Considerations in selecting a software solution for your family office

Maxime Wattel - May 05, 2016

The CEO that goes shopping for a software solution for their Single Family Office is quickly confronted with the fact that this is no one-size-fits-all buyer’s journey.

It’s true, no two Family Offices are alike, and even within the arena of Single Family Offices in particular, we see a wide variety in terms of size and structure:

  • Most of the time an SFO will be but a small department within the main operating business of the family, having no formal existence, other than in name.
  • On the other end of the scale, a Single Family Office could be a standalone organisation created exclusively for one purpose to be managed independently of any other business activities.
  • Then there are those who might not even be aware of the fact they fall within the range of the Single Family Office, such as affluent individuals and ultra high net worth investors who manage their wealth with just the help of an accountant.

The size and the structure of the Single Family Office varies widely and it can be concluded that their needs regarding software systems will differ likewise. The question is how to find a software solution to manage your unique Single Family Office efficiently in today’s complex wealth management world and how to minimise the total cost of ownership of such a system.

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The Needs of the Modern Family Office

The first step to finding a software solution for your SFO is to consider the challenges of the modern family office environment, and how it impacts your business needs.

Corporate Structures and Complexity

Factors such as the regulations of the country in which you operate and the way in which the nationality and residence of the family office members affects taxation all plays a role in the type of vehicle that is most appropriate for the establishment of an SFO. But, apart from the variety in choice of the main SFO corporate vehicle the assortment of underlying vehicles such as companies, trusts, partnerships, investments and other asset management further differentiates the unique needs regarding setup, management and control.

One of the first requirements of a software system is the ability to cope with the recording and control of the corporate shareholdings and all relevant information such as minutes, returns to registrars, bank accounts, signatories’ information, etc.

The structure of a family office can become even more complex as families advance through more than one generation, and inheritance directions result in a structure resembling that of a multi-family office with a “virtual” allocation of proportions of assets, revenues or costs to second and subsequent generation family members or even sub-family groups.

A second requirement of the SFO’s financial and corporate systems is that they must therefore be able to cope with a “reallocation” of transactions to special vehicles (actual or virtual) created to handle these circumstances. The systems implemented must also possess flexibility in design and be efficient in executing these processes speedily and accurately to minimise human intervention and thus reduce operating costs.

The Independence of the Affluent: Search for Flexibility, Need for Growth and Dwindling Trust

While Ultra-HNWI wealth grew by 19.8% in Asia-Pacific, 19.4% in North America between 2012 and 2013 (World Wealth Report), HNWI wealth is unlikely to be management today by an investment bank or even more than one external asset manager, without the active control and participation of the owner.

An increasing lack of trust in these institutions and the search for more flexibility – not to mention the exorbitant costs of management – have added impetus to the expansion of the Family Office industry. The existence of an SFO and the consequent control of investing activities has resulted in aggressive negotiation of brokerage, custodian and other fees.

Another change in recent years is that Family Offices are moving away from the objective of preservation of wealth to that of growth. Whereas the strength of the equity markets has helped investment in that asset class; private equity, commodities and alternative investments have also become popular instruments to invest in, globally. In increasing search of alpha, many SFOs have also entered the hedge fund market as well as those of options and more exotic derivatives. Rising real estate prices and art values have spurred SFOs to enter these markets actively.

The software systems used by Single Family Offices are required to not only provide for cash management but sophistication in simulating and tracking the underlying transactions so that analysts can model their forecasts and for back office to monitor operations efficiently. The days of working mostly with Excel spreadsheets are long gone, and Straight-Through-Processing applications are no longer the exclusive domain of large asset managers and banks.

Shift in Responsibility: From Active to Passive Management

Warren Buffet is quoted to have said that, upon his death, his wife should put all his wealth in a trust and more specifically:

“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”

Admittedly he was not the first to have advised passive investment; that is to say tracking one or more market indexes. The argument has raged for years, and faith in active management may now have been lost. More worryingly, it is estimated by some sources that in 2014, only 10% of US investment managers have outperformed the benchmark. We have no doubt that these statistics are similar in other countries, as this perception appears to have become widespread. Create Research, a UK consultancy estimates that around 20% of European pension funds’ money is tied up in passive funds and this must be due in large part to the belief that active management is ineffective.

In the end, it is the Family Office CEO that becomes responsible for managing a complex investment portfolio and making allocation and rebalancing decisions in accordance with policies dictated by the board, trust or family members.

Another essential requirement of software systems for Family Offices is to deliver sophisticated and purpose built reports to provide information on performance, actuals v. budgets, future cash flow forecasting, as well as regular management accounting.

Selecting a Software Solution for Your Family Office

To sum up, if you can identify with the challenges of the modern Single Family Office regarding management systems and financial reporting as discussed above, here are a few important items to include in your checklist when selecting a software system for your SFO:

  • A functionally integrated solution based on a unique technology
  • Ability to integrate to banks, custodians and other third parties
  • Flexible investment management module with straight-through-processing capabilities
  • Robust and easily customisable reporting
  • Powerful accounting and cash management capability
  • Flexibility in design to accommodate the changing structure of the FO through multiple generations

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