Journal of Financial Planning: June 2023
Eric T. Ludwig, CFP®, is the program director of the retirement income certified professional (RICP) designation, a professor of retirement income at The American College of Financial Services (www.theamericancollege.edu), and the co-director of the college’s Center for Retirement Income. He is a Ph.D. candidate at Kansas State University with a research interest in investor behavior.
Chet R. Bennetts, CFP®, CLU, RICP, CLF, is the program director of the CFP® program and ChFC at The American College of Financial Services. He is also a professor of financial planning and the Larry R. Pike Chair for Insurance and Investments. Chet is a Ph.D. candidate at Kansas State University with a research interest in the psychosocial elements of financial planning.
Introduction
In recent years, the financial services industry has witnessed a surge in the adoption of artificial intelligence (AI) and machine learning technologies. Among these technologies, chatbots have emerged as a popular tool for improving customer experience, enhancing operational efficiency, and reducing costs. Chatbots are computer programs that use natural language processing (NLP) to simulate human conversation, allowing users to interact with them through messaging or voice-based interfaces. ChatGPT, a large language model trained by OpenAI, is a cutting-edge AI technology that can be utilized by financial services professionals to automate customer interactions, provide personalized financial advice, and analyze large volumes of financial data. The use of ChatGPT in the financial services profession has the potential to revolutionize the way financial services are delivered and transform the industry as a whole.
At least, that’s the response that OpenAI’s ChatGPT gave when we asked it to write an introductory paragraph about its use in the financial services profession. We will explore the use of ChatGPT through two related facets: (1) how financial planners can effectively use ChatGPT in their practice, and (2) how to use it as a business owner, since many financial planners are themselves, business owners. While many of the recent news articles surrounding ChatGPT, including its verbiage in the opening paragraph, tout the benefits of ChatGPT, this article also explains its limitations and things to watch out for when using it.
How Does ChatGPT Compare to Traditional Search?
ChatGPT is an artificial intelligence language model based on the GPT-4 (as of March 14, 2023) architecture, which has been trained on vast amounts of data and can generate human-like responses to text-based prompts. As an AI language model, ChatGPT can answer a wide range of questions and provide information on various topics, including financial planning.
Compared to traditional search engines like Google, ChatGPT is designed to provide more personalized and conversational responses. Rather than simply providing links to web pages, ChatGPT can engage in a dialogue with users, understand their intent, and offer tailored information and insights. Additionally, ChatGPT can generate answers that are more concise and directly relevant to the user’s query, while Google may provide a broad range of results that require further filtering and analysis. For now, there’s an added benefit in that the responses from ChatGPT are not advertisement-driven, unlike those that promote a specific product or service and are presented in an order that depends on how much the company paid for the ad rather than the relevance of the information.
One of the interesting experiences using ChatGPT is the ability to chat with it, as its name implies, whereby the user can feed it additional information, after an initial response and ask it to update it. This is different from searching with Google where each search query is independent. Keep in mind, the response it generates is based on the quality of the question asked. Garbage in and garbage out also holds for this AI.
How Financial Planners Can Effectively Use ChatGPT in Their Practice
As with any technological advancement that financial planners (FPs) can integrate into their practice, understanding what it is and what it isn’t, as well as what it can and cannot do, is vitally important. As FPs, you can effectively use ChatGPT in your practice by incorporating it as a tool across several domains, including client communication and education, with the two generally happening concurrently.
Client Communication
It’s common to get an email from a client asking questions about a headline they heard from their preferred news source. One such client question we recently received while working on this article was, “What are some steps I should take to prepare for a recession,” which we turned around and asked ChatGPT. The following is the “chat” that took place with our instructions and questions in bold and ChatGPT’s answers being italicized:
Q: What should my financial planning clients do to prepare for a potential recession?
A: As an AI language model, I cannot provide personalized financial advice. However, here are some general tips that may be helpful to consider when preparing for a potential recession:
- Build an Emergency Fund: Having an emergency fund is important to prepare for any unforeseen events, including a recession. Try to save at least 3–6 months’ worth of living expenses in a separate account that is easily accessible.
- Review Your Budget: Review your monthly budget and see if there are any areas where you can cut back on expenses. This will help you save more money and increase your emergency fund.
- Reduce Debt: Try to pay off any high-interest debt, such as credit card debt, as soon as possible. This will help you save money on interest payments and free up cash flow.
