AI in the industry

Date: 11 Oct 2023

Karen Jones

It is no secret that artificial intelligence is here to stay in the wealth management industry, but the question of ‘friend or foe’ still hangs in the balance. In this feature, we investigate existing implementations, the importance of distinguishing between data management vs generative AI, impending compliance requirements and more.

Lizzie Williams, Managing Associate and Solicitor Advocate at Harbottle & Lewis, provided examples of how AI is already operating in the legal sector. She noted that AI is already being used in a variety of ways and explained: “One common example in the context of disputes is using AI to assist in the review and analysis of large pools of documents. For example, many of the platforms used to review documents offer ‘predictive coding’ where the system learns from how humans have categorised documents, and predicts how other documents will be categorised, speeding up the review process. Some platforms also offer ‘sentiment analysis’ which assesses the type of emotion expressed in a document. Obviously, there must be proper human oversight, but AI does open up these sorts of efficiencies.”

Williams continued: “There are many other potential use cases, for example, using AI to assist with research, document drafting and due diligence, and AI will no doubt have an increasing role in the legal profession. That being said, there are serious data and intellectual property issues to navigate, and there is legal uncertainty in a number of areas, which means the legal industry like other industries will need to proceed with care.” 

Phyllis Townsend, Partner at Baker McKenzie, said: “AI is used in portfolio management and investment strategies. In terms of the legal profession, AI is currently more focused on document-heavy transactions. However, AI and machine learning is now also being used to produce standard form agreements, negotiate basic contracts and produce legal analysis. Whilst it does not come without challenges, AI has an important role in the future of the wealth management industry alongside the trusted advisor relationship, to whom clients (still) look for comfort on advice.”

Robot or replacement?

So when it comes to administrative work and data management jobs, AI seems to be playing a substantial role in making an efficient dent in the ‘grunt work’. Could its abilities develop to do the more nuanced work? Is there any truth to the news headlines claiming lawyers and other professionals will be edged out of their jobs by AI?

Philip Higson, Founding Partner of Carlyon Services, made the crucial distinction between data management AI and generative AI. He addressed confidentially concerns around AI and described the current situation as “quite clear”. With strict confidentiality laws and procedures in place, particularly in Switzerland where he is based, client CRM systems are a “closed loop” and data “will be prohibited from being dropped into ChatGPT to make summary statements, presentations or meeting notes.” Professionals can use AI to trawl through large amounts of text and data from public sources, but not to generate text using information about clients or counterparties. Higson said: “I do not know of any legal research or correspondence that will be used which was AI generated.” It seems legal confidentiality will reign supreme over AI.

Andrew Shilling, Partner at Rawlinson & Hunter, provided an example of AI’s shortcomings: “Some professional services firms are attempting to use AI robots to provide curated legal advice. The results so far have been patchy as large language based AI robots have a tendency to ‘hallucinate’ – in other words they often make up plausible sounding, but wholly incorrect, legal advice which has no basis in reality. This is why advice issued by professional services firms that is derived from AI robots is first curated by a human legal expert, in order to remove any ‘hallucinations’.”

Olga Miler, Co-Founder and CEO of SmartPurse, a financial education platform, cited research that bolsters the idea that AI will be a helpful companion, rather than your next personal wealth manager. She said: “Recent surveys showed that while 72% ‘of investors believe that AI is a game changer for investors and traders,’ 82% ‘believe that artificial intelligence will never replace human guidance’. By using human guidance and AI in tandem, companies can leverage AI’s greatest strengths to create scalable, pragmatic solutions that don’t oversell and underdeliver.”

Milner continued: “When looking at how to incorporate AI in ways that wealth management hasn’t yet seen from a customer-service perspective, financial services firms need to be intimately familiar with the relationship between its advisors and clients. Research by Accenture has shown similar findings – after surveying 500 financial advisors across the U.S. and Canada, the company found 83% ‘believe AI will have a direct measurable and consistent impact on the client-advisor relationship in the next 18 months.’ By examining every piece of how that interaction takes place, firms can dissect which elements of the process can be automated and which require a personal touch. In practice, this can translate into better informed wealth managers that can pass key insights to their clients while retaining the qualitative factors financial advisors provide. Modern digital private banks for example use AI chatbots alongside human interaction. By taking on repetitive tasks, AI can help to significantly reduce costs and enhance the client-advisor relationship, giving advisors back precious time to focus on the human interaction and close connection to their clients.”

