Navigating the Future: The Role of AI in Independent Advisory Practices

In today's rapidly evolving financial landscape, independent advisors face the dual challenge of growth and client engagement amidst changing demographics. According to the recent 2026 RIA and Independent Advisor Survey conducted by Federated Hermes, nearly half of the surveyed financial advisors cited their primary concern as effectively leveraging technology to connect with more clients. This represents a significant trend as advisors increasingly view artificial intelligence (AI) not just as a buzzword, but as a critical tool for practice enhancement.

The survey, which included insights from 300 financial advisors across the United States, indicates a notable shift—56% recognize AI as a promising opportunity, and only a mere 8% see it as a potential threat. This optimistic outlook aligns with the belief that AI can significantly improve operational efficiency within their practices, with 70% of advisors anticipating that AI will streamline processes and free up valuable time for client engagement and business development.

Many advisors actively applying AI have reported observable improvements in productivity. They noted enhanced meeting follow-ups, comprehensive documentation practices, and better tracking of action items. However, the survey also highlighted a critical need for further education; over half of the respondents expressed interest in understanding AI integration better, emphasizing the importance of training and support from asset managers.

Amidst these technological advancements, the demographic landscape presents a challenge. The survey revealed that older advisors, particularly those aged 60 and above, are troubled by the aging of their client base and the difficulties in attracting younger clients. With nearly half of their retail clients falling between the ages of 60 and 80, advisors face mounting pressure to rejuvenate their practices by appealing to a younger demographic. Alarmingly, only 31% reported having recruited younger advisors within the past year, hindering their efforts to enhance team productivity.

Investment patterns are also evolving, as the data indicates a significant shift in client asset allocations. For the first time, exchange-traded funds (ETFs) have surpassed mutual funds in client portfolios. The survey found that ETFs now constitute 29% of average client assets, with just 26% attributed to mutual funds. This change signals a proactive move among advisors, with 64% planning to elevate their ETF allocations while 45% anticipate diminishing their mutual fund holdings.

Although alternative investments remain a modest percentage of client portfolios, interest is clearly growing. Current allocations average around 2% or less across various alternatives like private equity and hedge funds. Insightfully, about 26% of advisors reported using alternatives as a moderate part of their portfolios, while 22% are open to learning more, showcasing a growing potential in this space.

As Bryan Burke, president of Federated Securities Corp., noted, the survey sheds light on the challenges reshaping independent advisory practices—balancing the opportunities presented by AI with the need for demographic strategies and the ongoing shift toward ETFs. His emphasis on the need for practical applications of active strategies across different asset classes underscores the current market landscape.

Looking forward, advisors must remain vigilant about educational opportunities and embrace the changes that come with adopting AI technologies. By enhancing operational efficiencies and staying responsive to demographic shifts, they can transform potential challenges into avenues for growth and expanded client relationships. Furthermore, they can take advantage of the increasing popularity of ETFs and alternatives to provide their clients with a more diversified investment strategy.

In conclusion, as independent advisory practices navigate this complex environment, the integration of AI and keen investment strategy will be paramount. Advisors seeking to improve client engagement and drive business growth will need to embrace technological advancements, adapt to changing demographics, and consider new investment options to thrive in the future. Advisors can reach out to Federated Hermes for insights and support as they embark on this journey toward innovation.