- Diversify Your Investments: Make sure your investment portfolio is well-diversified and includes a mix of different asset classes, such as stocks, bonds, and real estate. This can help minimize risk during a market downturn.
- Stay Informed: Keep up to date on economic news and trends so you can make informed decisions about your finances. Consult with a financial adviser for professional guidance.
Remember that each person’s financial situation is unique, so it’s important to consult with a financial professional who can help you create a personalized plan that takes into account your specific goals and risk tolerance.
A few things of note. First, it appears that even AI chatbots have a compliance department that generates proper disclosures for itself. Second, an average FP would know these general suggestions based on their knowledge, experience, and expertise, but that is not the point. Although an FP would not copy and paste this directly into an email, it provides a strong foundation for them to use relevant components and build upon it. On that note, these suggestions seem relatively general. What if the client was nearing retirement?
Q: Can you personalize this for someone who is nearing retirement?
A: Sure, here are some personalized tips for someone who is nearing retirement and wants to prepare for a potential recession:
- Assess Your Retirement Income: As you near retirement, it’s important to assess your retirement income sources and make sure they are sufficient to support your retirement lifestyle. Consider factors such as your Social Security benefits, pension income, and retirement savings.
- Reevaluate Your Risk Tolerance: As you approach retirement, you may want to reevaluate your risk tolerance and consider adjusting your investment portfolio to reduce risk. This can help protect your retirement savings in the event of a market downturn.
- Consider Delaying Retirement: If you are able and willing to work longer, consider delaying your retirement to give your retirement savings more time to grow and potentially recover from a recession.
- Review Your Retirement Expenses: Review your expected retirement expenses and see if there are any areas where you can cut back to reduce your overall expenses. This can help stretch your retirement savings and make them last longer.
- Stay Informed: Stay up to date on economic news and trends so you can make informed decisions about your retirement finances. Consult with a financial adviser who can help you create a personalized plan that takes into account your specific goals and risk tolerance.
Remember that preparing for retirement is a long-term process, and it’s important to have a plan in place to help you navigate potential market downturns. By taking proactive steps to prepare for a recession, you can help protect your retirement savings and ensure a more financially secure retirement.
Again, this is not something that one would necessarily copy, paste, and hit send on a reply to a client. However, the ability to have a semi-personalized response in a matter of seconds can save an FP time in responding to these types of questions.
Client Education
As previously mentioned, often, when communicating with clients, we are simultaneously educating them. Building from the previous example, we engaged ChaptGPT with the following:
Q: I am a financial planner. Can you please write an email to a client who is nervous about market volatility and specifically touch on why diversification is important? Also touch on MPT statistics since the client is already in a diversified portfolio with a low beta and has over 20 years until retirement.
A: Dear [Client],
I hope this email finds you well. I understand that market volatility can be a cause of anxiety, especially for those who are invested in the stock market. I want to reassure you that as your financial planner, I am here to provide you with guidance and support during these uncertain times.
First, let me assure you that you are in a good position because you have a diversified portfolio with a low beta. Diversification is one of the most important principles of investing because it spreads your risk across multiple asset classes. This means that if one asset class, such as stocks, experiences a downturn, your other investments, such as bonds or real estate, can help mitigate the impact of the market volatility on your portfolio.
I also want to touch on the concept of Modern Portfolio Theory (MPT), which is a framework used by many financial professionals to build portfolios that optimize returns for a given level of risk. MPT emphasizes the importance of diversification and asset allocation in managing risk and maximizing returns.
One key aspect of MPT is the use of statistics such as beta to measure the risk of a portfolio. Beta measures the volatility of a portfolio relative to a benchmark, such as the S&P 500. A portfolio with a low beta, like yours, is expected to experience lower volatility than the benchmark in both up and down markets. This can provide you with a greater sense of stability during market downturns.
In addition, you mentioned that you have over 20 years until retirement. This is a significant amount of time, and it provides you with the ability to ride out short-term market fluctuations. Historically, the stock market has provided strong long-term returns despite short-term volatility.
It’s important to remember that investing is a long-term game. While market volatility can be nerve-wracking in the short term, staying invested and adhering to a well-diversified investment plan is key to achieving your long-term financial goals.
