How Advisors Can Manage 6 Big AI Compliance Challenges

4. Remaining Compliant With Cybersecurity Protocol

Cybersecurity remains a primary concern for financial professionals as they navigate the integration of AI. Many firms unfamiliar with AI express concern about potential breaches of their technology infrastructure.

At present, widely known generative AI tools like ChatGPT function as web engines and lack access to infiltrate systems. However, given the dynamic nature of cybersecurity threats, attempts to hack systems leveraging the AI framework are likely to emerge over time.

Key takeaway: In general, it's important for a firm's cybersecurity infrastructure to be strong enough to ward off an attack. Enabling tools like multi-factor authentication, the use of complex passwords, and ensuring passwords are updated regularly should be standard practices that will help circumvent threats. But it will be important to keep an eye on any risk-related developments as AI technology continues to evolve.

5. Diligently Documenting Advice

Financial professionals must thoroughly document the rationale behind any advice they provide. Generative AI, while advanced, is unable to draft client notes independently or run portfolios, as that removes the trained professional from the equation and causes a disconnect between rationale and next steps. AI is only as knowledgeable as the algorithm it's utilizing, which could lead to an algorithmic bias that's not necessarily in the best interest of the client. In addition, the advice it puts out could be inaccurate, unreliable, or not considerate of a client's full financial picture, especially considering that some forms of generative AI are pulling from older databases of information instead of real-time search engines.

Key takeaway: There are ways to leverage the technology in compliance with the rules, including using it to compare funds or create generic outlines, but it's imperative to take the framework for these recommendations and create personalized advice that's unique to the client's situation, with a meticulously documented thought process.

6. Preparing for Future Legislation

The regulatory landscape for generative AI is still developing. Over the next few years, as the tool continues to progress, we can expect clearer definitions around how financial professionals can and cannot leverage the technology. The SEC just released a proposed rule on using predictive analytics for a firm's best interest rather than their client's (https://www.sec.gov/news/press-release/2023-140). This rule is likely the first of many to follow.

Key takeaway: The ability to be nimble in navigating changes and updating policies as the regulatory environment takes shape will be important. And demonstrating a proactive approach to AI compliance will ensure a smooth and secure utilization of the technology.

Conclusion

When taking a 10,000-foot view of the use of AI in financial services, our industry's awareness of AI and its compliance challenges will continue to unfold as it becomes more widespread. What started as technology to write brief snippets of content has evolved for our industry into a tool that can be used to create formulas, review assets and investments, and research portfolio options.

With the exciting innovations generative AI provides, the biggest challenge for financial professionals navigating the tool is using it appropriately. As long as AI is properly understood and used safely with outputs vetted by humans, it can be a tool that will benefit financial professionals as they serve their clients.

The best way to ensure compliance with generative AI is to put in place a clear policy that covers the tool's dos and don'ts while staying on top of – and knowledgeable about – changes to the technology as it evolves.

Mike Pedlow is executive vice president, chief compliance officer at Kestra Financial.