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May 25, 2024

SEC Chair Highlights How AI May Affect Your Financial Stability

With the advent of ChatGPT, AI has played a central role in the most explosive technology growth this century, with hundreds of millions of users signing up in just a few months. AI is a hot topic for

With the advent of ChatGPT, AI has played a central role in the most explosive technology growth this century, with hundreds of millions of users signing up in just a few months. AI is a hot topic for some of the largest companies in the world, with Google and Apple both creating competing chatbots, and Microsoft investing $10 billion into ChatGPT creator OpenAI.

AI is here to stay. But is this good news for your wallet? Gary Gensler, the chairman of the Securities and Exchange Commission (SEC), shared some causes for concern about AI technology. It could affect your investments, so let’s take a closer look.

Gensler recently shared with Bloomberg that the SEC is focused on regulating the financial sector in regards to AI. His concern is to protect investors from advisors that use AI to build financial plans.

“When an investment advisor or broker works with you as an investor, they’re not supposed to put their interest, the advisor’s interest, ahead of yours as an investor,” says Gensler. “And so what we’re trying to do is make sure that the technology aligns with that standard…that they’re putting our interest as an investor in the right place and not putting themselves ahead of it.”

When financial advisors or investment firms use AI to help you build an investment portfolio, for example, the AI data might give a recommendation that doesn’t fully align with the investor’s best interest. This is a breach in the fiduciary standard, and is something the SEC is watching closely.

When financial companies use AI to build their investment models, it may cause issues that could ultimately hurt investors. In recent remarks for a speech at the National Press Club, Gensler said, “AI may heighten financial fragility as it could promote herding with individual actors making similar decisions because they are getting the same signal from a base model or data aggregator.”

What he is referring to is using AI to create an investment thesis or portfolio recommendation (for example; using a robo-advisor), causing many investors to be invested in the same things. This “herding” can artificially inflate the price of an asset, and bad actors may look to take advantage of this.

Furthermore, Gensler is worried about AI steering clients toward products they may not necessarily need, or that financial firms may charge more for AI-generated offerings. “When communications, product offerings, and pricing can be narrowly targeted efficiently to each of us, producers are more able to find each individual’s maximum willingness to pay a price or purchase a product,” he said.

Gensler went on to say that AI could even disrupt the “interconnectedness of a global financial system, relying on what might be one, or maybe two or three base models.” This means that there is a risk of many parts of the global financial system relying too heavily on a single source of information.

Gensler is focused on this space as regulators have not caught up with how quickly the technology is moving, and this means the technology is ripe for fraud to occur. The SEC will be focused on creating proper regulation for this emerging technology, but in the meantime, investors should be hyper-aware of how financial firms are using AI with their investments.

While regulating the financial industry is a good idea to protect investors, AI can also be used by criminals. This is already being seen, with more sophisticated online scams being created using ChatGPT and other AI tools.

Phishing scams used to be easy to spot, as many had misspellings or grammar errors, but ChatGPT makes it very easy to craft well-written emails in almost any native language. AI tools that generate video content can easily fake a video from someone you know to make it look like they need money or help in some way.

Additionally, AI trading bots can manipulate financial markets, especially in unregulated industries like cryptocurrency, causing investors to buy at inflated prices and lose their money.

While AI is going to make life much easier in some ways, it will also make it easier for criminals to rip you off. It’s important to understand how scammers and criminals operate to protect your assets.

AI is not going anywhere, but the way it is used in financial companies and businesses is going to be highly scrutinized. The SEC is highly focused on protecting investors and consumers from the pitfalls of AI, and is considering drafting up new regulations to help with this effort.

The best way for you to protect your money from these stability risks is to educate yourself on finance and investing, work with a financial professional who can explain your investment plan in simple terms, and protect yourself from online threats.

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