Family offices (FOs) are institutions unto themselves. This makes selecting and implementing technology within family offices, particularly single family offices that don’t have clients or shareholders to answer to, more challenging than other investment-focused organizations and fund managers.
Fund managers and financial institutions have relatively specific departmental needs, strict, clearly defined governance requirements and business models that would be decimated by contravention of these. On the other hand, family offices often don’t have pressing commercial motivators or an obvious catalyst for change. Their evolution often involves highly manual processes, and the need to improve investment infrastructure is highly nuanced, and the cost-benefit analytics is far less obvious. While most multi-client organizations regard state-of-the-art technology as an asset, investment, or business driver, family offices generally rather consider it a cost.
When family offices decide to implement new technologies, their requirements are often complex, and the demand for consistency is considerably higher than other organizations. This often severely limits software and tech choices, adding to the challenges.
Through recent conversations with some of the most prominent family office technology advisors it was evident that family offices face several challenges related to software and technology. Below are the top issues they agree are most common when selecting and implementing technological solutions and how to overcome them.
1. Make peace with the selection process
Technology solution selections are complex and time- and resource-intensive. Simon Minder of M76 believes that one of the biggest challenges family offices face is “not falling for the sweet poison of a shortened selection process.” He states, “If you only look at the big cornerstones of the solution, this will inevitably lead to big disappointments or project termination. This is then mostly ugly and expensive.”
Recommended For You
To overcome this challenge, Minder suggests that family offices should never take shortcuts or try to circumvent the RFP process. Instead, time and resources should be invested in in-depth solution requirement analysis. Kent Lawson of Family Office Exchange advises that during this analysis, families should strategically examine their technological needs in the coming decade and work backward as this helps define the infrastructure required to serve the office in the future. He adds, “understanding the kind of history and data clean-up that may be involved makes the process very thoughtful.”
These exercises help define the family’s requirements clearly and also aid in providing insight into the “bigger picture”. When this is clear, it becomes easier to identify which solutions may be a good fit.
2. Find software that is both fit for purpose and integrates with incumbent solutions
Shaun Parkin of Hall Road believes that a significant challenge in the technology selection process is finding a solution that is fit for purpose and integrates with incumbent systems. He adds, “Gaining a true understating of downstream impact is also a challenge.”
Doug Fritz of F2 Strategy agrees and has found that family offices tend to want the tools to support their way of working instead of other forms of advisory businesses that are more willing to change their processes to adjust to the tools.
Lawson likens new technology implementation to “flying the plane that you are rebuilding in mid-air” – a challenge compounded by the fact that there are generally only a few full-time employees available to participate.
To overcome these challenges, Parkin advises that family offices understand their actual rather than perceived needs and priorities and conduct a “state of play” mapping exercise before implementation as it’s challenging to turn around once a program is in place. In addition, being open-minded is vital. Parkin’s team often introduces different technology suppliers that may not always be an obvious choice. This allows the family to see outside a narrow supplier list and often gives them insight into what is available.
Frequently these types of complex exercises require help. Lawson suggests reaching out to an experienced team of professionals that can identify the available technologies for a particular stage of change, perform due diligence, and manage the implementation process to meet the needs of the family office.
3. Evaluate In-house versus outsourced solutions
Comprehensive portfolio management, accounting and reporting platforms represent a substantial investment for a family office. This cost is compounded when solutions for trading, analytics, risk management, compliance and other functions in the investment process are added to the solution’s functionality. Given the pace at which technology advances, family offices must constantly review their systems to ensure they are not at risk of falling behind or outgrowing their capacity. The variety of vendors and their offerings adds another layer of confusion.
For all these reasons, Julien Aboude of MEA believes that family offices are increasingly asking themselves if it makes sense to own and maintain their own technology infrastructure or find an outsourcing partner to take on that burden so they can focus on the family financial objectives. Outsourcing can offer cost savings compared to traditional software licensing, implementation, training, maintenance, and upgrading when it comes to technology. It can also reduce or eliminate the need for in-house IT staff.
Aboude adds, “Outsourcing can be a scalable, sustainable way to address these challenges. Done right, outsourcing can reduce headcount while increasing efficiency.” When selecting an outsourcing provider, he recommends that family offices look for several characteristics. These include state-of-the-art technology, commitment to continual innovation, dedicated service and support, comprehensive accounting and reporting, flexible report delivery options, advanced security, comprehensive operational services, customizable co-sourcing options and complementary expertise.
Experts agree that due diligence process is a critical step in making the best possible decisions as time-consuming as it can be. Family offices should answer a variety of questions before proceeding with a decision. These include whether multiple teams can use technology or if the office will require more than one platform. Regarding vendor evaluation, questions like “do they have enough experience working with complex wealthy families?” should be posed. Also, “Can they handle the full implementation of the project and provide sufficient support and data security?”
4. Go beyond technology when it comes to security
Security remains a critical challenge for family offices. A recent Deloitte survey indicates that 38% of European family offices had experienced a cyber attack in the past 12 months. Aboude relates that in addition to the challenge of keeping up with new technologies like cloud storage and transacting over the internet, it is increasingly challenging to protect against threats when using these solutions. The realization that protection is required has sunk in within family offices. However, the gap between this and putting active measures in place remains.
To overcome this challenge at the most basic level often requires help from experienced professionals to implement the latest technologies and cyber security measures. Additionally, both family members and employees need training and should adhere to security protocols. Even with the best systems, breaches often occur due to human error. Therefore, regular security reviews and upgrades must become part of the family office operations.
5. Bridge the generation gap
When it comes to the use of technology in family offices, Aboude notes, “One of the biggest generational differences in how people of different ages prefer to receive information. Older generations traditionally prefer paper copies of periodic reports, whereas younger generations have grown accustomed to having real-time information and interactive capabilities on demand.”
Fritz believes that the next generation will drive innovation. He states, “I have high hopes for the Gen 3s that will increasingly demand better tools, access to data and transparency, which their peers that are working with traditional wealth firms or multi-family offices (MFOs) enjoy. As a result, we have a ‘reconning’ in the works over the next few decades where FOs must adapt or face pressure from lower-cost/higher service MFOs.”
Still, in the interim and particularly when overlap in generations within the family occurs means that families have to find solutions that can deliver information in various formats. Being aware of this in the research phase helps to eliminate issues later on and ensure engagement across the age gap.
When it comes to technology, family offices face a myriad of challenges. However, investing in planning, due diligence and expert advice can help families overcome these challenges while saving time and resources.