When it comes to compliance, don’t be fooled by the AI mirage

The world of financial advising is abuzz with the potential of artificial intelligence (AI) — from crafting investment strategies to streamlining communication. While AI promises a revolution, it’s crucial to recognize its limitations, especially as they apply to RIA compliance.

The SEC’s recent proposal on “predictive data analytics” highlights the potential for AI-driven conflicts of interest. Imagine an AI advisor nudging clients toward investments that benefit the firm, not the client. The allure of AI-powered compliance is understandable. However, the SEC’s scrutiny of AI in seemingly less complex areas, like investment strategies, suggests that dangers lurk in intricate financial regulations.

This has been countered by a recent bill, the Protecting Innovation in Investment Act, proposed by Senators, Ted Cruz and Bill Hagerty. The senators argue the SEC’s rule would stifle innovation and be overly burdensome for firms. While the bill itself targets a specific SEC rule, the underlying message resonates: compliance isn’t a one-size-fits-all problem solved by software or templates. It requires the nuanced judgment and expertise of experienced professionals — human securities attorneys and certified securities compliance professionals (CSCPs).

Why AI Can’t Guarantee Compliance

The allure of AI for streamlining tasks is undeniable, but for registered investment advisors (RIAs), it falls short of guaranteeing compliance.

Here’s why relying solely on AI can be risky.

• The Human Touch In A Grey World: Regulations, though detailed, often leave room for nuanced interpretations. Experienced human attorneys can navigate these grey areas by drawing on past cases and regulatory history. Their judgment keeps you firm on the right side of the law and helps to avoid unintended consequences. AI, on the other hand, needs help understanding the context and intent behind regulations.
• Compliance On The Move: The regulatory landscape for RIAs is a constant dance with change. New rules emerge, interpretations shift, and enforcement priorities evolve. Human experts can proactively monitor these changes and adjust your compliance strategy accordingly. AI, however, struggles with such adaptability. It may require significant reprogramming or training to account for new regulations — potentially leaving your firm exposed in the interim.
• The Bias Trap: AI algorithms are only as good as the data with which they’re trained. Unfortunately, data sets can harbor hidden biases that can seep into the AI’s decision-making. This can lead to discriminatory compliance practices and potentially impact specific client groups unfairly. Human oversight is essential to identify and mitigate such biases, in order to foster fair and ethical implementation of compliance protocols.
• The Black-Box Conundrum: Many AI systems, particularly complex ones, function like black boxes. They deliver outputs without a clear explanation of how they arrived at those conclusions. This lack of transparency is problematic for compliance. Regulators may not accept an AI decision without understanding the reasoning behind it. Human experts can provide clear explanations and justifications for compliance actions, which helps to build trust with regulators.
• The Accountability Gap: In the event of a compliance failure, assigning accountability becomes a challenge with AI. Who is responsible: the programmer, the training data, or the very nature of the algorithm? Human oversight provides a clear chain of accountability, with a party who is responsible for compliance decisions.

While AI can be a valuable tool for automating compliance tasks, it shouldn’t be the solution for an overall compliance program. The human element remains crucial for interpreting regulations, adapting to change, mitigating bias, providing transparency, and ensuring accountability.

It’s important to remember that regulations themselves aren’t open to interpretation. But the way they are applied to specific situations can be. This is where the expertise of human compliance professionals comes into play.

Why AdvisorLaw Is Your Trusted Partner In RIA Compliance

While AI holds promise for streamlining tasks, it can’t replace the human expertise crucial for navigating the complexities of RIA compliance. At AdvisorLaw, we offer a team of dedicated professionals who provide personalized guidance and support. We don’t believe in generic solutions — we work with you to develop a comprehensive compliance strategy tailored to your RIA’s unique needs.

Don’t let the allure of AI blind you to the critical importance of human expertise in navigating compliance. Contact AdvisorLaw today, and let our team of experts help you achieve and maintain robust compliance — with confidence.