AI in Family Offices: The Risks of Relying on AI for Decision-Making and Client Services

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This is the second in a three-part series on AI for the ArentFox Schiff Family Office Newsletter. In our first installment, we evaluated the risks associated with the use of AI in estate planning and family offices, focusing specifically on concerns surrounding privacy, confidentiality, and fiduciary responsibility. In this installment, we drill down further into the impact of AI on fiduciary obligations and the rendering of client services. Our final installment will examine the use of AI in wealth management.

Outsourcing Fiduciary Decision-Making to AI

AI technologies, such as machine learning algorithms and predictive analytics, are increasingly being utilized across industries to enhance decision-making processes. These tools quickly analyze vast amounts of data, offering insights that can inform investment strategies, risk management, and asset allocation decisions. Family offices, traditionally known for their personalized and human-centric approach, now find themselves at the crossroads of adopting AI. The decision to do so is not easy, as it involves navigating legal implications, managing technology effectively, and striking a balance between operational efficiency and risk. By augmenting human judgment with AI-driven insights, family offices can potentially enhance their ability to fulfill fiduciary duties, such as acting prudently and in the best interests of their clients. AI can assist by providing data-driven insights and reducing cognitive biases that may influence human judgment. By automating routine tasks and analyzing complex scenarios, AI could enable employees to focus more of their time on developing strategic initiatives and growing client relationships. However, the goal of adopting AI must be secondary to maintaining high standards of fiduciary responsibility and a human touch in client service.

While AI can provide sophisticated analyses and recommendations, it is essential for family offices to maintain oversight and ensure that decisions align with fiduciary obligations. This includes understanding the underlying algorithms, mitigating biases in data inputs, and interpreting AI-generated outputs in the context of broader financial goals and ethical standards. Over-reliance on AI-generated recommendations can potentially diminish the development of critical thinking and decision-making skills among employees. Employees may lean too heavily on AI outputs without independently assessing the underlying rationale or considering qualitative factors that AI may not capture. This is particularly risky because AI models are designed to please the user and are susceptible to making errors or hallucinating facts. Over-reliance on AI could also lead to employees deferring their own reasoned judgment to algorithms, potentially overlooking nuances that a machine is not designed to catch. Additionally, family offices deal with sensitive and complex matters that often require human intuition and experience. By relying heavily on AI, future family office professionals may never develop the skills and judgment of their predecessors.

As discussed in our first installment, pivoting to AI could have serious implications for fiduciary responsibilities by leading to decisions that are not in the best interest of the clients. Family offices must therefore strike an appropriate balance by fostering a culture that values human expertise ahead of technological advancement and encourages employees to critically evaluate AI-generated insights and think independently in the context of fiduciary obligations.

Cutting Corners May Lead to Losing Touch with Clients

With AI taking over routine tasks, there is also a danger that employees may become complacent, relying too heavily on AI for decision-making and problem-solving and becoming disengaged from critical aspects of their roles. This could lead to a decline in critical thinking skills and a lack of initiative, which are crucial for the effective functioning of a family office.

Family offices commonly help clients understand the complex trust structures high-net-worth families use to transfer generational wealth in a tax efficient manner. A family office may prepare summaries or charts for this purpose. AI has been hailed as a great tool to prepare summaries. A junior family office professional may be intrigued by the convenience of copying a lengthy trust agreement into ChatGPT instead of taking the time to read and digest the trust. In doing so, they may be overlooking significant privacy and confidentiality concerns. As discussed in our initial installment, family offices deal with highly sensitive information and must carefully evaluate the use of AI systems. Personal and financial information could be at risk of disclosure due to the AI model's inadequate data anonymization practices, the model's use of information fed to it for further training, and cybersecurity threats to the AI platform's servers.

Reliance on AI could also pose a risk to the future of the family office. A new family office professional's ability to learn and grow in their career may suffer from the use of AI to complete their tasks. Turning back to the junior employee's trust summary assignment, while ChatGPT might be able to pass the bar exam, it does not have the human insight to distinguish which parts of a trust are important to clients. When asked to summarize a sample Spousal Lifetime Access Trust, the AI response stated that "[t]he trust is designed to provide for John's spouse and descendants, with specific provisions for distributions during his spouse's lifetime and after her death. The trust also includes provisions for the administration of trusts named for John's descendants." While its conclusions were not incorrect per se, it did not summarize distribution standards, powers of appointment, or trustee succession. Experienced family office professionals and estate planners know from personal experience that these are the key details clients want to understand. AI cannot replace this type of emotional intelligence. If a family office came to rely solely on AI summaries, future generations of family office professionals may lose touch with what truly matters for high-net-worth families.

To mitigate these risks, if family offices embrace AI, they must respect the ethical implications of AI adoption and promote a proactive approach to employee engagement. This includes ongoing training and development programs that enhance technical proficiency in AI technologies while reinforcing the importance of ethical decision-making, accountability, and human insight. By empowering employees to understand AI's capabilities and limitations, family offices can cultivate a workforce that leverages AI as a tool for enhancing fiduciary responsibility rather than a substitute for independent judgment or practical and emotional considerations from human experience.

Conclusion

AI has the potential to bring significant changes in the way family offices operate. However, it's crucial to manage this transition carefully to ensure that the benefits of AI are harnessed without compromising on fiduciary responsibilities and the human touch that is at the core of family offices.

The key is to strike a balance. With its ability to analyze data quickly and accurately, AI can help family offices make more informed decisions, reduce errors, and increase efficiency. Additionally, AI can take over routine tasks, freeing up employees to focus on more complex and value-added tasks. Family offices may decide to embrace AI but must not do so at the expense of human judgment and skills. Family office leaders need to ensure that employees are not only trained in using AI to succeed in our increasingly digital environment, but also maintain their critical thinking skills, ethical standards, and empathy. Moreover, they need to have robust policies and procedures in place to manage the risks associated with AI. Family offices can navigate these challenges while maintaining rigorous standards of fiduciary duty by leveraging AI as a tool for augmenting rather than replacing human expertise. By doing so, family offices can position themselves at the forefront of industry innovation while upholding their paramount obligation to act in the best interests of their clients and provide highly personal service.

• Hanna R. Dameron

  Associate
• Tracy L. McLaughlin

  Partner
• Kevin Matz

  Partner