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2024-03-27

The impact of AI technology is the final trend we will explore to wrap up our four-part series. AI has been a hot topic, especially since ChatGPT burst onto the scene in late 2022. Since then, a variety of ventures from start-ups to big tech have accelerated efforts to deliver the latest AI products. Just like the early days of the internet, there has been significant adoption of AI-enabled platforms within the past year, with Chat GPT reaching over 100 million active users*. While governments are grappling with appropriate levels of regulation, most family offices are considering the variety of opportunities this boom presents. AI not only opens the door for potential investment opportunities, but can enhance family office and portfolio company operations, and provide innovative solutions to improve risk management.

AI can influence most aspects of the family office ecosystem and change the efficiency with which it delivers value to the family to achieve sustainable growth. With only 3% of SFOs confident that they have “leading-edge investment and operational technology”, there is a significant opportunity to incorporate technology advancements within family offices*. However, the availability of AI talent is fast becoming a challenge for businesses that want to incorporate this technology. The industrialized world is potentially set to experience the toughest war on talent since McKinsey coined the term in the 1990s.

With so much information to explore about the rise of AI and its potential implications for family offices, it is hard to do this topic justice in this article. This information will only scratch the surface of the sub-trends, focusing on the potential talent implications related to each area.

Part 1

Investments

There is a vast opportunity when it comes to investing in AI technologies and many families are rapidly evaluating new ventures as part of their direct investing strategy. Some family offices are taking an offensive position, pursuing AI-focused tech startups with a vision to disrupt industries. Many CIOs will proceed with more caution pursuing a “nuanced approach” as the families they represent focus on long-term wealth preservation versus aggressive growth. Innovative AI ventures can be both pricey and risky with significant roadblocks to setting up the infrastructure needed*, thus not the best option for all investors.

The Raptor Group is an example of a family office taking the direct investment approach, supporting companies that have the potential to disrupt industries through the power of AI. One example is Ambience Healthcare*, the creator of the most comprehensive AI operating system for healthcare organizations. Their technology uses AI to document provider notes, code visits, create a streamlined after-visit summary for patients (tailored for language and literacy), and generate referrals for specialist care. Technologies like this, when implemented correctly, could have a significant impact on the healthcare industry overall by reducing physician burnout and decreasing the need for manual inputs.

While investing in early-stage tech is not for every family office, exploring funds that include AI-focused ventures can be a more conservative way to invest in such technologies as it offers the ability to diversify capital investments. Another strategy families are using to capitalize on this boom is through investments in verticals supporting the growth of AI, including areas of manufacturing, data centers, and energy. The demand/supply figures in this field are certainly compelling for potential investors.*

One New York-based family office signaling great confidence in the future of AI through its investments is the Duquesne Family Office. In the first half of 2023, this family office made significant investments in both Microsoft and Nvidia, totaling $430 million*. Both smart investments as the stocks have since taken flight, with the Nvidia stock more than doubling in price since.

Improving Deal Flow

Not only does AI have the potential to add investment opportunities for family offices, but newer and “smarter” technologies could change how such deals are sourced, managed and funded. While much of this process is currently relationship driven and manual, the automation brought about by AI-driven software could change the way and speed in which data and trends are analyzed and risks assessed. AI will bring about the capability to draw insights from massive amounts of data related to an investment opportunity, enhance deal evaluation, influence how decisions are made, and streamline due diligence, disrupting the investment process as we know it today.

AI for Family Office Operations

Data and technology are at the forefront of the day-to-day operations within a family office. AI enhances the "intelligence” of technology, providing family offices with more sophisticated and faster analytical and decision-making power and improved operational effectiveness. Some of the most prominent pain points family offices experience with current technology are the need to aggregate data in a unified way, data transformation, the ability to extract information from legacy systems, and data integrity. While helping ease some of these frustrations, adopting AI-backed platforms can also help reduce risk and increase staff productivity.

