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Technology priorities for family offices

This final article in a series of six is written by Mats Berggren, Director of Sales, Advent Software EMEA.

There are several key themes that family offices are wrestling with at present as they face up to this period of extreme market turmoil and uncertainty. Risk though is proving to be an area of particular focus.

According to the recently released Merrill Lynch/Campden Research European Single Family Office Survey 2009, almost half the family offices polled said that asset protection has become their primary concern as they contend with the current crisis and the hit their portfolio values have taken. Meanwhile, more than 60 percent depicted their families’ investment objectives as “balanced” or to “preserve,” with a further 20 percent describing that objective as to “preserve very conservatively.” As a result, the survey noted there was a marked swing away from equities investing and into cash.

But although the SFOs questioned may have become more risk averse in their investment strategies, 74 percent said the actual way they handle risk has not changed. Instead it appears that most have yet to significantly enhance their risk management systems, a large number of which continue to run off Excel spreadsheets. Upgrading risk management procedures was cited in the survey as one of the primary areas of focus for the coming 12 months however.

As it should be, since a sophisticated risk management infrastructure can produce manifold benefits.

For one it will help family offices to better control their various trading risks – market, credit, liquidity, issuer, counterparty and the like – and thus guard against the potential losses they can incur.

There are prospective upside benefits too, since an advanced risk management platform can counter some of the performance difficulties so many investors are facing at the moment by helping them to improve investment returns.

For instance, the Merrill Lynch/Campden Research survey noted that the SFOs featured have been adopting a more defensive stance by reducing their exposure to equities and alternatives. Yet in three years’ time they predicted portfolios would once again look much the same as they have in the past, with the equity ratio rebounding and the cash weighting falling.

However, achieving a more sustainable balance of wealth preservation mixed with alpha-generating returns will be a key feature of successful family offices in the period ahead. And to do that will require a combination of investment innovation, diversification, flexibility and prudence, rather than a pure return to old models.

Which is where a sophisticated risk management system will be an invaluable aid, since it can provide family offices with the tools and confidence to seek out better risk-adjusted returns across a wider spectrum of investment possibilities, whether that be by country, currency, asset class or trading strategy.

Aside from the risk management imperative though successful family offices will need to concentrate their attention on several other areas of prospective improvement.

Cost cutting in particular has taken on a new sense of urgency among organisations of all stripes, given the difficulties they are having in achieving any sort of positive returns in the current climate. As a result, many financial institutions have resorted to widespread headcount culls in an effort to slash expenses.

But for family offices, which already operate with a comparatively small number of staff, improving their cost base is best achieved by making existing employees more efficient. That means introducing automated processes wherever possible to remove the error-prone and wasteful use of manual resources in the family office’s more mundane activities, and freeing them to concentrate on higher-value asset generating tasks.

And reaping operational efficiencies through the implementation of robust yet flexible technology solutions can be achieved in all areas of the transaction lifecycle: in portfolio modelling, portfolio rebalancing, inputting trade data, feeding the portfolio management and accounting platforms, collecting and reconciling transaction and position information with brokers and custodians, generating performance measurement figures and analysing them, generating and sending management and client reports, and being more responsive to and proactive in dealings with client families.

But creating a truly effective risk management environment or achieving the level of operational efficiency needed to meet today’s and tomorrow’s cost challenges is not something that can be achieved in isolation. Yes, incremental improvements are possible by implementing a specific solution to fix a particular problem, whether that happens to be a new trade order management system, a more robust risk engine or a better reporting tool. But the results will always be limited.

Rather, the greatest gains come from having a reliable and functionally-rich platform that encompasses the full breadth and extent of the trading lifecycle, integrating the sundry front- to back-office functions in a virtuous loop of data integrity and operational efficiency. And it is through this framework that a family office’s latent synergies can be fully realised.

Click here to learn more about the Merrill Lynch/Campden Research European Single Family Office Survey 2009

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
Click here to read the fifth article in the series

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