Artificial intelligence may save the world (or destroy it, depending on who you ask), but first it’s gotta move out of its parents’ basement. 

Big Tech and government programs are expected to dump $1 trillion into AI infrastructure in the coming years, including big splashes for new data centers, chip factories, and the power grids needed to make it all happen. But, beyond some reports of worker efficiency and automation, the returns on those investments have been slim to none, according to new research from Goldman Sachs.

For all the money flooding into Gen AI, you might expect it to tackle more pressing issues than teaching robots to flip burgers or participating in beauty pageants. “We estimate that the AI infrastructure buildout will cost over $1 trillion in the next several years alone,” said Goldman head of global equity research Jim Covello. “So, the crucial question is: What $1 trillion problem will AI solve?”

It AIn’t Happening

The main issue is that AI just isn’t that intelligent. In order to upend industries, the technology must be able to solve complex problems, which it isn’t built to do, Covello said in the report. For example, the internet was able to usher in low-cost solutions to disrupt high-cost ones, like Craigslist taking over classified ads in newspapers. AI is finding it much harder to live up to its revolutionary reputation:

• The study estimated that only a quarter of AI tasks will be cost-effective within the next decade, and that the technology will impact less than 5% of all tasks. 
• Over that timespan, AI will increase US productivity by a factor of approximately 50 basis points and impact the national GDP growth by less than 1%.

Blue Chips: Of course, the stock market, or shall we say Nvidia, is eating up the hype after it briefly became the largest stock in the S&P 500. But that optimism may also be showing signs of faltering; the chipmaker lost over $550 billion in market cap over a three-day period last month. The report found there is still significant room for the AI theme to run, because, well… bubbles can take a long time to pop.

To be fair, other experts cited in the report were much rosier. There is massive potential for AI to ultimately generate returns beyond the current “picks and shovels” phase when a possible “killer application” could emerge and take over the world. The study noted the internet had such applications in its infancy. Until then, let’s hope the bubble fizzles rather than bursts.

It’s no surprise that wealth managers are some of the better-paid financial professionals in the industry, with arguably some of the lowest office hours-to-golf hole ratios in the country. But market returns are expected to drop over the next decade, putting pressure on the value advisors provide their clients — and the fees that they charge them. 

US stocks have generated a healthy 12% annualized return over the past decade, but the good times aren’t expected to last: Morningstar researchers are calling for that to be cut in half over the next 10 years. And while clients could care less about measly fees when markets are in the stratosphere, if returns plummet to just 5%, then a standard AUM fee quickly becomes 20% of total returns. 

“You can be sure it’s going to draw a lot more scrutiny,” CEO Kunal Kapoor said during a keynote speech at the June Morningstar Investment Conference in Chicago. While there are always doomsayers, the day will eventually come when markets begin to sputter. “Are we crying ‘wolf’ again?” Kapoor said. “Let me assure you of this: The wolf shows up eventually.”

Race to Zero

The 1% fee on assets has been a standard in the financial industry for decades. But we need to look no further than the asset management industry for a warning. Expense ratios on funds toppled over the past decade, and have led to fees as low as five basis points for passive products. Average fees in the US crashed some 40% in the 2010s as competition for assets heated up and new issuers entered the fray, according to data from JPMorgan.

So, what’s the upside? Kapoor has two pieces of advice. Make sure clients understand the value of great advice: put it front and center, embrace it, and talk about it. For the second, embrace technology to bring down overhead and create better experiences for clients. 

More Fees, Please. While 1% AUM fees may be unsustainable in market downturns, there are plenty of other fee options that are gaining steam. Fee-based plans and subscription models can help advisors with steady income streams and are actually preferred by some clients. A study by the fintech AdvicePay of almost 400,000 transactions that were made last year found:

• Monthly recurring subscriptions for planning fees jumped to an average of $265 per client, which is a 6% rise over the previous year. 
• Quarterly subscriptions also saw an increase of 1.6%, averaging $968 per client.
• Fees that included one-time payments also grew 6.7%, bringing the average to $1,578.

The world’s largest investment company just got even bigger.

In the second quarter, BlackRock raked in $51 billion of new client cash, bringing its assets under management to a record $10.6 trillion and making it a standout in a season of all-around lavish bank earnings.

Despite that good news, the New York-based asset manager’s quarterly revenue came in below expectations. BlackRock generated $4.81 billion in revenue, not the $4.86 billion Zacks Investment Research had estimated. Still, it was an increase of 8% year-over-year.

CEO Larry Fink attributed BlackRock’s healthy performance to growth in private markets, retail active fixed income, and the company’s ETFs, “which had their best start to a year on record,” with investors adding $139 billion to the asset class in the first half of the year.

Success Loves Company

While the Federal Reserve figures out its will-they-won’t-they relationship with rate cuts, the economy is still in a boom — or at the very least, a rebound — period. As a result, BlackRock wasn’t the only one on Wall Street making waves this past week — plenty of major banks beat their earnings expectations:

• Goldman Sachs’ profits more than doubled in the second quarter to $3 billion, thanks to a resurgence in dealmaking. According to a PwC analysis, overall deal value in the US for the first five months of 2024 totaled $535 billion, up nearly 30% from the $412 billion in the same period last year. Many of those deals are being driven by AI-related mergers and acquisitions.
• JPMorgan Chase topped expectations, with profits hitting a record $18.1 billion. Its second-quarter success was due to investment banking fees surging 52% year-over-year and the bank’s strategic sale of its stake in Visa Inc., which netted America’s biggest lender a gain of $7.9 billion.

Not Good Enough: While it sounds like good news for everyone, sometimes it takes more than beating earnings expectations to impress investors. Wells Fargo and Citigroup surpassed analysts’ profit projections, but both banks’ stocks took hits after releasing their quarterly reports last week. The companies were among the worst performers on the S&P 500 by market close Friday. Tough crowd.