Finding good financial advice can be stressful – and expensive. This is one of the reasons why chatbots have become an increasingly popular and free alternative.
But using artificial intelligence to answer your pressing money questions also comes with hidden dangers. I’m a finance professor who closely monitors the spread of AI in personal finance, and I recently warned that AI is at its riskiest when it sounds most confident. I advised readers to consult a human professional when making risky financial decisions.
A response came back that caught my attention: What if you can’t afford an advisor?
This is the reality for many households. A traditional advisor can cost hundreds of dollars per hour, which makes little sense if your savings are modest. For these people, AI is not a second opinion, but rather the only financial advisor they will ever have. So the sensible question is not whether they should use it; It’s about making it something truly helpful without being misled.
My answer: For people who can’t afford ongoing advice, AI is really useful for budgeting, paying off debt, and low-cost investing.
The art lies in using AI well. Here are some simple guidelines to get accurate and actionable answers when interacting with a chatbot:
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AI is well suited to everyday money questions
When it comes to sensible leadership, the gap between AI and a human advisor is the smallest. Build a small emergency fund. Pay off high-interest debt. Contribute enough to your company pension plan to match the full employer contribution, i.e. h. free money, can be skimmed off. Invest in low-cost, diversified index funds. Don’t panic sell when markets fall.
None of this is controversial. It’s consensus advice, and that’s where the AI is reliable and its trust is earned.
Here are some examples of specific questions that a chatbot answers well:
My daughter is 6 years old and I would like to have about $60,000 saved by the time she starts college. How much do I need to set aside each month to get there, and what return is expected?
I have credit card debt with an interest rate of 22%, a car loan at 7%, and a student loan at 5% and have $300 set aside each month to pay back. What has priority?
My employer contributes 50 cents on the dollar up to 6% of my salary to my retirement fund, and I make $58,000 per year. How much do I have to contribute to cover the entire game and how much is that worth for a year?
In my pension plan, a fund charges 0.85% per year and an index option charges 0.05%. If I invest $40,000 over 25 years, how much will this gap cost me?
I am the sole earner in my household, my income fluctuates from month to month, and my expenses are approximately $3,200 per month. How big should my emergency fund be and where should I invest it?
My retirement plan includes a 2055 target date fund and an S&P 500 index fund. What is the difference and what factors should I consider when choosing one of the two?
Notice what these questions have in common. Each question is a general question with an informed answer, and any fact specific to you is provided by you, not guessed by the tool. Give him the facts and ask him to provide the reasoning and his answers are really convincing.
For these questions, which affect 90% of your financial life, AI is a useful free guide, and for someone who has had no professional advice at all, this is a real win. The danger lies in the other 10% and the key is to tell the two apart. A typical chatbot answers everything you type – even questions it shouldn’t – in fluent language that can safely be wrong.
So slow down if a decision is large, irreversible, tax-related or sold to you. Examples include negotiating a windfall or inheritance; advance withdrawals or conversions between retirement accounts; entitlement to social security; taking on large debts; and weighing each pitch for a product such as an annuity or life insurance.
Inherited retirement accounts alone have withdrawal and tax rules that a chatbot can state with absolute certainty and still get wrong for your specific case, costing thousands of dollars.
Five habits that make AI safer
Once the list of questions is decided, here are some precautions you should take when interacting with a chatbot.
Let yourself be asked questions first. Start with: “Before you give me advice, ask me the questions a good financial planner would ask.” General answers emerge from under-specified questions, and you learn what details actually lead to a more useful result.
Ask it to argue against itself. After each recommendation, respond: “Tell me the strongest arguments against it and the situations in which it would be wrong for me to do so.” If it can’t respond, it’s a sign that the bot is transitioning into a more dangerous mode. This one precaution signals you to be careful more than any other.
Let it show its assumptions. If the bot predicts that your savings will grow to an impressive number, ask what assumption it made and what it would change. You will learn that it assumes there is a stable return every year, no missed contributions and no fees. This means that the forecast is just information and not a promise.
Check the facts. Contribution limits, tax brackets and deadlines change, and this is where AI can become subtly outdated. Check directly with the IRS or Social Security Administration. If a number drives your decision, don’t take the word of a chatbot.
Never share personal information. Do not provide any account information, social security numbers, or logins. Describe your situation generally. Good advice does not require the release of data that can be used against you.
Robo-advisors are a cost-effective middle ground
If your primary need is simply to invest, robo-advisors stand between a free chatbot and an expensive human. These automated platforms create and balance a diversified portfolio of low-cost funds based on your goals and risk tolerance, typically for an annual fee of 0.25% to 0.50% of assets under management, often with a low or no minimum balance.
In a 2022 study of a major robo-advisory platform, my co-authors and I found that typical users tend to be young, male, and often retail investors—the very people who have been priced out of traditional advice. We’ve also found that during times of high market volatility, new account sign-ups increase. People turn to these tools when markets get turbulent, when automated discipline helps the most and a panicked move costs the most.
The catch: Robo-advisors rely on preset models and the input you give them. You don’t have to worry about a divorce, an inheritance or a complicated tax year. If your life changes and you don’t update your input, the strategy won’t adjust itself.
What a human adds that the AI doesn’t
Let’s assume you can afford a professional. What advantage does human advice offer over a bot?
It’s not just about the material results. In a new study, I found that the value of human advice is reflected in lower financial anxiety rather than higher returns. It wasn’t just about having an advisor. Rather, comprehensive planning reassures customers: detailed support in the areas of estates, investments, retirement planning, risk management and tax issues as well as advice on the psychology of money.
Human advisors have a big advantage over AI: they provide security and reduce fears.
Amy Hirschi on Unsplash, CC BY
I found that this benefit was concentrated almost exclusively among households with lower financial literacy, where the effect was about six times larger than among the most financially sophisticated, for whom it was negligible.
Two further insights are practical. My research found that clients of Certified Financial Board-certified advisors reported more comprehensive service in all six planning areas, so qualifications are a reasonable indicator of what actually helps. And the use of AI showed no signs of replacing human advisors, nor did it ease financial fears.
Reassurance is the only feature that current AI does not provide.
A professional doesn’t have to be expensive
In order to hire someone to help you, you don’t necessarily have to hire a consultant on a fee basis. You can save here with paid planners, who charge a flat hourly rate to answer a targeted question for a few hundred dollars, through professional and certification organizations like the CFP Board, the Garrett Planning Network, the XY Planning Network, or the National Association of Personal Financial Advisors.
Additionally, many corporate retirement plans and credit unions offer free coaching. Non-profit credit counseling is available to help you deal with debt through the National Foundation of Credit Counseling. And if your annual income is $69,000 or less, the IRS’s free Volunteer Income Tax Assistance program offers free tax help.
So the choice is not between AI or an expensive consultant. It’s AI for the everyday questions, a robo-advisor for hassle-free investing if you want one, and a single affordable hour of human time in the moments that matter, ideally with someone doing comprehensive planning and not just a single transaction. The last point is not just a preference, but what the evidence shows actually reduces worry.
https://theconversation.com/got-money-questions-how-to-get-chatbots-to-give-you-accurate-answers-288185