Compliance, compliance, compliance

With the proposal for the EU Artificial Intelligence Act now available and slated to come into force in less than two years, it might be time for professionals to start preparing. Charles Kerrigan, Partner at CMS UK, certainly believes so and compared this to the run up to GDPR. He said: “We know the rules that we’ve got to comply with and there is a period of time to get ready for compliance. That is a substantial piece of work for all businesses for a couple of reasons. One, everyone uses AI, and two, there is AI at scale.When we go to wealth managers and other types of financial institutions, we are finding that they have hundreds, if not thousands, of AI deployments and our first question is ‘where are you using AI in the business?’. And they often are unable to point to a list; it requires some work for them to answer that question and they are often surprised at just how many deployments they actually have. For sure we can see that the future holds a vast compliance job. The Commission estimates €7bn in annual compliance costs, so this is not a trivial addition or obligation, and it is pushing compliance on to digital systems, which are only becoming more sophisticated.”

Kerrigan also emphasised the importance of lawyers working with technical partners to test systems. He said: “You could just send each question to a lawyer, but there are so many deployments it would take years and years to get the answers back. So you’ve got to use software to test the software, and this is where there is a requirement for a very close partnership between law firms and technical partners. The clients obviously do not say ‘we’re interested in hearing about new regulations related to AI’, they say ‘what do we need to do?’ That is the critical question for where we’re at right now.”

Crypto and AI – the two new frontiers

Whilst we had him, we asked crypto expert Charles Kerrigan about the interaction between crypto and AI, as two new hot topic technologies for the financial services sector.

Kerrigan first noted that the adoption of crypto in traditional financial services is a technical adoption, meaning it relates more to the adoption of blockchain technology in financial markets infrastructure.

On the relationship between the two, he went on to say: “[T]here is a relationship in the sense that these two quite difficult and new technologies are landing at the same time. In a way, this may make it easier for institutions because they now have a bit of familiarity with these sorts of radical new technology and are having to work out how to deal with it, but it may also be more difficult as they now have to deal with two at the same time. I would also say that those bank regulatory teams are pretty overloaded with work since the great financial crisis. The volume of registration, particularly out of Europe, is vast, so for the Digital Markets Act and the AI Act to follow that is a practical and logistical challenge. For me, this maybe looks a bit less like MiFID or EMEA to the banks, that kind of post-crisis regulation, because that was directly pointing at what they do in their core business, but I think it’s equally significant as those core financial regulations. So a good question for banks and wealth managers is to make sure they are not missing this and saying ‘well, it’s not financial regulations, it’s not on the critical path for us.’ It absolutely has to be on the critical path for them.”

Investing in AI

Whenever a shiny new thing appears on the scene, one of the first questions in the melee is ‘can I invest?’ – perhaps more slowly followed by the question, ‘should I invest?’ We asked Olga Miler if AI investment is all guaranteed high returns, or a tricky path.

She said: “It’s important to treat AI like any other investment, which boils down to a couple primary strategies: conducting sound research and maintaining investment best practices. AI has the potential to unlock new ways for businesses and consumers to interact across a variety of sectors – in many cases, it already has. Around the world, people have demonstrated a catalog of use cases of how they are using AI to enable the work they do. Broadly speaking, AI is a notable technological advancement. Like any other technological innovation that means there is risk and reward, but no guarantees. To achieve a positive return on investment, investors should carefully consider how AI can be utilized in today’s market, how firms are implementing it, and what that means for the future. In short: look beyond the headlines and the hype for the business case. This leads into the second strategy – maintaining proper investment practices. Those include having a well-diversified portfolio, not overextending your budget, and thinking about the long-term. For AI, that could mean choosing between investing in companies that have proven track-records enabling AI technology in their processes, supporting startups with visionary ideas or selecting investments that are required for the underlying infrastructure. Each has its benefits and drawbacks, but investors should famliarize themselves with the developments, the technology and select options that match their goals and risk tolerance.”

Thank you to all of the experts who contributed to this feature.

Subscribe to our weekly newsletter here, to ensure you don’t miss out on any future features.

See the Citywealth Top list of fintech lawyers

See the Citywealth Top list of trust litigators

Read about chatbots and the fintech industry