Aspects and Pitfalls Family Offices Should Consider

From AI to blockchain, the technology of tomorrow continues to shape our future and not only impacts our personal lives, but our professional ones as well. Whether or not you’re tech savvy, individuals must embrace these news trends and adapt with the times or risk being left behind. This is especially true for the family office. Gone are the days of using outdated, time-consuming legacy systems. Today, technology is paving the road forward to a more efficient future – especially in the finance industry. 

However, each evolution brings its own set of challenges to overcome and a learning curve. Family offices who have yet to implement technology into their existing operation are faced with a multitude of their own challenges including increased accounting and reporting complexity, data security, generational change, keeping pace with technology, and scaling staff resources. This poses a significant issue for family office and asset management executives who want their organization to deliver the most effective and efficient service possible.

Today’s Challenges

If the past 40 years have taught us anything it’s that major and minor financial crises will continue to transpire, and family offices are not immune to their effects. These external events pose even greater cause for concern when paired with the eternal and inevitable issues unique to family offices, such as succession events. Over the last year, inflationary pressures have challenged asset managers and family offices to reconsider investment strategies in pursuit of NAV protection and growth. Under these conditions, changing investment strategies and redistributing assets quickly is critical, yet many family offices have struggled to do so.

At the end of the day, it comes down to their data management in what can be diverse asset portfolios managed through complex legal and tax structures. Decision-makers rely on data but without technology to automate the process, it can take weeks, sometimes months to collect, reconcile, and consolidate. Knowing where your money is at any given point is critical to staying ahead of the curve and remaining prepared for the next eventual crisis. Ultimately, your strategic goal of protecting or growing your wealth is at the mercy of such unpredictable events.

Benefits of Adopting Technology

To effectively make decisions and streamline complex workflows, it’s important to keep up with advanced tools such as automated processes that can ensure your office and data are up to date. This can help increase efficiency, control internal costs, and deliver a high level of service that family members expect and demand. For example, family offices that adopt the “continuous accounting” paradigm, have the ability to automatically gather data from custodians, brokers, and other sources and post it to a unified general ledger. This allows them to generate reports and calculate NAV without waiting for the period to close as opposed to legacy systems that require manual inputs, resulting in slower, less efficient processes in turn leading to increased costs and a significantly lesser level of service. 

Family offices that integrate technology into their existing systems not only increase overall efficiency, but can benefit from partnership accounting and reporting including sophisticated ownership structures, support for multi-asset class and multicurrency, data aggregation from custodians, brokers, and market data sources, automatic reconciliation between data sources or entities, a unified general ledger that is a single source of financial data for portfolios, workflow automation, and reduced reliance on Excel spreadsheets or error-prone manual inputs. 

Beyond general technology, artificial intelligence (AI) can help family offices achieve even greater success. AI takes away the need to perform tedious tasks, allowing staff to reallocate their time to more paramount projects and better serve the families they support. We’re already seeing AI and even machine learning (ML) being used in everyday finance functions, such as embedding AI and ML into cloud-based accounting software, eliminating the manual effort previously needed with accounts payable and receivable and getting the right information as quickly and accurately as possible to make better decisions. Without the benefits of technology, family offices may struggle to manage the aforementioned partnership accounting and reporting. 

Identifying and Overcoming Economic Threats

Additionally, one of the biggest threats to a family office is not knowing where their wealth is. This can cause great damage to that office and create a real threat to families as they often receive wealth reports weeks or even months after a fiscal period has closed. In the current economic climate, it could be disastrous if you cannot rebalance your portfolio in minutes simply because you don’t know where your portfolio is.

It’s important to focus on reporting excellence and financial control to identify and prevent threats. The industry has industry-wide metrics or KPIs to measure these factors. However, now there are tools that can help family offices assess their performance in these critical areas. By integrating technology into their current management processes, family offices now have a solution that can improve their reporting and financial control, allowing them to quickly and accurately answer the question “where is my money?” 

Some threats that face the family office are out of their control – such as a recession which can change the ways family offices invest and cause them to reevaluate their investment strategies and asset allocations. Family offices may become more conservative in their investments during a recession, focusing on preserving capital; rather than seeking high returns. They may also shift their investments towards assets that are considered safer during times of economic uncertainty such as private equity.

To make informed decisions about changing their investment strategies, family offices must have a clear understanding of their current financial situation. In the real world, few family offices have this level of insight due to challenges with reporting excellence and financial control. By improving their performance in these areas, family offices are primed to have a better understanding of their current financial situation and make more informed decisions about how to adjust their investment strategies during turbulent times.

Measuring Your Family Office’s Performance

Additionally, family offices should review its risk management processes to ensure that they are robust enough to handle potential economic shocks and assess its liquidity position to ensure it has sufficient cash reserves to weather any potential downturns. Effectively evaluating these areas relies on the ability to measure performance. As Peter Drucker famously said, “What gets measured gets managed.” 

To establish a plan and get ahead of economic challenges, family offices should focus on developing and implementing Key Performance Indicators (KPIs) which allow them to measure their effectiveness in areas such as reporting excellence and financial control. By regularly measuring and monitoring their performance in these areas, family offices can identify opportunities for improvement and take the necessary steps to address any weaknesses before they become major problems.

Assess the quality and financial reporting of your family office here