Future-proofing has to be front of mind as family offices upgrade their technology, but this rests on first properly defining their needs.

Here, Gemma Leddy, partner-in-charge, PKF O’Connor Davies Family Office; Marc L Rinaldi, partner-in-charge, PKF O’Connor Davies Family Office and Thomas J DeMayo, principal in the Cyber Risk Management Group, explain why this is a multifaceted question.

PKF O’Connor Davies works with the whole spectrum of family offices, providing accounting, reporting and Virtual Private Office services from the “entry point” up to those managing multiple billions. Yet as Marc L Rinaldi observes, they are all now increasingly united in one aim: to fully embrace technology as they professionalise.

While the model is predicated on durable advisor relationships, Rinaldi sees family offices increasingly realising the folly of relying too much on people – both in terms of the manual “workarounds” necessitated by inadequate systems, and “key man” risk. “Family offices have historically relied on veteran personnel to execute very complex investment and tax accounting tasks using manual processes and Excel spreadsheet formulas,” he says. “They are now seeing the cost of that can be too high if they are basing investment decisions on poor information or they have to fear key people leaving. This will only accelerate as wealth passes down to younger generations primed to make radical change and embrace technology.”

Initially slow to digitise, soaring levels of investment confirm that wealth managers now very much see technology as the key to thriving (and even surviving) amid frenetic change in regulation, investment trends and client preferences. But where family offices share many of the same pressures pushing the broader sector to modernise and automate, they are under particular pressure to make the right technology choices, explains Gemma Leddy.

High-stakes decisions
She first notes the high financial stakes, given that best systems cost at least $75,000 to $150,000. Then there is the significant time investment that a typically small team must make. “It could take a year or more for software to be fully implemented, with the staff trained, history backfilled and the specific reporting formatted,” she says. “With a significant investment in cost and time, they really need to ensure that the software is going to meet their needs for many years.”

Although future-proofing should be the aim, Leddy still sees a real requirement for family offices to make sure any purchase will in fact solve their current issues - not least because “these aren’t huge organisations and they don’t have the bandwidth to dedicate people to software that doesn’t work”. But before deciding if a solution really is worthy of the name, family offices must first accurately define what their needs are.

These may be incredibly broad, Leddy points out, encompassing financial management, accounting and reporting, tax planning, compliance, transactional support, lifestyle, governance and wealth transfer, not to mention the very wide range of asset classes ultra-high net worth Individuals tend to own. In her view, one software system therefore is unlikely to meet all of these requirements – or at least not with “all the bells and whistles” – meaning that institutions need to focus on the functionality they absolutely require.

According to Leddy, family offices must deeply ponder the deceptively simple question, “What are we trying to accomplish?” and in so doing answer many more about what information needs to be managed and what it is ultimately for, along with who will use and run the software. Any proposed solution must then face off convincingly against this requirement set, with costs set against the benefits likely to be actually achieved in key areas such as data management efficiency or investment analysis.
 
Rigorous testing required
The specifics of each family office’s requirements might mean dedicating six months to this discovery process, says Rinaldi, with extensive software beauty parades likely to be necessary after that. This process may take a year, he concedes, yet rigorously testing vendors’ claims against reality is the only way to avoid buyer’s remorse.

“Key to due diligence is really understanding what a piece of software does and testing that it functions as promised,” Rinaldi explains. “You may have unusual transactions, meaning that a system won’t work quite the way you’d hoped, for instance. It may take a little longer, but you must do test cases working with the system.”

The result otherwise is “a lot of different software solutions pasted together”, Rinaldi continues, giving reconciliations as a classic example of good-looking dashboards often concealing fundamental flaws.    

“Many systems don’t capture and reconcile data from cash transactions effectively, let alone generate meaningful reports in one place,” he says. “Imperfect data-scraping tools also very often create more work than they save.”

The uniqueness of each organisation’s requirements – and that they are “used to seeing things their own way” – should mean that very close attention is paid to a system’s configuration capabilities, says Leddy, since inflexibility inevitably leads to the aforementioned layering of solutions.

Yet they also need to understand the underlying costs of customisation and seek a provider who can accommodate this requirement. “Establishing an understanding of your true needs will help achieve the right configuration early on,” she explains. “If you require special reports designed, get this done ‘officially’ so resources aren’t sucked into making changes each month.”

Assessing internal capabilities
Clear-sighted internal evaluations are in fact the crux of a robust technology strategy – and where many have gone awry – notes Thomas J DeMayo. It may be that existing staff cannot handle an implementation without outside help, he explains; or indeed, they may not be best placed to operate new software at all, which is one reason why outsourcing is on the rise. “The sustainability of any solution is key,” he advises. “A family office gearing up for technology change needs to evaluate their staff’s experience and capabilities, and remember the requirement for cross-training and back-up.”

As Leddy observes, this discovery process should have the very welcome side-effect of helping to secure the high level of staff buy-in required for technology upgrades to be successful. But in fact, expectations need to be robustly managed for all parties, particularly how fast vendors will resolve emerging issues. “Family offices are so unique with so many variables that you can’t deploy a ‘cookie-cutter’ approach, and that’s part of the reason why so few systems can claim to do everything well currently,” says Leddy. “Therefore, a lot of future-proofing is about finding providers you can go on a journey with.”

Gaining the confidence to jump in
Full co-development between family offices and technology vendors is now common, an approach which takes to its furthest extreme a credo Rinaldi sees as vital: that relationships have to be true partnerships which will evolve with the business (and its operating environment).

“Family offices might be fearful of jumping into new technology since they believe that better solutions will come along, but software improvements are most effective for those families that embrace software improvements and new processing ideas,” he says. “If you find a partner working with similar clients and committing to tackling future needs proactively, then you can make that leap [with] more confidence.”

Future-proofing requires a granular understanding of the market and what software capabilities really are out there, which is why a consultancy’s overview can be invaluable.

Ultimately, however, this confidence can only be born of real clarity about the organisation’s mission, now and going forward, the experts warn.

“Future-proofing requires a clear understanding of the market and what software capabilities really are out there, which is why a consultancy’s overview can be invaluable,” Leddy concludes. “However, their value can be even greater in helping family offices formulate a strategy that will work for them today and get them to where they want to be looking ahead.”

In her words, looking at tomorrow, family offices must first ask themselves, ‘"What is our purpose and what do we expect the purpose to be in the future?” And thus, answering questions that are ostensibly about technology are likely to call for much deeper soul-searching first.

This forms part of this publication’s latest research report, Technology Traps Wealth Managers Must Avoid. Download your free copy by completing the form below.