New research from the FCA about AI published today - which suggests younger investors are placing their trust in AI for investment guidance - reveals some concerning misunderstandings, industry experts say.
The regulator's new research revealed that 56% of 18 to 40-year-olds who own or are considering investments trust AI tools. That’s more than those who trust TV and radio (47%), press (46%) or social media influencers (29%).
The FCA survey found that 44% of investors mistakenly believed AI-generated financial information was regulated.
Some 32% also thought they would be eligible for compensation from the Financial Services Compensation Scheme or the Financial Ombudsman Service if AI advice went wrong.
Financial Planners said education for investors was needed to help them understand the risks and what protection, if any, they have when asking AI tools for financial guidance.
Rob Hillock, head of personal Financial Planning at Broadstone, said: “AI is rapidly becoming the first port of call for a new generation of retail investors, but confidence is clearly running ahead of understanding.
"The rapid growth of low-cost trading apps has put stock-picking and crypto investment within easy reach, while AI can appear to offer free, instant guidance on which investments will be the next winners creating a potentially dangerous combination
“AI can make investing more accessible by explaining complex concepts and supporting research, but it cannot replace regulated financial advice or personal judgement. Crucially, it cannot necessarily replicate the personalised assessment needed to determine whether an investment is suitable for an individual’s objectives, time horizon, appetite for risk and capacity for loss.”
David Ogden, compliance officer at wealth manager Sparrows Capital, shared concerns about the gap between consumer trust and protection mechanisms.
He said: "That tech-savvy younger generations are increasingly turning to AI for investment guidance is no surprise. In many ways, it's a natural evolution as we shift toward crypto and tokenised ecosystems.
"The FCA research raises some fascinating points though, particularly regarding the gap between consumer trust and actual FCA protection mechanisms. While AI tools can be extremely helpful for preliminary research and jargon-busting, they lack the proactive diagnostic capability of a professional financial adviser.
"AI works only with the information provided to it. A human personal financial advice service provides value precisely by asking the crucial questions an investor might not have thought of or thought relevant. Neither does it have a personal client relationship that can greatly inform the direction of advice linked to specific goals, which can be extremely nuanced."
Dan Coatsworth, head of markets at investment platform AJ Bell, said the use of AI by young investors currently poses a risk to the whole investment industry due to bad experiences damaging an individual’s attitude to investing or saving money in the future.
He said: “The FCA’s research highlights that many younger people – 18 to 40-year-olds – are putting faith in AI for investing. It would be devastating if they made major investing mistakes by trusting AI as that could dampen their enthusiasm for saving for the future. People having a bad experience might become less willing to put away as much as possible and that could lead to a poor quality of life down the line.”
Separate research from adviser platform Wealthtime has found that advised clients are also using AI.
According to Wealthtime’s research, carried out in August by The Lang Cat consultancy among 175 advisers, 63% of advisers reported that clients are independently using AI tools in relation to their financial advice, including 27% regularly and 36% infrequently.
A further 31% suspected some may be doing so, with just 6% saying they have no reason to think any clients are using AI for advice. On average, advisers estimated that 28% of their client base was using AI to some extent.