AI is appealing to family offices as it can streamline redundant and routine day-to-day tasks. Some family offices have already adopted innovative systems to support financial tasks in accounts payable/receivable, month-end close, tax preparation and data aggregation for financial analysis and reporting. For a family office, this could mean that all invoices are automatically coded to the general ledger, approved, and paid or that tax forms and schedule K1s are auto populated, saving time and reducing the risk associated with completing these tasks manually. Sage* is one of the leading global software companies providing these types of accounting and finance solutions suitable for family offices but many competitors are offering similar solutions.

Portfolio Management

Portfolio management is another area where advances in AI will revolutionize how family offices analyze and visualize data. Tools available in portfolio management use predictive analytics and pattern recognition and provide solutions to test investment scenarios and contingency plans. While it is unlikely that family offices are relying on AI to choose funds and other investments at this stage in the game, there are programs available that enhance data analytics to optimize strategic decision making. Addepar*, for example, offers solutions to centralize and consolidate financial information, provide bespoke reporting in real-time, perform portfolio trading, rebalancing, modeling, forecasting and analyze and visualize portfolio data. There is no universal adoption of such platforms within family offices yet. However, many are interested in the efficiency and automation AI-backed solutions offer, allowing the family office more time to dedicate to complex and value-added work.

The linked U.S. Family Office Technology Snapshot from Alphamille highlights specialist tools and applications available to family offices. Each platform is likely to be impacted by the onset of artificial intelligence, so the question remains, when is the right time and which is the best technology to incorporate into the tech stack? There are a variety of options available, making the task of exploring and selecting software feel quite daunting. It is important to select a technology that works best with the investments and needs of the family office, understanding that some technologies are still in the beta phase of development and that more sophistication is ultimately more expensive and time-consuming to implement.

For some family offices, the best option for adopting AI-backed software would be to buy developed solutions as bespoke builds could be very costly. Enterprise AI platforms are still in the early stages and likely only do a small portion of what they will be capable of over the next few years. Because of its infancy, there are questions about a platform’s agility and ability to keep up with changing technology, enhancing current operations in an impactful way. Also, with any new technology, it is important to question if the benefit will outweigh the disruption to the organization and the financial cost to purchase and implement. For family offices that operate more like a business start-up, many barriers to adoption must be overcome to implement AI effectively into a family office technology plan.

Risk Management and Cyber Security

Risk management is an area where many family offices still lack a governance framework. Family offices are formed to grow and preserve the wealth of a family, many for generations, and cyber security is integral to protecting that wealth. A data breach or cyber-attack are arguably the biggest risks the family will face so the correct safeguards must be in place to decrease vulnerabilities against such threats.

Many family offices currently use manual processes and spreadsheets, making them vulnerable to human error, theft and fraud. Automation through AI can help minimize the reliance on manual inputs and ensure more accurate and protected data. The predictive analytics of AI can help mitigate risk also as it can foresee potential threats ahead of them becoming reality. Generative AI will also be useful in controlling operational risk as it can run through different risk scenarios and create models representing the outcomes of each.

Operational risks are a very real consideration for families and 61% of family offices are concerned with cyber-attacks and data breaches*. While this is true, less than half of family offices have cyber security controls to protect their most valuable digital assets. For those that do, common safeguards are the use of cyber security software (91%) as well as staffing internal heads of cyber security/technology (45%) or forming external relationships with cyber professionals in the event of an attack (63%)*. AI technologies can be useful to support family offices in minimizing risk and vulnerabilities to cyber-attacks as many of the system tasks can be automated, helping to identify threats and generating alerts earlier than ever before.

AI for Portfolio Companies

In the AI conversation, it is also important to consider the family businesses or portfolio companies. The adoption of new AI-backed technology can likely increase productivity, competitive edge and ultimately profitability within these organizations. The impact is potentially huge and warrants industry-specific analysis. The key question is, could AI disrupt the business model of a particular portfolio company?

AI is starting to disrupt every aspect of business, from content creation in marketing, customer relationship management in sales, enterprise resource planning in supply chain, selection in recruiting and software programming in technology. The choice of tools has the potential to be intimidating to explore, but a planned approach with strategic support from a family office owner /shareholder can alleviate some of the thinking. A family office has the potential to support portfolio companies with building use cases that can be shared with other functions and businesses within the group.