If you have any further questions or concerns, please don’t hesitate to reach out to me. As always, I am here to provide you with the guidance and support you need to navigate the markets with confidence.
Best regards,
[Your Name]
As you can see, the more specific we are with our inquiry, the more detailed and applicable ChatGPT will be. If we had prefaced our request with us being high school students who wanted to explain diversification to their parents, the voice and response would be that of a high school student. In fact, after the above response, we asked it to write the letter in the voice of Samuel L. Jackson. We would also include that, but we are unsure exactly how the bleep button works in written media. Feel free to try it yourself, as it is worth the laugh.
How Financial Planners as Business Owners Can Use ChatGPT
If you ask ChatGPT this question, which of course, we did, it will tell you about things like lead generation, marketing, customer service, automation, and training/development of staff. While the first several mentions seem like the ultimate golden goose, it took another 10 minutes of “conversation” with ChatGPT to discover that these involve integrating the ChatGPT engine into other chassis that allow for chatbot integration into your website or social media. In this case, ChatGPT assumes that its users possess the knowledge, desire, and ability to utilize these techniques and features. With that being stated, an FP who is capable and willing to do so could benefit greatly from using ChatGPT as a tool for training and developing their staff. By investing time in creating potential questions or problems that clients might call or email about, along with the applicable parameters or logic, an FP could enhance their team’s skills and knowledge.
Some Limitations of Using ChatGPT, AI
We would be remiss if we did not discuss the obvious and inherent limitations and risks associated with using ChatGPT or similar AI solutions. First, we are working with an AI language generator, so the responses will likely not be in an empathetic tone that matches the nature of the inquiry or the desire of the FP. Second, it is not up to date with news. When we asked it to explain the problems with inflation in the United States in 2023, its response was:
As an AI language model, I don’t have real-time access to current news events, but my training data goes up to September 2021. However, I can tell you that inflation has been a topic of concern in recent months due to a variety of factors such as supply chain disruptions, labor shortages, and rising commodity prices.
Another thing users should be aware of is that ChatGPT and similar AI solutions will occasionally provide incorrect, incoherent, and simply implausible answers. Unlike the AI we interact with either on our phone or a device at home that searches the internet and provides information from that search, ChatGPT is constructing its response based on the highest probability of coherency that is established in the training it receives in each version. As a result, it can misinterpret facts while combining its response with other facts and very convincingly state the totality of this combination as empirical truth. These events are referred to as “hallucinations,” and when challenged by asking it to provide its source, the sources it cites appear to be an amalgamation of primary sources mixed with references to those sources. As an example, when asked, “What research is available surrounding financial wellness and health?” it provided five short summaries from the current literature. One response provided was:
Financial literacy is important for health outcomes: A 2021 study in the Journal of Financial Planning found that individuals with higher levels of financial literacy had better health outcomes, including lower rates of depression and better self-reported health.
When further instructed to cite its sources, ChatGPT provided the following source for the above response:
Xiao, J. J., Chen, S., & Kaczynski, D. (2021). The Impact of Financial Literacy on Health Outcomes. Journal of Financial Planning, 34(1), 62–72.
An extensive search on Google Scholar and the archives of the Journal of Financial Planning yielded zero results for this publication. Further, we cannot figure out the combination of publications ChatGPT used to derive this source. Whatever was causing it to hallucinate for this response, was mighty powerful indeed. However, it is important to note that all the inquiries thus far have been done so on Model 3.5 of ChatGPT. Model 4 has recently rolled out, and many of these issues appear to be getting better in our early testing. We also have access to Google’s Bard, and in analyzing the two responses to the same question, conversing with ChatGPT feels like conversing with an undergraduate student, whereas Google Bard (at this point) feels like talking to a middle schooler. No doubt both will continue to evolve and improve.
Closing
Whether you’re a CFP® professional or ChFC who specializes in comprehensive financial planning or an RICP who provides retirement income planning on complex scenarios, there is a high likelihood that ChatGPT will not replace you. Clients will continue to prefer personalized advice from a human being, especially for advanced planning topics where those with a CFP® mark, ChFC, and/or RICP excel! On the other hand, this technology could reasonably replace some of the administrative functions being performed, and sales assistants’ jobs could be on the chopping board, or at least the nature of their position will change. Similar to the use of robo-advisers, we see a case where ChatGPT will be a tool to assist financial planners, not replace them.