In the broader wealth management space, the role of technology is now undeniable. Do you think the role of technology is now fundamental for a family office business too and, if so, why?
I think the role technology can play in the wealth management space has never been in doubt. However, historically, there has been under-investment in technology. One of the key reasons has been that technology costs have been prohibitive (and related to that), the bigger universals were deploying their strategic investment budget elsewhere. However, technology is becoming cheaper and a number of the universal banks are rotating out of investment banking into wealth management. Now that a build-out of the wealth business is a strategic imperative, it is making it easier for those divisions to access discretionary budget, but is also forcing other smaller players to jump into the ‘arms race’ to stay competitive.
Without a doubt, this all translates across to family offices too. What it means is that family offices become viable at lower AUM levels. They can get up and running from a technology perspective relatively quickly. And the incumbents? They must join the arms race.
At the family office level, the benefits of engaging with technology have perhaps been less clear. When you look at the sector today, would you be able to identify a clear set of benefits that a family office can achieve (or should look to achieve) through the adoption of technology?
From my perspective, the broad benefits of engaging with technology are the same across the board:
- Increased revenue generation – in terms of a family office, some of the interesting technologies that can create an ‘edge’ here are in the areas of ‘Robo-Research’; access to ’illiquid’ deal flow; solutions that allow you to better leverage against existing assets and technologies that bring down the cost of the age old issue of reliable consolidated reporting
- Reduced cost – for the majority of family offices, it makes no sense to run a back office; the economics don’t work, and it is hard to create competitive advantage. The fact that the overall cost of technology is reducing means that family offices can now run an operating model which is much more akin to how a hedge fund runs and focus on their core competences. While for a hedge fund this is investment management, for a family office this may cover a multitude of sins.
- Better control – for sure the old days of using spreadsheets and access databases and all of the control issues that go with that are becoming a thing of the past.
If I wanted to establish a family office and I wanted to set up with technology at its core, where do I start? What are the fundamental pieces of the technology jigsaw that a family office should adopt and how do they go about determining what is right for them?
I think the starting point should never be with technology. The starting point should always be with a robust set of business objectives and a strategy to achieve them. Underpinning that will be the proposition or product and service mix that is required. Then you get into operating model and the pieces of the technology jigsaw. From my perspective, some of the key questions to answer are:
- Is this going to be a single family office or is there an interest or desire to exploit the platform for the benefit of other clients and evolve into a multi-family office?
- What is the product and service mix and how complex is it?
- Will investment management be outsourced or kept in-house?
- How you are going to deal with custody, administration and reporting and whether you outsource this altogether or whether you buy a SaaS service or a SaaS+ service?
- How customizable does client reporting need to be?
- How will banking and credit requirements be met?
In terms of determining what is right, it is important to clearly define your requirements, understand who the key players are in the space and then hold a beauty parade to evaluate the solutions. Most vendors will tell you that their solutions do everything or can do everything with the minimum level of enhancement!
In the world of technology, developments and buzzwords are everywhere. Many of these are likely irrelevant for the business of family office. When you look across the technology landscape, can you identify developments that are relevant for running a family office?
Family offices come in so many shapes and sizes, that it is difficult to say. However, some of what I’m seeing with clients that we work with or hearing from my network is:
- For sure, outsourcing of custody and admin is almost a no-brainer. You have a number of players out there, some independent, some part of larger (generally Swiss) banks that have compelling solutions built on very sophisticated technology. Not only can they provide very slick, safe, white-labelled solutions but also have the operational capacity to provide a managed service. The other thing is that their business models are all based on scale and family offices can benefit through their buying power, particularly in the area of ancillary services where there are benefits of dealing with participants that can 'aggregate' deal flow.
- I’ve already mentioned it, but ‘Robo-research’ is an extremely interesting area. MIFID 2 has had a massive impact on the traditional research business model and there are some interesting plays out there which have their roots in institutional banking that are now being delivered at a price-point that can work even for the smaller family offices. So while family offices can't justify the cost of in-house research or even necessarily buying in research, many will be able to see real value in tools that allow them to curate/create their own research.
- I think that while there have been quite a few developments in the investment management space, interesting things have only started to happen relatively recently in the banking and credit spaces. Where family offices have excess capital and don't necessarily want to deploy that when equity markets are choppy or achieving real returns is very difficult without taking excessive risk in the fixed income market - some of the peer to peer plays are offering compelling returns at comparatively low levels of risk. Also, I think the proliferation of trade finance plays will provide an opportunity for suppliers of short term capital at very compelling annualised rates.
What about a message for solution providers? Do you think the family office space is well served? Do you think solution providers understand the needs of family offices? Would you have any advice for them in how they can better meet the needs of this sector?
This is a difficult one. There is a huge addressable market. However, the more homogeneity in any market, the easier it is for solution providers to produce solutions that the market wants. As soon as you have huge diversity and fragmentation in your market, things become complicated. Wealth management is hugely fragmented overall, and there are thousands of family offices. Solution providers follow the money, so as the value of assets (and therefore the available technology budget) managed by family offices increases, there will be more focus.
It is hard to offer advice to solution providers as I empathise and sympathise with the challenge in delivering product to such a heterogeneous market. So I guess if there was any advice I would give, it would be to recognise that family offices come in all shapes and sizes and to develop solutions that are flexible enough to wrap around their needs.