Part 2

Talent Implications

Understand The War for AI Talent

AI unquestionably presents financial benefits to investment teams within single and multi-family offices, whether it’s using AI-enabled data analytics to create alpha or implementing automation tools. The talent challenge is ensuring existing team members have the relevant market knowledge and skills to upgrade an existing system. Arguably all investment professionals need to be AI savvy and willing to try new approaches to their work.

All family offices need to be aware of the wider demand for AI talent. It will always be difficult for a small family office to justify an AI hire, even on an interim basis. Large SFOs or MFOs with a bigger team, a better budget for compensation, and a broader investment program could still experience challenges attracting the right AI/investment talent, due to the intense level of competition as every area of financial services is looking to build capability in this area.

A recent FT article,* highlights the competition for the best thinkers and engineers in this field, and not surprisingly, money matters in this race. Big tech firms are making bold moves to hire leading AI talent by offering attractive salaries and sometimes acquiring businesses just for the talent, so-called ‘aquihires’. A talent report from research firm, Zeki*, suggests a large proportion of AI talent is moving into healthcare. No matter what the sector, the talent landscape for professionals with AI expertise is fiercely competitive, driving up the costs to attract best-in-class talent. The most valuable of these candidates being the so called “purple people” possessing both the technical and interpersonal skills to navigate such technological advancements within organizations.

Build a Talent Community

For investment firms already immersed in technology, embracing AI both internally and externally is perhaps less of a challenge. For example, ICONIQ*, originally a single family office for a Silicon Valley billionaire has grown to become a substantial MFO with $80Bn in AUM. They have been clever in creating an ecosystem of complimentary talent that spans family office advisory services, real assets (data center/real estate fund), and the direct investing arm. The latter, known as ICONIQ Growth invests in and partners with entrepreneurs utilizing a team of specialists who support growth-stage tech companies. This community of tech entrepreneurs contains domain experts who can support and help each other through the various stages of growth, plus help attract exceptional talent in frontier technologies such as AI.

Engage with External Experts

For most family offices, the best solution to guide the technology roadmap is to involve an expert specializing in family office ecosystems. These advisors will have a deep understanding of each software and its nuances, benefits and limitations and provide an unbiased approach to holistic technology overview and design. However, before engaging with a technology advisor, the family office must be united on the strategy and vision for the future. If there is a well-crafted plan in place, an advisor can guide the family office in structuring and implementing the best software stack that most suitably aligns with the organizational needs. The worst possible scenario is to use AI to enhance a process that is already broken, but instead apply it to already well functioning workflows. A COO candidate shared a story of ‘test-and-learn’ as an approach for rolling out new AI tools within his family office to build confidence and buy-in to new ways of working.

Alphamille* and RSM* are examples of advisors providing family offices services in key areas such as technical architecture design, technology enablement and cyber security, and there are others offering similar services. When selecting an external advisor, be aware that some companies will have their own proprietary software or strategic alliances with certain programs, so their advice and support may come with bias towards such applications. Be sure to explore this with any potential advisor to ensure the best fit for your situation.

Hire an Internal Specialist

For family offices with a sophisticated tech stack already in place, it may be time to evaluate the expertise and capabilities within the team. If there are talent gaps and more specialism is needed, there are ways to think about incorporating a missing skillset into the team. For a substantial family office, an obvious option is to hire an in-house technology expert. Maybe this is a Systems Implementation Specialist, an AI Solutions Architect or even a Head of Information Security or Cyber Security Engineer. Another beneficial role could be a Business Transformation Manager who will bring the skillset to guide the organization through AI integration, ensuring alignment with the long-term strategy.

For small-medium size family offices (sub $1 billion), technology is likely to fall under the role of COO or even CFO. In these cases, this person needs to be tech-savvy and able to evaluate the opportunities and threats that AI will present. The technology subject matter expert for a family office should be knowledgeable enough about the topic to ask the right questions, understand their limitations and identify when the time is right to engage with an external expert, an example of this could be hiring fractional support to help guide the family through a period of decision-making and implementation. Alternatively, for more strategic involvement, a family office could add a technology expert to an advisory board if one is in place. This option would provide more consistent, long-term advice and counsel on the evolving technology plan.

