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Technological advances

Family office technology has come a long way since the days of spreadsheets. Paul Golden looks at family offices’ move towards cloud computing, outsourcing and customised software.
Technological advances

The telecoms crisis of 2001, a far larger crash than the dotcom bust, didn’t just bring influential companies such as Global Crossing and 360networks to their knees. The crash also saw a number of family offices lose far more money than they had ever anticipated.

The reason? The family offices had hidden exposures and didn’t have the technology in place to understand how their investments overlapped, says Joe Lonsdale, chief executive of wealth management software developer Addepar. Technology, when properly used, enables family offices to report timely and accurate data to their members. It makes it possible to manage investments more effectively and tailor information, for example developing performance reports to present returns one way for standard equity holdings, another way for assets the business holds but does not manage, and in a completely different way for alternative investments.

This is important, says Lonsdale, because family offices “tend to lack transparency and don’t have good insight into how their holdings and investments overlap”. But without the proper technology, he says, many of the family offices affected by the 2001 crash weren’t aware they were so exposed.

More than 10 years later, there is a general acceptance that information technology has the capacity to deliver a competitive advantage in the family office environment. Robert Trinchet, chief information officer of GenSpring Family Offices, says the ability to rapidly aggregate financial information from various custodians plays a critical role in supplying advisers and clients with the data they need to make informed decisions about short-term and long-term investment needs. “Operationally, technology has enabled our family offices to reach levels of efficiency that would otherwise be unattainable.”

Of course, speed is not always the most valuable commodity. Depending on the office’s focus, a Bloomberg terminal may be sufficient to help it see trends within markets, but since many family offices have an asset allocation strategy skewed towards alternatives, instant market information isn’t always critical, says Jason Brown, chief executive of software firm Archway.

There is also the danger that instant access to information encourages a knee-jerk response, reckons Chris Thompson, partner at Greenway Family Office, which advises its clients to take a long-term view of the investment markets rather than react to information from rolling news feeds.

Family-founded wealth management firm Laird Norton Tyee’s investment research team uses software that provides real-time data. However, the company’s director of technology, Bill Frizzell, reckons access to quality investment information is more important than everyone in the firm having market data on tap. “We believe in a long-term investment strategy supplemented by medium-term tactical adjustments and with this type of investing, developing the right strategic asset model is more important than knowing what the market is doing at any moment of the day.”

It’s clear that there is no consensus on the value of real-time data, but many are also divided on specific issues such as the value of spreadsheets, the merits of outsourcing and the availability of suitable software packages.

The spreadsheet has been a feature of the family office since Excel first emerged in the mid-1980s and is still a force to be reckoned with in the alternative asset space in particular, according to Charlotte Denton, senior vice-president of Northern Trust’s wealth management group. “There are no reporting standards or ways to easily track capital calls or distributions, so many family offices still track these investments on elaborate spreadsheets.” But it’s important to make it easy to move data back and forth between the core system and spreadsheets with single clicks for certain types of analysis, she adds.

Trinchet goes much further, suggesting that family offices should not build critical functions or workflows based on spreadsheets. “Experience has shown us that spreadsheets often result in fragmented data that comes with storage and access challenges. They break down quickly when complex relationships in data are involved and it becomes a challenge to report on data relationships or help identify trends over time across multiple spreadsheets.”

GenSpring isn’t the only family office that’s turning away from spreadsheets. Martin Engdal, business development director for Advent Software in Europe, the Middle East and Asia, says his firm has witnessed a migration from Excel among multi family offices in particular. “The value proposition [for more sophisticated technology platforms] for these firms is stronger because they are looking for new clients and a scalable platform allows for growth.”

Some single family offices find it hard to justify the cost of an IT platform and those that only use a single custodian are often inclined to use that custodian’s platform, an example being Northern Trust’s Wealth Passport. However, other single family offices will be attracted to different IT platforms because they want to offer specialised reporting to family members, especially if they use more multiple custodians.

There is also a growing interest in cloud services, where offices access computer processing and storage resources as they are needed, consuming technology as they would a utility service, says Engdal. Over the next few years, he reckons family offices will start to buy cloud-based portfolio management services. He also expects more family offices to outsource their IT function as well. “It is estimated that fewer than one in four have in-house IT resources, although this varies by geography. For instance, US family offices are more likely to outsource than their Swiss counterparts.”

Whether a family office employs in-house IT managers and staff or outsources its IT services usually depends on its size. “Smaller to mid-size offices tend to have an IT person on retainer,” says Denton. “Larger family offices often have them on staff. A family office must assess the cost of adding another employee to the payroll against the cost of outsourcing. It also needs to consider ongoing IT maintenance, planned upgrades and system security risk management.”

Brown reckons that since many family offices are an extension of a family’s operating business, they can piggyback on its IT staff to handle technology needs and issues as they arise. In this case the IT manager is on site, available and familiar with the team’s hardware and software requirements.

