How Can Family Offices Leverage Artificial Intelligence? Four Applications


For more on artificial intelligence (AI) in investment management, check out The Handbook of Artificial Intelligence and Big Data Applications in Investments, by Larry Cao, CFA, from the CFA Institute Research Foundation.


Artificial intelligence (AI) has created substantial buzz and substantial fear in the business world and popular culture alike. Everyone has heard of ChatGPT and other generative AI platforms, and more and more people are using them in both their personal and professional lives.

The investment world is no different, and financial professionals are searching for ways to both implement generative AI and protect themselves from it. While AI is a useful tool that can create powerful and positive outcomes, it also involves substantial risks. That’s why family offices need to understand its strengths and limitations and work to responsibly integrate AI into their practices while being mindful of the potential threats.

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How AI Can Help Serve Clients

AI can generate investment recommendations, analyze scenarios, run simulations, and monitor various investment factors. Companies deploy AI for risk analyses, supply chain management, accounting exercises, and financial planning, among other purposes. By incorporating AI into their tech stacks, family offices can increase productivity and cut costs. After all, an adviser’s time may be better spent building client relationships, increasing innovation, and expanding market share rather than, say, data modeling. This improves efficiency without necessarily rendering human staff obsolete. By leveraging AI, family offices can reallocate their human capital to where it brings the most value.

AI-Inspired Personalization

AI’s chief value proposition for family offices is through investment software. By processing massive datasets, AI can help identify potentially alpha-generating trends and patterns. Augmented by human judgment and restrained by clear boundaries, AI can help fine-tune the investment process and deliver individually tailored client solutions.

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How Can Family Offices Best Leverage AI?

Family offices can deploy AI wealth management models trained on historical financial data, market trends, and other relevant factors and apply them to the following tasks:

1. Investment Analysis

AI-generated investment scenarios and simulations can help guide and inform family office investment strategies by providing insights into the potential risks and returns. Just as financial planners run through sequence-of-return-risk scenarios, family offices generate alternative investment scenarios and performance simulations based on massive datasets. By bringing AI to bear, they can make more sophisticated and data-driven decisions.

2. Portfolio Allocation Optimization

AI can simulate different allocation strategies; account for risk preferences, return objectives, and constraints; and suggest optimal portfolio compositions that align with investment goals. As such, AI-driven investment analysis gives family offices the means to test assumptions and run through contingency plans.

3. Risk Management

Risk management in family offices has always been challenging. But AI is helping to address this. By monitoring market data, macroeconomic indicators, and other relevant factors, AI can help flag risk scenarios. Enabled by AI, family offices can sandbox test catastrophic events against their datasets and model the magnitude of their risk. But AI’s value add goes beyond diagnosis; it provides a toolbox with which to monitor potential threats and respond at strategic times.

4. Alternative Data Analysis

By using AI to process and analyze alternative data sources, such as social media feeds, news articles, and online sentiment, family offices can now identify emerging trends and investment opportunities, gaining insights that traditional analysis has overlooked in the past. There is massive potential to explore qualitative data and add nuance to datasets that previously were out of reach or too costly to analyze.

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Intentional — But Cautious — Adoption of AI

AI will continue to grow in importance and capability. With that in mind, firms are right to explore the advantages that AI offers as well as its potential excesses and downsides. Executive teams need to devote resources to understanding how AI can strengthen or threaten the business and assign team members to monitor and explore these programs and their impacts on the organization.

While AI’s strengths are many and obvious, AI applications are only just beginning to be deployed, and as with any new and largely untested technology, there is reason to be cautious.

Indeed, family offices navigate highly regulated fields and often have sensitive intellectual property considerations to keep in mind. Each office will have to decide the boundaries to set around AI implementation. The risks are real: Samsung software engineers uploaded sensitive source code to ChatGPT servers. A lawyer who relied on ChatGPT received completely fabricated case law that exposed them to sanctions and ethics violations. Given these risks, family offices need to build in redundancies and quality controls to ensure their intellectual property is safe and the information they provide clients is accurate.

AI will revolutionize family office operations. That’s why each office must be intentional about its AI adoption formula, governance procedures, and long-term AI roadmap. The tools are out there — it’s up to family office innovators to determine how best to deploy them.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/dan


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