Five operational challenges facing the modern family office
By Darren Berkowicz, SS&C Technologies
Published: 19 June 2023
Advancing technology, cyber security threats, increased financial complexity, talent issues and generational change make running a family office today particularly challenging. This article explores how family offices can master these challenges and deliver high-quality service to family members.
The growth of wealth worldwide has been accompanied by a proliferation of family offices, the primary vehicle for protecting, preserving, and growing family wealth for the benefit of future generations. Much of the commentary on family offices has been devoted to the evolution of investment strategies and asset diversification. Less attention has been paid to the increased operational complexity family offices face. While wealth management is their traditional focus, family offices must also keep pace with complex tax, regulatory and accounting requirements. A family’s growth with each succeeding generation adds more complexity, creating a larger clientele with diverse expectations and demands.
This growing complexity puts pressure on family offices to modernise their operations. The question is how to achieve greater efficiency and control internal costs while delivering a level of service family members expect and demand. To respond, family offices must address five key operational challenges:
1. Increased accounting and reporting complexity
Family office portfolios today are far more diversified than those of a typical wealth manager. Along with traditional equity and fixed-income instruments, family offices are likely to invest in global markets, hedge funds, private equity and other partnership vehicles. Direct investments in businesses and ventures are increasingly popular. Assets also include real estate holdings and hard-to-value collectables ranging from art to automobiles. Meanwhile, managers must maintain sufficient liquidity to meet impromptu demands for cash from family members for big-ticket purchases.
Moreover, family offices need to account for multiple investment entities, which multiply as the family grows. The growing number of separate entities and the complexity of services they entail are the chief drivers of internal costs.
Add to these challenges the variety of tax and regulatory regimes around the world, and you get an extremely complex environment for accounting and reporting. Unfortunately, many offices are stuck in spreadsheet-and-calculator mode or have built proprietary systems which cannot easily adapt to the proliferation of investment types or entities. Technology exists today to support multi-asset class strategies, streamline and automate complex workflows and deliver a holistic picture of each client’s wealth.
2. Data security
Wealth owners place a premium on personal privacy. Family offices have a responsibility to protect not only their clients’ assets, but also their confidential information. This is a major challenge in our interconnected world, where virtually every endpoint is a potential target for cyber criminals. In the 2022 RBC/Campden Wealth North American Family Office Report, 37% of family offices globally reported they had experienced one or more cyberattacks over the preceding year, while 31% said they do not have a cyber security plan in place.1
Considering the amount of wealth family offices control, and the many electronic connections they have with financial institutions, they are likely to be targets of hackers and thieves. Are your security controls adequate to protect clients not only from existing threats, but from increasingly sophisticated and nefarious emerging schemes?
3. Generational change
According to the Family Office Exchange, generational transition is a top concern of family offices today, yet fewer than one-third have a formal succession plan.2 As families grow, their wealth cascades over increasingly large and diverse generations. Besides creating more entities and increased accounting complexity, family office executives face differing generational attitudes and expectations. Younger family members may be far removed from the founding generation that first created the family wealth. They likely have very different ideas about wealth and money. Many are interested in steering their wealth to good works through impact and ESG-driven investments.
They certainly have different ideas about how they receive and consume information. Where older generations may prefer periodic paper or PDF reports, the younger generation has grown up with real-time, interactive information at its fingertips on demand. Family offices must be equipped to satisfy this range of expectations, with the flexibility to deliver reporting through the preferred channel of each family member.
This flexibility is especially important for younger family members who may question the direction of the family office or choose to leave the fold entirely and seek wealth management counsel elsewhere. To retain these clients and their assets, the office must be able to demonstrate it is technologically up to date and can readily deliver the information younger members want in the way they want to receive it.
4. Keeping pace with technology
Technology can play a crucial role in addressing each of these challenges. However, a comprehensive portfolio management, accounting and reporting platform represents a substantial investment – not to mention add-on solutions for trading, analytics, risk management, compliance and other functions. Moreover, given the pace of technology, offices must constantly review their systems to ensure they are not at risk of falling behind or outgrowing their capacity.
Family offices need to ask if it makes sense to own and maintain their own technology infrastructure, or if they should find an outsourcing partner to take on that burden so they can focus on the family financial objectives.
5. Scaling staff resources
Family offices also need to determine the different skills and expertise they need within their own walls. Pressure to keep headcount low means focusing on the core mission of wealth management. Yet running a complex wealth environment frequently calls for specialised tax, accounting, compliance, systems and operational expertise, as well as in-depth knowledge of specific investment instruments and markets. In the wake of the pandemic of 2020-21, the investment industry has experienced a talent shortage and difficulty filling key positions, from portfolio management to operations and IT.
In addition to their internal resources, family offices must have access to trusted professionals whose knowledge and capabilities complement and augment the strengths of the in-house team.
The outsourcing option: what to look for
In the face of these challenges, many family offices are choosing to outsource some or all of their core technology, as well as their middle- and back-office operations. On the technology side, outsourcing can produce cost savings compared to traditional software licensing, implementation, training, maintenance and upgrading, while also reducing the need for IT staff. On the operations side, outsourcing can deliver significant efficiency gains without the need for additional back-office staff or specialised expertise in operational functions.
Not all outsourcing providers are the same, however. When evaluating providers, it’s important assess whether they have the resources and industry expertise to serve as an extension of your office as a true partner. Key characteristics to look for include:
State-of-the-art technology: The systems and solutions the provider operates on your behalf should be of industry-leading calibre and reflect an in-depth understanding of your business needs.
Commitment to continual innovation: A key reason for outsourcing is to relieve the need to keep current with technology – which means your outsourcing provider must assume that responsibility. Does the provider have a track record of continual reinvestment in technology?
Dedicated service and support: Be sure the provider offers 24/7 support with people who are thoroughly trained on the inner workings of the solutions you depend on.
Comprehensive accounting and reporting: Can the provider handle all your calculations and information requirements, including tax, partnership allocations and performance, and deliver a complete, accurate picture of each family member’s wealth?
Flexible reporting options: The provider should have hard-copy, web-portal and even mobile reporting capabilities to satisfy the requirements of different family generations.
Security: The provider should be able to demonstrate audited security controls complying with the highest industry standards for protecting data at rest and in transit.
Comprehensive operational services: Does the provider have the breadth of capabilities to take on any or all of your operational needs? Ideally, you want to be able to outsource to a single provider.
Customisable co-sourcing options: You may have reasons for wanting to control certain operational processes in-house. The provider should have a flexible, client-focused service model easily adaptable to your preferences.
Complementary expertise: Look for a provider to augment your staff resources with experts in accounting, tax and compliance issues as well as operational best practices.
The good news for family office executives is they do not have to go it alone in building out their operational infrastructures to satisfy the increasingly complex demands of multi-generational family wealth. The key is finding an outsourcing provider with the breadth of capabilities, depth of expertise and proven infrastructure to serve as your partner in delivering outstanding service to family clients.
1 Campden Wealth Ltd & Royal Bank of Canada, The North America Family Office Report 2022 (https://www.rbcwealthmanagement.com/_assets/documents/cmp/the-north-america-family-office-report-2022.pdf)
2 2022 FOX Foresight – The 3Ts: Critical Forces Disrupting Our Future (https://www.familyoffice.com/public-resources/3ts-critical-forces-disrupting-our-future)