Family offices, in both single and multi-format, are gaining traction quickly, with wealthy families and individuals seeking a customised level of service and the option to consolidate all their assets and affairs in one place.
Indeed, High-Net-Worth (HNW) families have placed a high value on financial administration services and timely, accurate reports to make informed financial decisions and reduce the time spent managing complex personal finances.
Functions in demand include personal bookkeeping, bill paying, entity and partnership accounting, and investment performance reporting. These functions need to be joined, and reporting needs to be in a consolidated format. Advisers and the families they serve should have access to both a holistic view of their affairs and a more detailed perspective if required.
The growth in the popularity of the family offices has taken place against the backdrop of a fairly benign investment environment with low-interest rates and volatility. This means that portfolio management has rarely been a role demanding quick decision-making in a quickly changing and volatile market.
In turn, that has created a false sense of security for investors and those managing family wealth, and the demands on systems and data have, accordingly, been quite manageable. Indeed, if markets are relatively calm, there is no need to have systems in place that can turn around data to make for actionable insight into an almost real-time market.
But all that has changed with Covid-19, geopolitical uncertainty, and rampant inflation. Investors need to have confidence in the ability of the family office to pivot quickly and make informed decisions about assets - where to place and invest them for optimal results and the impact that has on broader holdings.
The stakes are high in both emotions and actual asset values. This is even more so considering that Ultra-High-Net-Worth (UHNW) families tend to hold an esoteric range of assets, including private equity, real estate, and other non-liquid investments.
The right software
So, any software needs to be able to accommodate all asset types – from equities and fixed income to alternatives, and private capital investments. The system should also be versatile enough to deal with capital structures, contributions, distributions, complex master-feeder structures, and unique entity arrangements. In addition, a general ledger and investment and partnership reporting solution needs to be present, to represent an accounting, tax and advisory perspective. The idea is to be able to provide tailored and consolidated reporting with full confidence in the calculations and accuracy of the information – and in a timely manner.
But family offices are not known for their state-of-the-art systems. Many are still highly reliant on manual workflows that are centred around complex and usually inaccurate Excel spreadsheets – often designed and operated by one single person. In the past, family offices have been reluctant to spend money on systems that are poorly designed for their needs. Indeed, where a system has been installed, it is usually something designed for a bigger corporate rather than a small, selfcontained family office that is concerned solely with managing wealth.
The issue is that there are many different solutions. Even if the family office takes a best-of-breed approach and introduces several components, CRM, portfolio management, general ledger, and a sprinkling of Excel, integrating all this is going to be tricky. Moreover, it is going to be prone to errors and mismatches when the processes match up with each other and, more importantly, in terms of the data! The potential for mapping errors is huge!
Governance
And that is not what is required! If the past few years have shown us anything it is that family offices need to incorporate governance around their processes and data management that is more in line with the rest of the wealth management industry. They need to ‘professionalise’, avoiding key person dependency, and inject some formal procedures, audit trails and rules.
We think there are two primary needs - integration of investment reporting with the general ledger, and a robust database to ensure data is accurate and consistent across all reports and information. Any software also has to work ‘out-of-the-box’ but also offers flexibility to customise and modify reports to meet the divergent needs of the firm’s customers.
The customisation play, in particular, is very important in light of varying standards regarding data, the lack of any single operating model and the varying needs of both individual family offices and their family members. Having a series of disjointed solutions that do not work together defeats the object of placing all assets into a family office model in the first place.
And when it comes to data, any system needs to be agnostic so as to be able to take it in a variety of formats from various third parties. This is a massive issue in Asia, where custodian banks vary greatly in the cleanliness, quality, format, and timeliness of data. Many still send data in PDF files, rather than CSV files.
Ultimately, people want personalisation and accuracy when they set up a family office - that is the whole idea; it should be the justification for the cost. And software is the means to achieve this.