Technology should remain a constant conversation within family office leadership and an expert in this area can lead frequent technology reviews that will analyze current capabilities, identify technology and efficiency gaps, build test cases and evaluate safety protocols. Ultimately the adoption of new technologies will require a cost-benefit analysis to know when the right time is to initiate a change.

Drive Team Efficiencies

Improvements in technology and the rise of AI can prompt family offices to reinvent the way in which they work. The idea of automation and enhanced efficiency is compelling because of the opportunity for time savings. The adoption of AI-backed programs will likely not eliminate roles in the short term but allow team members more time to focus on strategic and value-added tasks. Most family offices are already very lean, in fact Stryde’s core single family office clients have between 5-20 non-domestic employees on average. The benefits of increased automation and integration will minimize the time needed on certain, routine assignments, freeing up talent to focus on higher-order priorities. This change in workload may bring about an opportunity to reallocate human capital within the family office to increase overall performance, with the unlikely scenario being valued talent is let go.

Conduct Workforce Planning

It is likely that AI could have a more dramatic impact on team structures within portfolio companies rather than the family office itself. Within these companies, jobs could take a different shape, some will be made redundant, and others created. In the scenario that jobs are eliminated, what do organizations do with this talent? One important trend coming from increased automation and digitization as it pertains to portfolio company talent is a concept known as worker retraining and moving to being a skills-based organization, prioritizing the relevance of skills rather than years of experience in a particular profession.

AI implementation paves the way for an opportunity to provide continuing education to employees to enhance the skills of valued talent displaced by newer technologies. Employee retraining can help organizations develop skillsets that align best with the needs of the business. A thorough analysis of employee capabilities and organizational gaps can help to determine who is best suited to receive specific education/training.

Utilize Peer-to-Peer Networks

At Stryde, we have learned of other strategies our clients are utilizing to strengthen their positions around technology and risk management that include engaging peer-to-peer family office networks and leveraging IT infrastructure within portfolio businesses. Some families will liaise with other family offices or family office organizations to share learnings and recommendations on technology advances, streamlining current operations and the best approaches to cyber security. Others have leveraged the existing IT teams within the family business or that of a portfolio company as somewhat of an outsourced service to set up and manage cyber security solutions for the family office.

Conclusion

Everything in a family office should be looked at through an AI lens. If an area of the day-to-day operations within a family office has not already been disrupted, it is likely to be in the not-too-distant future. Here is the bottom line, before deciding which tools should be added to the technology infrastructure, a family office first must solidify its vision and from there design an optimal tech stack and team to best serve that strategy.

Adopting new AI technology is a large undertaking that requires thorough evaluation. Family offices need to make sure they get this right as implementing the wrong systems could be costly. Because of the rate at which technology is advancing, fueled by AI, the infrastructure and solutions within a family office need to be constantly assessed and reviewed. Lastly, organizational alignment is critical to promoting and implementing any technological advances. It is more than just having the best technology, but also having the people and processes in place to optimize its potential.

There is no room for complacency when it comes to AI, those families choosing to remain nimble, open to the possibilities of AI, and employing expert talent will be well-positioned to lead the charge in wealth creation and preservation, spanning generations.

Authors:

Lisa Slagel: ls@strydesearch.com

and Katherine Travell: kt@strydesearch.com

If you are looking for AI talent, get in touch, we can help you find a 'purple person'.

*Notes and Sources:

1. https://www.businessofapps.com/data/chatgpt-statistics/

2. RSM Family Office Operational Excellence Report, 2024.

3. https://www.ambiencehealthcare.com/

4. Loud and Clear: KKR 2023 Family Capital Survey, February 2024.

5. https://markets.businessinsider.com/news/stocks/stanley-druckenmiller-nvidia-microsoft-stocks-artificial-intelligence-ai-tech-shares-2023-5

6. https://www.sage.com/en-us/

7. https://addepar.com/