AI Can Optimize Your Portfolio. Can It Optimize Your Financial Life?

Written by: Erin Wood CFP®, FBS®

ChatGPT must be confused by now. One month I'm a 62-year-old man trying to figure out how much retirement income my portfolio will generate. The next I'm a couple in their 50s weighing loan options. Then I'm a 70-year-old woman wondering if long-term care will deplete her savings.

I give the chatbot real scenarios I've seen from clients and ask it to build me a portfolio. It's not that I need the help, but I want to know exactly what kind of advice people are getting when they turn to it.

Here's what I've learned: when you ask AI a straight-up question, it's genuinely good. Tell it you have $500,000, a moderate risk tolerance, and a 6% target return, and it will spit out a perfectly acceptable asset allocation, showing you how much large-cap, small-cap, and bonds you should hold.

But when it comes to questions about real life, it starts to miss the mark.

AI isn't alone in getting stumped, either. A lot of advisors do too. That's because when it comes to real people weighing real-world problems, we haven't been thinking beyond the efficient frontier.

A floor, not a ceiling

There's a concept in investing called the efficient frontier. It's the idea that for any given level of risk, there's a maximum return you can reasonably expect, and you can plot that relationship along a curve. For decades, that curve was the whole game.

Then ETFs came along, indexing got cheap and mainstream. Getting to that optimized curve stopped being a specialized skill and became table stakes. Today, a robo-advisor or a chatbot can put you on the efficient frontier before you even finish filling out your profile. Having this information at your fingertips is a good thing… but there is more you can do to move beyond the efficient frontier. The challenge now is getting beyond it.

I call this concept “bending the curve.” What actions can you take to perform better than the efficient frontier would predict, without taking on more investment risk? Three of the biggest levers I lean on with clients are taxes, private markets, and debt. When you get those right, they put people in a better financial position, well beyond what portfolio management alone would suggest.

None of these show up when you focus solely on portfolio construction because none of these is a portfolio question. They're life questions. And that’s why you need to go deeper than a portfolio conversation with an AI chatbot.

Taxes: The lever with the most options

Taxes isn’t one decision, but a whole series of decisions. There's the tax drag on your investments themselves. And there's tax location, which refers to which type of account you keep your money in.

The most automatic piece of this is tax-loss harvesting, which is taking losses in a portfolio to wipe out gains elsewhere. But there are tons of opportunities throughout the year. An automated tax-management system does it continuously, capturing losses the moment they're available and reinvesting the proceeds to keep the portfolio's exposure intact.

Morningstar pegs the excess amount of additional return through monthly tax-loss harvesting at about 1%.

Tax location is another area with opportunities, but it’s one few people think much about. Because different types of accounts have different tax treatments, knowing when you make withdrawals from different accounts can mean the difference between staying in your current tax bracket and tipping into the next one. It can mean the difference between owing long-term capital gains tax and owing none.

Take income-related monthly adjustment amount (IRMAA). It’s a surcharge based on your income and it can raise your Medicare premiums if your reported income crosses certain thresholds.

IRMAA is calculated from your modified adjusted gross income (MAGI) from two years prior, so a single unusually high income year can potentially lock you into a higher bracket you won't feel until two years later.

At the cusp of retirement, people are generally making the biggest financial moves of their lives to get ready. They might be selling a business, doing a large Roth IRA conversion, or taking a big capital gains. All of these are taxable events that can raise your taxable income.

But an advisor can help you avoid these tax events by planning carefully. They can help you spread out your Roth conversions over several years so you don’t get hit with one big taxable event. They can recommend withdrawals from accounts with the most favorable tax treatment if you need extra cash for something unplanned like a roof replacement or a wedding so the withdrawal doesn’t count as income that could push you over the IRMAA threshold.

What’s more, they can also help you appeal an IRMAA if you can prove that it came about as a result a high-income year was a one-time event.

None of these moves change your investment strategy or your risk exposure. They just change how much of what you already have you actually get to keep.

Private markets: A new way to diversify

Until fairly recently, private market investments were mostly out of reach for anyone who wasn't already very wealthy. That's changed. Affluent investors now have access to these investments that behave differently from the daily swings of the public stock market, with different cash-flow patterns and sector exposures.

Part of why this matters is that public markets themselves have changed. Companies are staying private much longer than they used to. SpaceX is a good example. It didn’t go public until just a few months ago, 24 years after it was founded.

That’s part of a broader trend. The number of publicly traded companies in the U.S. has fallen from more than 8,000 in the mid-1990s to roughly 4,000 today, even as the economy has grown substantially. A portfolio built only from public markets is fishing in a smaller pond than it used to.

That’s what makes private markets a truly new lever for bending the curve, not just a repackaged version of an old one. It’s a tool that didn’t exist for most investors when much of the foundational research on portfolio returns was written. Adding a modest allocation doesn’t change your overall risk tolerance or goals. It just gives the full toolkit for reaching them.

Debt as a tool

Bending the curve encompasses other financial decisions too, like debt. It can be a surprisingly effective lever. For example, take securities-based lending.

The math makes the case on its own. Rates on personal loans currently are frequently higher than rates on loans borrowed against an investment portfolio. If the choice is between an 8% auto loan and a 6% loan against a portfolio, then it’s obvious which is the better decision. Best of all, there’s no need to sell securities and trigger a tax bill to raise the cash.

I bring this up because I see a real mental block around it. There's a common instinct, especially among people approaching retirement, that they should enter retirement completely debt-free. It's an understandable goal, but if your investments are earning more than a loan is costing you, then it’s worth exploring what “debt-free” actually costs.

Most people never find out about tools like securities-based lending unless someone brings it up first.

What this means going forward

The efficient frontier used to be hard to reach. Now it’s a commodity. That’s a real advance for the average investor. But it also means that the value an advisor provides can no longer come from the portfolio alone.

The real value now sits in the levers around the portfolio. But that requires an understanding of all the other financial things going on in the background. That requires a series of decisions that only make sense in the context of an entire financial life.

This information is for general educational purposes only and is not intended to provide personalized wealth management, investment, tax, or legal advice. Please consult a qualified professional regarding your specific circumstances.

Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.