The good news is that, from these ashes, a client-led demand has emerged for greater transparency, faster access to information and improved reporting. Up to date aggregation across a family’s entire wealth is fundamental to understanding exposure and risks, as well as a means to monitor costs more closely. It isn’t that data on investments is unavailable. In today’s world, one could argue that there is too much information; sifting out the relevant is the challenge.
Many family offices face this problem when consolidating investment data they receive from their managers. Investment reports are delivered in different media, at different dates, in different formats, and in different languages. Making sense of them is one of the most pressing challenges facing high net worth investors. Family offices typically employ staff or outside service providers to check and collate this information manually. Some even rely on one person or external consultant specifically to create an overall picture of their asset allocation and exposure, ensuring that the management of all their portfolios is in line with their investment aims. Months may pass before a consolidated picture emerges of the family’s investments, resulting in an impressive volume of paper reports that require time and willpower to study. The information is one-dimensional in format and often ‘stale’, making it hard to spot errors and poor performance. The risks and opportunity costs arising from the delay in adjusting asset allocation and in changing failing managers can be high.
Handling multiple relationships
Managing data within family offices goes beyond interpreting investment statements. Family offices need to:
• coordinate and communicate with their controlling families’ growing range of advisers;
• provide a coherent communication channel to the members of the family with an interest in its wealth;
• report to financial regulators as necessary — a growing number of single and multi-family offices now fall under the FSA and its equivalents;
• understand and react to significant financial events in a timely manner.
So what role is there for technology in offering solutions for communication and control? The answer first requires an analysis of the information flows themselves.
Family office management — the central role of information
In a typical family office, the three key components, each with its own areas of focus are as follows:
• Wealth knowledge — asset mapping, classification of investments, transactions history, portfolio projections and simulations;
• Management processes — account monitoring, cost management, strategic asset allocation, liquidity and debt management, selection of advisers, managers and service providers, communication with family members;
• Family profiling — client-linked data, family dynamics, people inventory, financial objectives, interaction with advisers.
Key benefits of aggregated reporting
Using technology to assemble different sources of information has compelling benefits. It allows automated aggregation of data from external and internal sources, saving time, money and manpower. Data can be presented in a multi-dimensional form. When applied across a number of portfolios, it produces a single, consistent format of reports, along with powerful analytical tools, including:
• measuring performance consistently across portfolios and managers;
• monitoring and controlling exposure
to markets, asset classes, sectors and currencies;
• identifying patterns in securities turnover to spot ‘churning’;
• easy tracking of investment management fees and charges.
Information aggregation can result in improved liquidity and liability management managers whose reports the family offices aim to aggregate. They provide functionality, such as order management, that is often not required and is reflected in the initial acquisition price and ongoing service charges, which can be high. Even with these all-encompassing solutions, investment data may have to be rekeyed into the system rather than simply uploaded onto the platform.
Aggregation by custodian or bank
This solution uses the custodian’s data processing systems. It is generally offered at no cost or as a small basis point fee embedded in the custody charges. Family offices, however, may have to accept a “one size fits all” approach. What’s more, many and the creation of customised reports for family members and advisers from a single validated source.
Reporting tools for control
In its quest for control, the family office first needs to aggregate information from many sources. Technology solutions can reduce the time for consolidation from months to days. The three broad choices on offer are discussed below.
Desktop applications
Many family offices rely on desktop software such as Excel. These are cheap to install and maintain, require little training to use and are adaptable. However, if more than one spreadsheet, with embedded formulae and macros, is used, and data entry is largely manual, computational errors may build up over time. Considerable time and effort will have to be spent on maintaining data integrity across reports. What’s more, the reports themselves are usually only accessible in an office environment.
Institutional investment systems
Family offices may opt to buy a complete investment management system. These systems provide complete sophisticated tools for aggregating and analysing information, but are primarily designed for the investment clients are reluctant to disclose all their holdings to a single custodian whose aim is to increase its wallet share. Clients striving to regain control may see this seductive offer of “free” or low cost aggregation as a surrender of their independence.
New internet-based solutions
There is now a demand for an aggregation solution geared to family offices, advisers and ultra high net worth investors. The choice of European-based systems is currently limited. Our view is that such a system should be browser-based to enable access to data anywhere and at any time from any web-enabled device. Since this solution requires no software installation on office machines, there is no need for training and in-house support. The system should also be modular, with the core module aggregating and reporting on investments. Importantly, its reporting feature should be tailored to suit clients’ specific needs.
It should provide tools for:
• controls on information access by users;
• asset and transaction analysis;
• performance analysis;
• fee analysis;
• cash flow forecasting;
• turnover analysis.
Reporting on investments alone does not satisfy the full information needs of the family office. Provision should also be made for additional modules to include:
• charitable foundations;
• digitized document storage;
• personal accounts;
• non-financial assets (property, art collections, etc.);
• task management (means of tracking service providers’ activities).
Importance of security
Clients are highly sensitive to the confidentiality of this information, so any browser-based system should have several levels of security on access, once connected, and after log-off.
Reporting — new delivery channels
The rate of innovation in information technology is unlikely to slow. The current trend is ‘convergence’ on handheld devices that display text, video and audio. In the last few years, ‘smart’ phones have become standard business tools. Any solution to aggregating information should, therefore, be as future-proof as possible, allowing communication through devices such as Blackberrys and iPhones. The incoming generation of wealth inheritors will demand nothing less.
