What is shadow AI?

Definition

Shadow AI is any AI tool used for firm business outside the firm's approved list: a personal chat account, a free transcription app on a phone, a browser extension that reads every page, or an AI feature someone switched on without telling compliance.

It usually comes from good intentions: people trying to save time with tools they like.

Why it matters for advisors

Shadow AI puts client information with vendors you haven't reviewed, creates communications you can't capture, and makes your AI disclosures inaccurate. It's the AI version of the off-channel messaging problem behind the SEC's recordkeeping cases.

The fix is partly policy and partly giving people a good approved alternative, so they don't need the shadow one.

Shadow AI usually grows because staff have a real need and no approved option. Giving people an approved tool that does the job, plus a quick way to request new ones, does more to reduce it than a ban alone.

Example

A firm finds several advisors using personal chat accounts to draft emails. It rolls out a business plan with SSO, bans personal accounts for firm work, and runs a short training session.

Watch out for

Banning AI outright tends to push use underground. An approved tool plus clear rules works better.