Of course, family offices are exploring the investment opportunities presented by artificial intelligence, but they are also excited about AI’s potential offerings to streamline operations and, one day, support investment and strategic decision-making.
AI technology is expected to soon facilitate the automation of some mundane but critical tasks for family offices, which essentially function as small institutional investment management organizations.
AI “will be incredibly useful in general, but definitely in the family office and ultra-high-net-worth space,” said Mark Rogozinczy, head of family office services at Cresset in Chicago. says.
Chief among these daily tasks is the mountain of paperwork associated with alternative investments such as real estate, private equity, and venture capital.
One of these tasks, for example, requires family offices to fill out an Internal Revenue Service Schedule K-1 for every partnership they have, Rogozinski says.
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These partnerships “could be private equity funds or hedge funds. It could be two families buying real estate and forming a partnership for tax and risk mitigation reasons,” he says. says. It can also be a family limited partnership with many partners, and each partner must fill out a K-1 and disclose their percentage of income, deductions, credits, etc., according to the IRS.
“With all the alternative investments and additional reporting requirements, a family’s tax return can stretch to 1,000 pages,” he says.
Using AI, much of the data needed for these returns can be collected and automatically entered into tax filing and compliance systems, for example. In the future, this type of system will be manual, semi-manual, and fully automated. “And that future is coming soon,” Rogozinski says. “Not in 10 years, but in one or two years.”
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Finding ways to streamline the manual processes that currently send out bulk emails, filings, PDFs, etc. has been the “holy grail” for educational institutions for the past 30 to 40 years, he says. Automating these processes would “significantly impact the efficiency and back-office of everyone receiving K-1s, not just family offices.”
Analysis takes more time
Rogozinski does not believe the advent of AI in the office will mean a reduction in the required staff. Instead, your staff can spend more time doing meaningful work.
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Currently, offices spend 80% of their time collecting data and only 20% of their time analyzing and understanding the data.
With AI, you only need 20% of your staff time to review automatically collected data to ensure it’s accurate, and then spend 80% of your time analyzing the data, making it better. “That’s right,” says Rogozinski.
In addition to tax forms, AI can collect statements from investment managers and external portfolio managers, enter that data into reporting systems, connect to existing systems, and access data sets. You can also enhance your reporting capabilities. We collect real lifetime data on the internet, extract it and input it,” he says.
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Currently, much of the pricing and performance information about investments is obtained from a variety of sources and is not necessarily timely. As a result, a family office’s reporting system may include current data alongside data from a year ago. “AI can constantly sift through the internet and datasets in real time, so when news breaks, we can immediately know what’s going on,” he says.
For example, a family office CIO may not necessarily be able to react to significant news that impacts long-term real estate investing, but “that information can be used from an investment perspective, from a cash flow perspective, or from a risk mitigation perspective. It can affect other activities,’” he says. “The more information decision makers have, the better decisions they will make.”
AI should also make it easier for family offices to coordinate the various systems they use to track information such as portfolio performance, estate planning, insurance, custodial services, investment rebalancing and trading, and more.
“Most of those systems are somewhat different,” Rogozinski says. Even when systems work together, it is imperfect. The hope is that AI systems will one day exist “on top” of data warehouses (systems like Microsoft SQL Server and Snowflake) for reporting and investment information.
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He says it will enable family offices to extract relevant data and information and report it “efficiently, effectively and consistently.”
In the coming years, the power of machine learning and artificial intelligence will be focused on automating manual, repetitive tasks, Rogozinski says. “The past of the future is, ‘Can AI and machine learning actually start to help us make decisions based on that data set?'”
For example, AI could help CIOs understand market trends and assess the likelihood of the Federal Reserve’s future actions on interest rates and the investment opportunities that action creates.
“Based on our projections and the data we see, we’re going to say, ‘Sell Coke and buy Pepsi, and here’s why,'” he says. “Humans will have to look at that, and there will be debate around that, but the evolution of AI over the next few years will get us there.”
