This fifth article in a series of six is written by Daniel Eriksson, Director of Product Marketing, Advent Software EMEA.
Client service excellence is a particular feature, and constant goal, of the modern family office. But providing customers with the consistently high level of performance and communication they expect depends on having the right raw data to work with from the start. As the saying goes: Garbage In, Garbage Out.
Data aggregation, therefore, is a critical part of a family office's operational tasks. But given the complexity of many families' wealth holdings, and the multiplicity of trading-related relationships they may have, bringing all the requisite information together in an accurate, timely and efficient manner presents the family office with a sizable operational burden.
Portfolio sophistication will be one part of the issue. In an effort to diversify risk and returns to achieve an optimal mix of wealth preservation and accumulation specific to that family, their investments will often span an array of domestic and international asset types. As a result, their holdings may be spread between a number of different custodians, brokers and banking institutions.
The challenge for the family office is to obtain the information detailing the daily transactions and account positions of its client's holdings at the different custodian banks used, and to reconcile that data with what is held on their internal systems to ensure their records are accurate and current. Where any discrepancies arise they must then be checked and resolved.
Furnished with this reconciled account information from the various custodians, the family office needs to draw the data together to get a consolidated, big picture view of their client's portfolio. Armed with this the family office will be in a position to monitor its asset class, currency and investment strategy exposures, assess its risk management policies, calculate performance and make better informed asset allocation decisions.
And where a family office outsources chunks of the portfolio management to multiple investment managers there is an extra layer of complexity.
In this instance the family office will determine how the client's assets are to be allocated to cash, bonds, equities, commodities, real estate, private equity, hedge funds and so on, while employing separate managers that specialise in each class to run those particular aspects of the portfolio.
But that subsequently requires it to do the account aggregation across multiple managers, and the various custodians they use, in order to obtain the necessary overview of its positions. For only then can it see, for example, the client's consolidated exposure across multiple counterparties, or assess its underlying exposures to different sectors or investment strategies in cases where it is using hedge fund of funds.
And while the data aggregation task can be onerous enough for a single family office, for multi-family offices the job becomes even more challenging, since they will face a greatly expanded universe of assets, investment managers, and custodian banks and brokers from which it has to extract, reconcile and consolidate the transaction and account information in order to monitor and control the portfolios under its charge.
Given the sheer volume of data involved, and the potential for costly errors to result wherever manual intervention occurs in the chain, it is essential that family offices have a framework in place for automating the data consolidation and reconciliation activities.
That process starts with an ability to efficiently collect relevant data from the custodian sources concerned. Automating the custodial reconciliation then requires a rules-based engine that can be configured according to matching criteria defined by the user, to enable the electronic matching of transactions based on their specific parameters. Meanwhile, any reconciliation discrepancies that crop up need to be filtered out for quick manual resolution where necessary, with the ability for staff to easily amend client files if required.
With this type of reconciliation workflow – that to the utmost degree possible eliminates manual data input and the work involved in checking and fixing the errors that result – a family office will be able to maintain accurate cash and securities balances, reduce settlement and other operational risks, ensure compliant trading and produce more accurate client statements much faster.
And because staffers are no longer tied up with such laborious administrative tasks, they will be free to concentrate on those client-facing activities that add greater value to both family and firm.
What is more, by automating another part of the operational process the family office is breaking down the correlation between its headcount and the quality of client service it can provide and assets under management it supports. As such, it will be able to both accommodate any growth in the business and maintain its standards of customer care without a corresponding increase in overheads.
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Click here to read the first article in the series
Click here to read the second article in the series
Click here to read the third article in the series
Click here to read the fourth article in the series