Which financial stocks could be hit hard by AI?
Seeking Alpha analysts Dr. Christopher Davis of Quad 7 Capital, Labutes IR, and Daniel Jones weigh in.
Christopher Davis: Make no mistake, the AI disruption fears seem to be hitting sector by sector. And there is some risk to financials and related stocks. The shift toward advanced automation is creating a significant issue where established players are finding their traditional moats narrowing. At least that is the thought, and stocks in the space are starting to get hit.
Perhaps one of the most vulnerable areas is the wealth management space, where firms like Charles Schwab (SCHW) and Raymond James (RJF), for example, are at risk with the rise of sophisticated advisory AI tools.
The threat is simple to understand. These AI systems can now handle complex tasks such as tax-loss harvesting and estate planning that were once the exclusive domain of high-priced human advisors. So, as these tools become more accessible, the whole fee-based revenue model that these institutions rely heavily on is now facing intense pressure, potentially leading to a long-term decline in profit margins as customers opt for cheaper, more efficient digital alternatives.
The goal for companies is to learn how to embrace and incorporate AI to prevent being disrupted and/or replaced. The market has already started to discount these names.
We would also add that the insurance brokerage industry is at risk as AI assessment algorithms are being developed. Insurance companies have always fed data into a machine to generate quotes, but the thought here is that companies that act as intermediaries are seeing their value proposition questioned as AI-driven comparison engines now allow consumers and businesses to find the best rates across multiple carriers instantly.
Because AI is faster and can now match risk to rate with higher precision and speed, the human element of the transaction is becoming a luxury rather than a necessity, putting downward pressure on the stock prices of firms that haven’t transitioned to a tech-first model. Some names at risk include Marsh McLennan (MRSH), Aon (AON), Arthur J. Gallagher (AJG), and Willis Towers Watson (WTW).
All of this assumes that significant lobbying won’t take place for regulations to prevent or offset this, but as it stands now, these are a few prime examples. There are many more.
Labutes IR: While AI can be positive for the financial sector as a whole due to improving efficiency over the long term, it can also disrupt companies that have business models based on high fees, are labor-intensive, and can be automated.
One area where I think AI could have a significant disruptive impact within the financial sector is related to wealth and asset management, especially concerning financial advisory and tax planning services, where AI tools can perform tasks much more rapidly and efficiently. This is likely to put pressure on pricing across the industry and on business margins in the near future, being a potential headwind for companies such as Charles Schwab (SCHW), Raymond James Financial (RJF), Morgan Stanley (MS), and Julius Baer (JBAXY) in Europe.
Daniel Jones: Just as there will be winners in the financial space, there will also be losers. The companies most exposed will be those that have little to no proprietary data and those that operate generic business services.
In the former category, you’re looking at companies that deal a lot with publicly available data. Although these companies do have proprietary data as well, the fact that a lot of their business is centered around data that is abundantly available but just historically difficult to aggregate is problematic. This helps to explain why companies like Nasdaq (NDAQ) and S&P Global (SPGI) have been down so much in recent months.
Small banks will also be challenged because AI makes digital banking more tempting and competitive. These enterprises also lack the resources necessary to effectively compete in a market that will be increasingly dominated by businesses with tremendous financial resources.