Due diligence is everything

In the first week, we looked at the first two pitfalls that Single-Family Offices (SFO) need to avoid, specifically the mistake of prioritising individuals over objectives and neglecting to create a mission statement. Last week it was the turn of the chief executive and the mistakes that SFO should do their best to avoid. 

This week we are looking at details that are crucial but all too often overlooked – the nuts and bolts of IT security and overlapping responsibilities between the Chief Investment Officer (CIO) and the investment committee. 

Misstep #5: Overlooking Reporting and IT Infrastructure

In family offices – just as in corporate businesses – reporting and IT infrastructure often serve as the organisation’s Achilles’ heel. Challenges such as digital threats, data protection, information security, and maintaining confidentiality are particularly acute in the family office context.

Unlike corporations that often rely on integrated Enterprise Resource Planning (ERP) systems like SAP or Oracle, Single Family Offices typically use Microsoft Suites. While useful, these tools are insufficient to manage, control and share data effectively, both internally and with external stakeholders.

The low level of adoption of some advanced technological solutions suggests that many family offices are still working with older, probably less efficient, systems and processes is a point that came through clearly in The Family Office Operational Excellence Report 2024 from Campden Wealth and AlTi Tiedemann Global. 

“The older generation doesn’t see investment in new technology as worthwhile so long as the existing processes are working. Consequently, none of our technology can really be described as cutting-edge,” said the Chief Operating Officer of one midsize Single Family Office in the US. 

Only one out of four family offices claims to have leading-edge technology for both investments and operations. Perhaps more alarming, 42% indicate that they have neither leading-edge investment nor operational technology.

To highlight the complexity in the realm of consolidated investment reports, consider that at the time of writing, we have identified approximately 40 service providers in this space, many of whom have developed their own consolidation tools.

These providers often market their solutions with claims like, “We are an SFO; we developed this for ourselves, so it will work for you.” Ironically, this contradicts the widely accepted notion that each SFO is unique, making a one-size-fits-all approach problematic.

Due Diligence is the key to defining requirements before diving into the software market. This allows the Single Family Office to conduct a more effective gap analysis, identifying both the added value and the limitations of potential solutions. While it’s tempting to seek insights from service providers, it’s essential to complete the initial groundwork first. 

Many SFOs make the mistake of simply asking what software other Single Family Offices use as a shortcut. However, as will be discussed next week, each family office has unique needs that are unlikely to be fully met by adopting another SFO’s model.

Neglecting the intricacies of reporting and IT infrastructure can lead to significant vulnerabilities for family offices. It’s essential to conduct thorough due diligence and recognise that each SFO has unique IT and reporting needs. By doing so, family offices can better safeguard their data and operations, ensuring long-term success and security.

Misstep #6: Overlapping Roles of CIO and Investment Committee

A common issue in family offices is the overlapping responsibilities between the Chief Investment Officer (CIO) and the investment committee. Driven by a desire for influence, the committee often oversteps its role, becoming overly involved in investment decisions. This intrusion undermines the CIO’s performance and erodes accountability, contradicting the principles of good governance.

To understand this issue better, it’s helpful to examine not only the family office itself but also the surrounding governance ecosystem, which often includes a family board, a family council, a family assembly, as well as various committees, including the investment committee.

Family offices vary in how they manage assets. Some handle it internally, while others delegate this role to a specialised investment office. This decision often hinges on the availability of skilled professionals, particularly in investment hubs.

Given the high compensation that skilled CIOs can command in the asset management industry, smaller family offices may find it challenging to attract top talent. To address this, the industry has developed outsourced CIO services, providing families with a dedicated team that leverages existing infrastructure.

The Campden Wealth and AlTi Tiedemann Global report found that the services most commonly outsourced by family offices are wealth-related, typically legal, estate, and tax planning. More than 60% of family offices use external vendors to provide these services. Administrative services such as IT and accounting are also extensively outsourced. Almost half of all family offices outsource at least part of their investment-related needs. 

As the founder of a midsized Single Family Office in the US said: “To be an office where you do everything in-house works out to be very expensive. Also, you need a constant workflow to keep people busy all the time. We do what we do best in-house and outsource everything else.” 

It’s crucial to acknowledge that few family offices can cover the entire investment landscape comprehensively. Therefore, each office must identify its focus within the investment process.

The most effective way to delineate roles and responsibilities is through an Investment Policy Statement (IPS). Contrary to the common misconception that the IPS focuses solely on investment objectives – such as cash flow, relative and absolute performance, reference currency, or fiscal considerations – the document actually has a broader scope. The IPS not only ensures transparency and accountability but also serves as a vital communication tool for all stakeholders, including the family. It aids in identifying any gaps or weaknesses in the investment decision-making process. In short, if your investment strategy has shortcomings, the IPS will help you pinpoint them.

Overlapping roles between the CIO and the investment committee can lead to governance issues and reduced performance. Clear definitions of roles, often outlined in an IPS, are essential for maintaining accountability and achieving the family’s investment objectives.