Within the financial sector, the retail advisory business is most exposed to the risk of disruption due to the evolution of artificial intelligence, warns Fitch Ratings.
In a new report, the rating agency analyzed the potential impact of AI on various parts of the U.S. financial industry, concluding that the technology poses the biggest threat to the retail wealth management business model.
“Advice-based services, such as financial advisory, are under most threat as they could be fully substituted by AI solutions if customers build trust in non-human AI agents,” the report said.
While, at this point, the threat remains largely speculative, Fitch said that it believes that “wealth managers are highly vulnerable to AI-driven disruption as product and portfolio construction becomes increasingly commoditized, and AI-enabled model portfolios and direct indexing can provide low-cost asset allocation, rebalancing and tax-loss harvesting.”
The uncertain legal status of AI-based financial advice may mitigate the threat, the report noted.
It also suggested that firms may try to combat the prospect of disruption by building in-house AI solutions, or cooperating with fintechs “to offset part of the revenue losses.”
Alongside the advisory business, the risk of AI-driven disruption is also a concern for small-to mid-sized active fund managers that are reliant on third-party distribution, Fitch said.
“Managers that are dependent on wholesalers (particularly for retail clients) and those with significant revenue-sharing arrangements could have their business models devalued by AI,” it said.
To the extent that AI-powered platforms usurp retail advisors, the competitive position and relationship models of traditional fund managers would be weakened, it said.
Additionally, “AI also allows for direct indexing at scale — a service that is no longer restricted to high-net-worth clients,” it said. “This is likely to put downward pressure on management fees.”
Other segments of the business that face a threat include high-frequency traders and inter-dealer brokers, the report also said.
“For high-frequency traders (HFTs), AI can sharpen signal generation and execution, intensifying competition and raising requirements for data, infrastructure and risk controls, eroding the competitive advantage of firms that cannot keep pace,” it said.
Similarly, traditional brokerage fees could come under pressure for inter-dealer brokers, “as AI can automate price discovery, matching and post-trade workflows, accelerating the shift from voice broking to electronic execution…”
Alongside business model risk, the rating agency also assessed the asset risk posed by the growth of AI — firms that are exposed through their lending to, and insurance of, both AI infrastructure and companies that are likely to be directly impacted by AI, which could ultimately lead to credit losses.
Within the financial sector, business development companies (BDCs) are most exposed, the report said — given their relatively high exposure to the software industry, which faces a high risk of disruption from AI. It estimated that software firms average 20% of BDCs’ portfolios.
“Fitch does not expect this to drive meaningful deterioration in BDCs’ overall asset-quality metrics in 2026, but accelerating AI disruption in future years will be a challenge,” it said.
Already, concerns about the impact on software companies has led to wider spreads for BDC bonds, higher investor redemptions and slower inflows, and lower stock prices for publicly listed BDCs, it said.
Alternative investment managers are also exposed to the software sector in their credit portfolios, through both direct lending and private equity investments, the report noted.
However, the alt managers are “generally diversified, with software representing on average 7% of assets under management,” it said. It added that the alt IMs have also said that their software portfolios “are positioned in areas expected to benefit from AI rather than be disrupted.”
Additionally, Fitch said it expects some alt IMs “to benefit from lower software valuations, as these will create attractive investment entry points.”
For now though, the growth of AI is not expected to affect credit ratings in the U.S. financial sector, it said.
“Adoption will be gradual and efficiency-focused, with credit outcomes still dominated by traditional considerations such as business conditions, financial flexibility and financial structure,” it said.