Should artificial intelligence (AI) be used in investment decisions?
- klauskilvinger
- Mar 28
- 3 min read
My AI is smarter than me, it never sleeps and constantly watches the prices, so it can make better decisions, right?
AI-powered tools are growing in popularity and are increasingly being used for financial investments.
These tools are based on publicly available knowledge and they can make investment recommendations.
However, despite their undisputed potential, there are significant risks that investors should be aware of.
What are the risks, what recommendations can be made and how can the AI Regulation and ISO 42001 help to reduce risks for investors?
Risks
Special risks with online AI tools for investments
Lack of supervision: These tools are not regulated by financial regulators, so investors have no protection from licensed financial service providers.
Lack of transparency: The functioning of many AI models is not fully understandable, even for developers. This entails risks, especially in the volatile financial markets.
No obligatory interest in customer benefit: Public AI tools are not obliged to offer individual advice or act responsibly.
Lack of legal protection: If an AI tool causes wrong investment decisions, no legal action could be possible against the provider.
Beware of AI-powered trading apps
Many websites and apps offer paid AI-generated trading ideas. These often have names such as "stock picking" or "stock signals". Investors should note:
Securities trading is risky and price developments cannot be predicted with certainty.
AI-generated information can be incorrect or incomplete.
No AI-supported strategy can guarantee that investors will operate successfully in the market.
Promises of exceptionally high returns should be viewed with skepticism.
Recommendations
1. Get multiple points of view
AI tools should not be the only basis for decision-making for investments. It is advisable to consult other sources and, if necessary, seek professional advice from licensed professionals.
2. Beware of scams and unrealistic promises
High returns from AI-based strategies can be dubious. Investors should be skeptical of promises that guarantee quick riches. What sounds too good to be true often has a catch!
3. Lack of regulation and risks
Publicly available AI tools are not required to act in the best interests of users. Their advice may be incorrect, outdated or misleading, which can lead to financial losses.
4 Protect data protection and privacy
Many AI tools do not have sufficient safeguards in place to protect personal data. Users should not enter sensitive information such as financial situation, age, or contact details
Help through the European AI-Act Regulation and ISO 42001
Together, ISO 42001 (AI Management System) and the EU AI Regulation can provide a structured framework to improve the quality of AI-powered financial decisions and mitigate risks.
Here are some key points on how they complement each other:
Governance & Riskmanagement
ISO 42001: Provides organizations with a structured AI management system that sets clear guidelines for the safe and ethical use of AI.
AI Regulation: Regulates risk-based requirements for AI systems, especially for high-risk applications such as automated financial advice.
Benefit: Companies can build a robust AI governance system to ensure compliance and minimize liability risks.
Transparency and traceability of AI decisions
ISO 42001: Promotes documentation requirements and clear processes for explaining AI decisions.
AI Regulation: Requires high-risk AI systems (e.g. automated investment advice) to provide comprehensible explanations for their decisions.
Benefit: AI systems in financial advice must be traceable and auditable, which increases investor confidence.
Data Quality & Bias Reduction
ISO 42001: Defines data quality requirements to minimize bias in AI algorithms.
AI Regulation: Requires high-risk AI to be based on high-quality and representative data.
Benefit: Reduces the risk of erroneous or biased investment tips due to inaccurate or biased data.
Security & Privacy
ISO 42001: Contains measures for IT security and the protection of personal data in AI applications.
AI Regulation: Complemented by cybersecurity and data protection requirements for AI systems, especially in the financial sector.
Benefit: Increased data security and protection against manipulation or misuse of sensitive financial information.
Human Supervision & Responsibility
ISO 42001: Promotes principles such as "human-in-the-loop" to ensure human control over critical AI decisions.
AI Regulation: Requires that high-risk AI always have a human control authority.
Benefit: No purely AI-based financial advice without human review, which reduces wrong decisions.
Result
AI is a promising technology, but its use for investment decisions comes with significant risks. The investor should be careful.
There is no absolute protection against errors and abuse, but the combination of ISO 42001 and the AI Regulation creates a solid foundation for the responsible use of AI in the financial sector.
This enables companies to:
1. Implement better governance structures for AI
2. Ensure compliance with regulatory requirements
3. Improving the quality of AI-powered investment decisions
4. Minimise risks such as bias, lack of transparency and data protection problems
Further information can be found on the BaFin website:
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