

For decades, the broader wealth management industry has been meaningfully divided in ways that many – perhaps most – consumers of financial advice still do not understand, even in the face of voluminous disclosures, educational campaigns, industry advocacy, and regulatory action. AI may finally change that.

Not All Wealth Managers Are Alike

The term “wealth managers” covers a range of occupations for financial professionals, and there are key — though not always obvious — differences between them.

RIAs

Legally speaking, registered investment advisers — or RIAs — are directly registered with and regulated by the Securities and Exchange Commission or a comparable state regulator. They generally receive fees for providing investment advice and other services and are bound by the fiduciary standard of advice, requiring them to provide advice that is in the best interest of the client (the “duty of care”) and imposing on them a duty to mitigate their conflicts of interest (the “duty of loyalty”).

Brokers

In contrast to RIAs, brokers, who often work for some of the best-funded brand names in financial services, are not solely regulated by the government, are not providing investment advice in a primary role, and are not always bound by a client-first mandate. They are typically regulated by the Financial Industry Regulatory Authority, which is a self-regulatory organization mostly comprised of other brokers and overseen by the SEC.

They are similar to salespeople, and any “investment advice” they offer generally must be “solely incidental” to serving as a broker. While the standard of advice they must follow formerly allowed them to recommend investments as long as they were “suitable,” starting in 2020, they must follow Regulation Best Interest, or Reg BI, which requires them to act in a retail customer’s best interest when making a recommendation. However, Reg BI — which is an improvement over the old suitability standard and also requires conflict mitigation — is not in all respects a continuous standard like the fiduciary standard. It generally requires keeping the client’s best interests in mind at the moment a recommendation is made rather than across the entirety of the client relationship.

Hybrids, banks, and others

RIAs sometimes operate alongside brokers, and brokers sometimes operate alongside RIAs. Additionally, banks, insurance companies, and other types of companies participate in wealth management, often through brokerages. In all these cases, multiple regulatory frameworks may apply, and consumer confusion is likely to be even greater.

These are all meaningful differences — in terms of regulation, the services offered, and how they are offered — and, understandably, many clients simply cannot tell the difference. In fact, many firms have relied on the continued confusion to support their business model. In the current regulatory landscape, it appears unlikely that these differences will be harmonized or made more apparent.

But AI may finally change that.

AI as an Inflection Point

AI is unlikely to replace wealth managers — at least not in the foreseeable future. But it now has the power to expose the gaps between genuine, client-first investment advice and other approaches in a way the industry has not yet seen. In this sense, it is poised to become the great equalizer that levels the playing field in ways current regulations do not.

Transparency could finally become the norm — for everyone.

AI can instantly identify actual and potential conflicts of interest, compare costs, enumerate capabilities and credentials, and describe compensation structures. It can also quickly identify prior complaints by clients and other indicia of behavior that is potentially unfriendly to clients.

What once required studying dense disclosures and understanding complex legal frameworks and standards can now be done in seconds with easily understandable outputs. In turn, while there remains a clear gap between RIAs and brokers, it should no longer be as difficult for clients to understand the difference.

A Tool for Effective Comparison

Yet, AI can do more than just identify the nature of the advice and services a client may receive. It can also ensure that advice quality becomes quantifiable on a relative basis.

Historically, while investment returns have always been measurable, it has not always been easy for clients to judge them relative to the level of risk taken, the impact of fees, the effect of taxes, and other factors. The impact of advice around estate planning, tax planning, risk management, and other key areas has been even harder to measure on a relative basis. Therefore, clients have had no universally reliable way to make educated comparisons, including between an advisor and a broker.

AI is poised to change that, too, potentially making advice substantially more measurable:

It can evaluate whether a portfolio aligns with a client’s risk profile.
It can benchmark fees against industry norms.
It can analyze tax efficiency, diversification, and long-term probability of success.
It can identify unexploited opportunities for advanced planning.
It can flag recommendations that deviate from a client’s stated objectives.

Possible Acceleration?

RIAs have long argued that their client-first, advice-centric model is best for current and prospective clients. But their messaging has had to compete against the vast resources of brokers, banks, and others as they lobby for fewer legal changes and pursue advertising campaigns and global brand recognition.

This has been a constant challenge for RIAs seeking to educate the public on the virtues of their model. Trends increasingly show relative flows favoring RIAs, so they are making progress, but AI may accelerate it.

In fact, armed with AI, RIAs can now more easily address disparities in resources around advertising and brand recognition. Many of the largest, scaled RIAs already are using AI-enhanced digital marketing to get their message out, with AI disrupting the old norms in favor of much more targeted and effective marketing campaigns.

Enhancement Rather Than Replacement

Some will argue that AI will replace all advisors and brokers in any event, so this discussion may eventually be moot. That point of view misunderstands both AI and human nature. AI can process information, but it cannot replace trust — at least, not yet.

It cannot reassure a client the way a human can during a divorce or other family trauma, a market disruption, or a health scare. It cannot understand personal or family dynamics or help a client navigate the emotional aspects of finance the way a human can.

The more likely outcome is that AI empowers both advisors and clients, including by helping clients make more educated comparisons of the financial advice they receive. Fiduciary advisors — whose differentiation is rooted in trust, transparency, and alignment — should find AI to be an accelerant. Others, who may rely more on persuasion, product placement, or information asymmetry, may need to reckon with a new reality.

In this sense, the wealth management industry is entering a new age of forced clarity. Conflicts of interest will endure, but they should be more visible. The fiduciary standard of advice will not be universal (yet), but its absence should be more obvious. The playing field is leveling, and the advantage rightly belongs to clients and the advisors who already were putting clients’ interests first.

Michael Nathanson is the chairman and former CEO of Focus Financial Partners.

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