Artificial intelligence (AI) has surged into the spotlight, with ChatGPT attracting over 100 million users in just two months. Beyond investing in well-known AI companies, how can family offices leverage this innovation to enhance their investment strategies and operational processes?
Family offices, a traditional cornerstone of financial services, are evolving rapidly in the face of technological advancements. While their core mission remains focused on investments, wealth preservation, tax management and estate planning, their methods are poised for a major transformation. Embracing innovation will be key for family offices to enhance their strategies and operations effectively.
Many assume that family offices can depend on private bankers for up-to-date research and data. However, they often overlook that family offices are not short on information; they lack insights. Many find themselves overwhelmed by numerous conflicting 30-page reports from various banks, each claiming to provide the most relevant insights.
Family offices can enhance operations by leveraging various AI technologies, including natural language processing for document processing and investment evaluation (particularly in private markets) and machine learning algorithms for tactical asset allocations.
A 2021 report by UBS and Campden Wealth Research revealed that 62% of family offices currently employ AI or have plans to integrate it into their operations. This trend is likely to accelerate and the first-mover larger and better-resourced family offices will find success and the rest of the industry will follow. According to a recent McKinsey report, AI technologies could potentially create US$1 trillion ($1.29 trillion) additional value for the global banking industry annually.
Key areas of AI implementation
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First, AI can transform the automation landscape within family offices, particularly in document processing and accounting functions. AI-powered systems can swiftly detect new invoices, accurately extract relevant data and seamlessly map them to appropriate ledger accounts. This allows administrators to focus on higher-value tasks such as reviewing, authorising and releasing payments.
In legal document processing, AI can simplify the review and summarisation of complex estate-planning documents, providing prompt-based quick answers and developing appropriate solutions efficiently. For tax filing, AI streamlines information gathering and forms population. For instance, PwC US has developed an AI-powered tool that reads and digitises Schedule K-1 tax forms and cross-references the data with other financial documents to flag potential discrepancies, significantly reducing the risk of errors in tax filings.
A key challenge is that family office employees need to upskill in working with the data and the adoption must use an AI model to ensure confidentiality and privacy concerns are respected.
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Second, family offices can use AI for data analysis and portfolio management assistance. Beyond applying AI directly to investment management, AI models can be run on investment and fund documentation to help family offices streamline the deal due diligence process. For example, retrieval-augmented generation can help family offices conduct due diligence questionnaires and reports quicker and directly compare investment managers’ answers with their documentation.
An Indonesian family office that the authors have worked with implemented an AI-driven documentation management system in 2022. Within a year, they reported an around 30% reduction in time spent for deal evaluation and a 90% reduction in time spent normalising conflicting document formats from different banks
While AI offers numerous benefits, it is not without challenges. A McKinsey report states that “technology integration across service providers is tedious and time-consuming — particularly when it comes to onboarding processes involving multiple manual steps, such as faxing documents and mailing hand-filled forms.”
Common misconceptions
To gather market insights, Nellson Hanjaya — a Chicago Global investment analyst and current family office practitioner — and I reviewed several surveys on attitudes towards technology from private banks in the region. We found that while AI’s potential in family offices is clear, several misconceptions may hinder its adoption. It is crucial to address these misunderstandings to ensure a more informed approach to AI implementation:
- AI is only useful for investment management
While AI is powerful in investment analysis, its applications in family offices extend to other areas like tax planning, risk management and client communication. - AI will immediately solve all efficiency problems
While AI can significantly improve efficiency, it is not an instant solution. Proper implementation, integration with existing systems and staff training are necessary for AI to be effective. - All AI solutions are equally effective
Family offices might assume that any AI solution will work for their needs. Still, AI tools vary in quality and suitability and careful evaluation is necessary to choose the right solutions. - AI doesn’t require human oversight
There is a misconception that once implemented, AI systems can run autonomously. Continuous human oversight ensures AI aligns with the family office’s goals and ethical standards. - AI implementation is prohibitively expensive for most family offices
While some AI solutions can be costly, various options are available at different price points and the long-term benefits often outweigh the initial investment. For less than the subscription to a Bloomberg terminal, some providers may provide customised news feeds and idea generation services that help to parse the signal from the firehose of information. - AI implementation is a one-time process
Some family offices might think that implementing AI is a one-and-done task. AI systems require ongoing maintenance, updates and refinement to remain effective and relevant.
Actionable insights for family offices
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Family offices should consider the following steps when adopting AI:
- Conduct a thorough assessment of current processes to identify areas where AI can add the most value.
- Start with a pilot project in a non-critical area to gain experience and build confidence.
- Invest in staff training to ensure smooth integration of AI tools.
- Establish clear metrics to measure the impact of AI implementation.
- Regularly review and update AI systems to ensure they align with the family office’s objectives.
As family offices begin to implement these actionable insights, it is important to consider the future trajectory of AI in this sector. AI is poised to further transform family offices through innovations like quantum computing for complex financial modelling and blockchain integration for enhanced transaction security and transparency.
As AI advances, family offices that successfully integrate these technologies will be well-positioned to offer superior services, make more informed investment decisions and navigate an increasingly complex financial landscape.
The key to success lies in viewing AI not as a replacement for human expertise but as a powerful tool to augment and enhance the unique value that family offices provide to their clients. Those that strike this balance stand to gain significant competitive advantages in the future.
Ben Charoenwong is an Associate Professor of Finance at INSEAD where he teaches investments and asset management. His research focuses on the regulation of investment advice and financial technology. He is co-founder and chief scientist at Chicago Global, a quantitative fund management and wealthtech company providing data-driven solutions for family offices and financial institutions.
