Why AI will never replace a seasoned financial adviser…or why love conquers all (or AI, anyway…)
Jack Meskunas (pictured), of Oppenheimer & Co, looks at whether financial advisers are in danger of being replaced by artificial intelligence.
While attending VCIA this year, a young captive insurance account executive asked if I thought AI would “replace me and other financial advisers”. The question stemmed from an article about an AI-driven portfolio that returned – hold on to your socks – 4% in the past year!
Four percent? I pointed out that money market rates were higher than that in the past year, with no market risk required to earn 4% a year. This got me thinking about why I believe AI will never replace a seasoned financial adviser (FA). Note the qualifier: “seasoned”. I fully believe AI could, and likely will, replace inexperienced financial advisers – those who lack the “love” (as I call it) that only develops over decades of portfolio creation and hundreds of thousands of transactions.
A little history
In graduate school, “A random walk down Wall Street”, by Burton Malkiel, was required reading. Its premise: “Anything that could possibly be known about a stock is already known, so it’s impossible to have an edge – just buy an index fund.” This is the kind of advice that Warren Buffet has touted in interviews, but never actually followed. To put a finer point on it, Berkshire Hathaway doesn’t own, and has never owned, index funds. Berkshire Hathaway and many top equity and hedge fund managers have outperformed common indices over long periods, not by mistake or guesswork, and not by relying on computers or AI.
In spite of this, computers have been used to facilitate and attempt to predict market moves since the advent of the calculator. What could seem simpler? Graham and Dodd taught us that stocks are valued at a multiple of their earnings and that the correct “multiple” should correlate to the company’s growth rate (a little simplification for clarity). One might assume that plugging in earnings, comparing growth rates and referencing market multiple would yield a sure-winner of a portfolio. But equity selection and portfolio management are far more complex.
What about captives?
Without rehashing the active-vs-passive investing debate, let’s consider what most captives do for asset management: active investing.
In an “active” portfolio, fixed-income and equity managers select specific securities. A seasoned FA chooses a handful of managers to address insurance-specific issues, ensuring funds can grow, yet remain liquid to pay claims. A large part of my role is learning the captive’s business and claims history to select the best managers for that framework.
Surprisingly, the portfolio’s goal is not usually to “beat the market” but to smooth performance, duration-match assets to projected liabilities, and avoid large downswings in portfolio value during volatile periods (think 2020, 2022, and 2025).
Buying an index such as the S&P500 or NASDAQ might be easy, but it doesn’t insulate the captive from sharp downturns. Very few captives and other insurance companies can withstand 20-30% losses in weeks or months, especially if unexpected claims force the realisation of losses before the markets recover.
AI can’t do that now, and probably never will. Running a captive insurance company is a bit like navigating open seas – there are infinite possible destinations. Successful captives might start with only one type of risk and expand coverage as they grow. A seasoned FA stays in touch with the captive manager, regularly reviewing and updating the IPS to keep it relevant.
“What about love? Don’t you want someone to care about you?”
The lyrics come from the band Heart, but I might be the first to use “love” to describe asset management for captives. We all know the saying “it’s a labour of love” and that’s exactly how I manage money, and how money must be managed to be managed well.
Much of what makes a portfolio manager (PM) or FA successful is an unquantifiable combination of experience, intuition, and passion – what I call “love”, The passion coupled with muscle-memory from having lived through – and more importantly invested through –market crashes of 1987, 1989, 1990, 1997, 2000, 2001, 2002, 2008, 2010, 2011, 2016, 2020, and 2022.
You might have read stories about AI chatbots professing love to users. Don’t be fooled, they don’t and can’t love you. And they shouldn’t be trusted with something as important as investment decisions for your captive insurance company, either.
This article was written by Jack Meskunas, a financial adviser with Oppenheimer & Co. Inc., who can be reached at +001 203 975-2084 or jack.meskunas@opco.com. This article is not and is under no circumstances to be construed as an offer to sell or buy any securities. The information set forth herein has been derived from sources believed to be reliable and does not purport to be a complete analysis of market segments discussed. Opinions expressed herein are subject to change without notice and do not necessarily reflect those of the firm. Additional information is available upon request. Oppenheimer & Co. Inc., nor any of its employees or affiliates, does not provide legal or tax advice.
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