First published by Family Wealth Report on November 14, 2019 by Doug Fritz, CEO at F2 Strategy
What is the best technological solution for your family office? There isn’t an easy answer because the needs of family offices are so varied and complex. F2 Strategy dives into this series with you to support your journey to finding the best technology solution for your firm. The first step in this process begins with understanding your clients’ goals, the services they require and the scope of the services you provide.
Family office snowflakes
Typically, family office services begin with investment management, tax accounting and estate planning. Other services handled include property management, day-to-day accounting, payroll activities and legal affairs. Expanded services include family management services (family governance, financial and investment education, philanthropy coordination, succession planning) and personal services (management of household staff, concierge health care, and travel arrangements).
In reality, there is no such thing as a “typical” family office. The industry chides that “if you’ve seen one family office, you’ve seen one family office”, however, the reality is that family offices are much more like snowflakes. Each is unique with their own set of complexities.
Although the level of services provided by individual family offices varies widely, even snowflakes share some level of commonality. At the core of every family office is stewardship. [This is] the responsibility to manage and preserve wealth for the benefit of the family, future generations and philanthropy. The ability to effectively measure and communicate the results of that stewardship is a principal function of the family office and is a primary driver of the choice of technology.
Let’s break it down: solving for “why”
The equation is simple: Starting value + Y = ending value. However, solving for Y (or the “why”) isn’t quite as simple as it looks.
At the highest level “why” can be broken down into two components: Net cash flows + total return. Each of these components can be broken down into greater and greater detail, finally culminating in the granularity of individual transactions and investment positions.
How technology falls into the equation
Ideally, a technology solution would address both sides of the equation on a single, fully integrated platform. In reality, a single solution that proficiently handles both accounting G/L (net cash flows) and investment performance and analytics functions (total return) is a unicorn; they don’t exist. Vendors tend to gravitate to one side of the equation or the other. Below is a list of some of the more popular vendors catering to family Offices and their level of proficiency in each area:
Defining your organization
Now that you understand some of the nuts and bolts of the technology equation to success, deploying a single solution may not be possible. Choosing which solution or solutions are best for your unique needs depends on how your family office defines its competencies, services and goals. Family offices tend to fall into four broad categories:
- Accounting and investment management are both managed externally – The need for an internal technology solution is low.
- Accounting is internal/investment management is external - family office services where accounting is the core competency includes tax support, banking, bill-pay. Accounting is the primary need and driver. An accounting platform with no or light performance reporting could be a possible solution.
- Accounting is external/investment management is internal – family office services where investment management is the core competency include asset allocation, asset selection and risk management. A performance platform with no or light accounting functionality could be a solution.
- Accounting and investment management are both managed internally. There is need for both a competent accounting platform and a performance reporting solution and a way to integrate them.
Steps to success
Once you’ve decided on the type of organization you fall into, how do you choose a partner and build out your strategic roadmap? There are several ways to start down this path:
- Ask your peers – Many of your peers may have faced the similar challenges and decisions you have and have gained experience with their choices.
Tip: Keep in mind, their industry knowledge may not be current, and they may have an inclination to recommend their current vendors to validate their own decisions.
- Conduct your own research. Read journals and articles; conduct your own RFP. No one knows your requirements better than you. The ownership structure, investments types and family proclivities are well known.
Tip: Avert disaster by vetting your set of questions with colleagues and supporting business lines to ensure nothing is missed.
- Engage a strategy partner – A strategic consulting partner can help define your needs, review what your competitors are doing and support your decision process.
Tip: Selecting the right consultant is critical. Make sure you partner with a firm that has a history of industry knowledge (knows the vendors and their strengths and weaknesses firsthand) and will be invested in your success from start to finish.
If your operation isn’t running as smoothly as you would like, your clients are asking for new and innovative solutions or your current vendor(s) are falling farther and farther behind as your requirements grow, it may be time for you to rethink your technology strategy. This piece was intended to begin to lay out the framework in the journey to finding the best technology solution for your firm. In the next part of this series, we plan to dive into more specifics around performance reporting tools and comparisons of available options in the marketplace.