Financial fraud in the age of AI

The adoption of artificial intelligence took both Wall Street and Main Street by storm in 2023.  Suddenly, we had the power of AI at our fingertips, utilizing it to help proofread and improve our writing, provide new thinking and fresh ideas and, yes, even tell us jokes. However, as the power and proliferation of technology and AI continue to evolve, so do the potential risks and alternative use cases that can be leveraged to impose harm on others. 

According to the FBI’s Internet Crime Complaint Center, phone and cyber scams accounted for roughly $10 billion in out-of-pocket expenses for Americans last year as harmful uses of AI fueled a new wave of financial fraud. The speed at which one can create computer-generated visual and audio content that looks and sounds like the real thing has increased exponentially, leading us to question what we’re seeing and hearing. Scammers are now using the technology to produce text, audio, and other materials to exploit individuals and their finances.

Given the stakes, financial advisors can differentiate themselves by helping clients better understand how technology has given rise to new types of scams. Further, they have an opportunity to advise clients on what can be done to guard against financial fraud and protect their assets while cultivating relationships with the next generation of clients.

NOT YOUR GRANDPARENTS’ FINANCIAL FRAUD

As a new era of financial fraud dawns, the possibilities for potential targets are boundless. No longer are phishing scams predominantly targeted to older demographics; with the power of AI, all cohorts are at risk of being victims of cyberfraud.

While younger generations are often more tech savvy than their parents and grandparents, they’re also subject to many common scams targeting their elders. The younger generations’ increased reliance on technology increases the likelihood of attempted fraud, as scammers often target individuals who are more extensively engaged online.

Despite the tendency of younger generations to be a bit more reluctant in admitting their vulnerability, a 2019 study by the Federal Trade Commission found that millennials are 25% more likely to report losing money to fraud generally than people aged 40 and over, and much more likely to report a loss on specific types of fraud. Further, a 2022 survey from IBM found that millennials and Gen Z spend the most time addressing fraudulent activity across all generational groups.

OPPORTUNITY TO ENGAGE NEXT GENERATION

Engaging with clients’ children has long been a priority for financial advisors, given the potential benefits of retaining that business for their practice. With an estimated $84 trillion projected to be inherited by millennials and Gen X over the next two decades – and $16 trillion just within the next 10 years – the opportunity for advisors is now. But this opportunity has also been a challenge: Many advisors find it difficult to ask clients about their children’s finances for fear of coming off as being too pushy or salesy.

The subject of financial exploitation may present a common ground from which to approach these discussions. Financial fraud poses a concern not only for clients, but also for advisors, as it jeopardizes the success of carefully crafted financial and estate plans advisors work to establish on behalf of their clients.

By fostering an open dialogue, advisors can educate clients and their adult children about the advances in financial fraud and the steps they can take to help insulate their finances from susceptibility. Specifically, advisors can help clients identify common fraud schemes, implement better habits – such as regularly changing passwords – and establish plans should they suspect they’re being targeted for financial fraud or exploitation. 

Since financial and technological literacy varies from household to household, advisors should take a personalized, hands-on approach to help identify and combat the risks presented by financial fraud and exploitation. To start, make sure clients understand the common red flags that often signal fraud. This might include suspicious links via email or text, unauthorized expenses, unexpected password changes, or being asked for personal information over the phone. Frequently changing passwords, being mindful of what personal information is available online, and setting account alerts are easy steps to start combating fraud.

It’s critical that advisors keep up with emerging trends and flag potential risks before it’s too late. Advisors can enhance the perceived value of their advice by being proactive with clients on such issues. Demonstrating deep knowledge of evolving technologies and their financial implications across demographics will make attracting and servicing next-gen clients easier for years to come.

In fact, according to Janus Henderson's Investor Survey: Insights for a Brighter Future, investors who are very satisfied with their financial advisor believe the following three qualities are key to the relationship:
• Provides peace of mind that I'm on track to reach my goals (69 percent)
• Cares about me as a person, beyond just my financial situation (61 percent)
• Provides financial education and makes me smarter (56 percent).

In addition to serving as a go-to expert for all financial matters, successful advisors strive to know their clients on a personal level and take the time to educate them on unfamiliar concepts – and it clearly makes a difference.

While AI clearly has many positive applications, its rapid rise also means that investors will inevitably be subjected to an increasing number of attacks via email, mobile phone, and other methods. Advisors shouldn’t shy away from difficult conversations around topics like financial exploitation, but rather embrace these challenges as opportunities to prove their value.

Matt Sommer is head of the specialist consulting group at Janus Henderson Investors.