The implementation of data isolation (insulating cones or ‘Chinese walls’) within one larger firm, is a practise most of us are familiar with within the context of legal, banking and asset management firms.
By limiting the exposure of data to only the necessary parties, organisations can keep their slates clean of conflict of interest issues, insider trading, inter-departmental abuse of power, and violation of client privacy.
While these issues are most often discussed within the legal, asset management and banking industry, nowhere is the matter of data insulation cones as pertinent as it is within the family office scenario.
The Risks of Insufficient Data Insulation within The Family Office Software
Legal expert in civil justice Elsa Kelly, explains that “the term ‘Chinese wall’ is a reference to the procedures taken by a firm to prevent information obtained in the course of acting for one client being disclosed to other personnel in the same firm who are acting for other clients to whom that information may be important.”
The family office is often a one-stop-shop, fulfilling various professional services for their clients; legal advice, financial services, legacy design, emergency planning, and conflict management. This variety of functions performed by different employees within one firm, as well as the complexity of intra-family relationships, mean that insufficient data insulation poses a great risk for the family office:
Where there are families, there is potential for relational conflict. As a family grows to a multi-generational structure, the potential for conflict increases exponentially.
In working with family offices over the years, I have come across even single-family offices who go to tremendous lengths to separate the accounts of different members of the same family. The scenario is not entirely unusual: Eight grandchildren of the original creator of a family office choose to manage their fortunes distinctly within the family office, but they don’t want each other to know what exactly they are doing.
While it is crucial for the family office to have access to all information relating to one family’s accounts to fulfil the family’s unified mandate, individual members’ decisions have to be respected and their privacy protected.
Inter-client relationships and organisational trust
Be it well-intended mention of one client’s activities to another, a report accidentally emailed to the wrong individual, or the deliberate sharing of information with the intent of influencing investment decisions, inter-client data leaks are bound to deal a blow to the family office.
The disclosure of investment activities or information regarding estate planning could prove fatal to the family office’s reputation. At the same time, even the accidental revelation of the identity of other family office clients could be seen as a violation of privacy, chipping away at trust in the organisation.
Conflict of interests
The family office that advises in matters of estate planning of one family member while holding information regarding the investment portfolios of other family members is bound to run into issues of conflict of interests unless client accounts are tightly insulated.
Here again, from an investment perspective it is important for the family office to have access to some global figures of what is happening across all client portfolios and an understanding of what estate planning will mean for future generations. The disclosure of information for these ends needs to be handled with extreme care, to ensure that only appropriate data is disclosed with only the necessary parties.
Data Insulation in the Family Office
In order for your family office to generate trust and steer clear of privacy breaches, your family office must demonstrate to clients and family members that:
Data is isolated for each client.
There is no possibility that information of one client can be accessed by another.
Employees within your organisation are restricted to what they can see.
To these ends, family offices have to think carefully about the software system they employ across all departments and branches of the organisation.
Integrated systems, insulated accounts
An integrated family office accounting software has the value of allowing administrators to set access rights to be implemented across the board. At the same time, it’s important that you choose a system that is flexible enough to allow individual settings for each employee, including restrictions to access client accounts and data which do not directly relate to the individual’s job responsibility.
Insulating employees from accessing multiple clients, and insulating client databases at the bottom level is especially important to ensure that the execution of administrative or accounting tasks such as billing, do not disclose the underlying (confidential) data. For example, the back office employee who calculates transaction fees on an investment doesn’t necessarily need to know what the nature of the investment is.
Centralised Fund Accounting software Across Multiple Branches
Family offices who expand to multiple branches in different locations are faced with a choice of implementing a centralised or a decentralised investment accounting software. From a privacy standpoint, a centralised system is easier to control as policies are identically implemented and enforced in all branches. Additionally, cutting out the need to duplicate a system across multiple offices means that a centralised system is also cheaper to maintain.
Does your family office require a higher level of security than that of a Cloud-hosted system? A private or hybrid Cloud solution would provide you with both the simplicity of a centralised system and the unparalelled security you are looking for.
Tony is a member of the Institute of Chartered Accountants in England and Wales and has worked for many years both in accounting practice as well as in the finance industry. He has a long track record in the application of financial and other software both as an end user as well as a provider of software and services to third parties.