GenSpring maintains a core skill-set in-house for critical business functions, such as investment and operational systems, and outsources to meet project demand. “We selectively outsource specific infrastructure functions,” says Trinchet. “We have found that this allows us the flexibility to best respond to the ever-changing business needs of the family office industry.”

Laird Norton Tyee also maintains in-house IT staff while outsourcing specific functions, but Frizzell reckons outsourcing too much of its technology infrastructure would run the risk of limiting the company’s ability to meet client needs. Thompson says that as a boutique firm, Greenway Family Office has chosen to outsource all of its IT services. “This allows us to manage our costs more effectively while also being able to focus our attention on what we do best.”

Another big issue is finding the right software for the job. “I know of several family offices who felt it necessary to design their own systems, while others are happy with off-the-shelf products. We are using a combination of both,” says Thompson.

Paul McKibbin, managing partner of consultancy firm Family Office Metrics, says many family offices have tried – and failed – to develop their own software. “They believed they could build their own solution, but sustaining the necessary development work is just not practical. Similarly, the typical family has neither the infrastructure nor the IT resources to build an in-house system, so integration of off-the-shelf applications is a big issue. Systems tend to be specific to asset classes, so we often need to integrate a number of ledgers. We look at asset allocation closely during the course of an integration project.”

Risk management is the real sweet spot for fund managers, he adds. “There is huge competitive advantage to be had in terms of portfolio construction and analytics.” Brown says every new client asks for enhancements to accommodate their unique processes and approach, whether it is in accounting, portfolio management, reporting and bill pay, or integration with custodians. He reckons that off-the-shelf products are completely inadequate in serving the needs of complex firms, referring to limited databases, slow processing speed, lack of functionality and poor reporting as examples of their shortcomings.

This view is shared by Denton, who reckons many family offices struggle to find the perfect solution. She says the challenge is effectively bringing together a general ledger, trust accounting, performance reporting, cash management, customised reporting tools and customer relationship management capabilities in a single package.

The most appropriate solution depends on the office’s priorities and goals, reckons Frizzell. “If it provides a high degree of customised service, integrating best-in-class applications will yield individualised, high-quality results. Alternately, family offices that use a standardised approach with clients often find that a single umbrella application provides a simpler solution.”

Lonsdale says software needs to be designed specifically for the private wealth management technology workflow – “there are new technologies emerging that are specifically designed for this environment”. Trinchet adds that the complexity of the family office – the many service offerings, the unique requirements of families, family dynamics and broad range of investment needs – makes it difficult to find pre-packaged solutions that can satisfy all needs. “There are emerging technologies that allow for customisation in the client relationship management system and portfolio accounting space that can get a family office part of the way there, but integration of best-of-breed systems is often required to meet the diverse needs of complex, multigenerational families,” says Trinchet.

The Stonehage experience has been that there is no plug-andplay solution, says Andrew Rodger, executive director of the MFO. “We use third-party software, but as part of a proprietary reporting system developed by a large team of IT and accounting specialists leveraging more than 30 years’ experience.”

According to Trinchet, software vendors could improve their products by being the best at what they do. “Providers are beginning to bundle several functions together, which works well for smaller implementations. But when a business grows and scale becomes a factor, this is not always the best approach. In most cases, bundled solutions tend to dilute quality – in other words, it is rare for the quality of a bundled function to come close to matching a best-of-breed system. Providers should focus on their core competency, although providing easy ways to connect their data to other providers makes integration of systems very attractive.”

Frizzell, too, says the world of family office software is not quite perfect yet. He wants improved and simplified maintenance of software – and says he is constantly looking at new software packages to see if there are better options.

But Thompson is more complimentary, suggesting that technology offerings in this space have come a long way in recent years. “There are many good options available to meet the needs of family offices and it seems this competition is driving vendors to constantly improve their products, which is great for us and the families we serve.”

Despite its undoubted usefulness, technology is an enabler of, rather than a substitute for, decisions made by humans, says Rodger. “Technology enables data to be collected more efficiently, but also presents risks in terms of security, confidentiality and over-reliance on software. Each family is different, but they all are trying to find ways of giving the best people the technological tools to do their job – in the end it is still about those people exercising professional judgement.”

Family office technology

The first step in any information technology project is to document your system’s needs and requirements, says Charlotte Denton, senior vicepresident of Northern Trust’s wealth management group. The more detailed the description the better. Your goal is to find software with functions and features that match your requirements, which also includes examining the size of the family office and the complexity of the investments that will be made.

For small offices, cost can be a big factor, whereas in larger offices that manage complex investments, customised software functionality can be vital. Many systems are built for more generic investment managers or hedge funds, so the software companies that tailor their product to work specifically for a family office will have an advantage in this space. In addition to features and functionality, other important characteristics are strong helpdesk/technology support and updates/enhancements.

When looking for a software systems provider, Laird Norton Tyee seeks out systems with strong market share and financial stability. It is also important to explore the system’s features and how these align with your needs, says the company’s director of technology, Bill Frizzell.

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