New Generation Of Tech Offers Better Investment Management, Reporting Solutions For FOs

Bob Ellis Fast Track Advisors LLC Principal 10 May 2011

New Generation Of Tech Offers Better Investment Management, Reporting Solutions For FOs

Family offices are among the most difficult financial services organizations within which to manage investments, writes Bob Ellis, a principal of Fast Track Advisors. But new-generation systems can decrease the expense of the family office, while improving accuracy and, hopefully, investment performance.

Family offices are among the most difficult financial services organizations within which to manage investments because of the complexity of the relationships among entities and the wide diversity of assets they hold. Until now, solutions from single providers have been prohibitively expensive, forcing most family office managers to cobble together a combination of spreadsheets, generic general ledger software and commercially-available investment platform solutions designed for other types of financial service providers.

Reasons for the family office management complexity

Family offices hold a variety of different types of assets. These include trusts, private equity investments, hedge fund participant interests, public company equities, fixed income investments, real estate, oil and gas properties, timber, and even yachts and planes. To try and fit this wide variety of asset classes into a traditional investment platform designed primarily for publicly-traded investments has proved difficult, and the “work-around” solutions developed in-house by the family office staff usually prove sub-optimal.

Complicating matters further, individual family members often own non-traded investments (such as hedge fund interests, private equity or limited partnership shares) where ownership may be held either directly or through a variety of entities, including partnerships or trusts. Keeping track of these holdings, valuing them, assigning interests appropriately, and auditing the outcomes can be extremely challenging.

In addition to investment management, family offices often provide specific personal services, such as paying personal expenses, hiring staff and managing properties while family members are not in residence, all of which must be charged to the appropriate members as checks are cut and expenses tracked accordingly.

To handle this level of complexity, family offices are often forced to utilize expensive staff and manual spreadsheets to manage the family’s wealth, raising costs and subjecting transactions and outcomes to potential errors. When the time comes to report to the family members, these jerry-rigged systems are then combined with reporting tools not intended for all the different asset classes. In order to better handle the recording, analysis, investment sharing and valuation requirements, new improved tools are emerging for family offices to be more productive, more accurate, and able to generate ad hoc reports for family members and their advisors more quickly.

Potential solutions

Family offices need to provide greater structure to the complex data that covers all these different types of assets and accounts. In my opinion, a best practices solution is one that could do the following:

Handle every type of asset that a family office might utilize or invest in

Handle every type of family, corporate and trust entity

Handle every type of hierarchy and nested relationship

Handle disbursements and expense management

Have all these systems fully-integrated to minimize human intervention

Have existing interfaces with specialty systems such as pensions, oil and gas, and real estate management

Create compliance, audit trails and review disciplines to better manage the assets

Be able to create detailed holdings and performance reports for members and third-party advisors in an ad-hoc manner

Be available to the family office in an in-house or outsourced solution

How should the family office bring all these capabilities together? One solution with which I am familiar involves the use of a trust accounting platform combined with a hedge fund accounting system and a general ledger, all directly integrated to minimize the level of work and the potential for errors. Why three separate accounting systems? I agree it may appear to be confusing, but let me explain.

The trust accounting platform handles the investment management, trading, compliance, tax lot accounting, performance measurement and automated account review, plus provides reporting and statement generation. Hedge fund accounting engines are designed to handle complex partnership structures and complex book and tax allocations. These two types of systems are frequently intended to work together, as well as provide data seamlessly to the general ledger system.

The integrated solution works in the following manner for all assets and management responsibilities of the family office:

The trust accounting platform becomes the books and records of all the family members and entities complete investment and asset accounts

All asset classes and individual assets  are set up on the trust accounting platform

By utilizing nested hierarchy capabilities in both the trust and hedge fund accounting system, assets on the trust accounting system become accounts on the hedge fund system, and vice versa, at different levels of the overall family hierarchy

These nested hierarchies are set up in all three systems. Within the trust platform, they are created as accounts holding specific investments; within the general ledger, the accounts tie to the hierarchies within trust accounting system; within the hedge fund accounting platform, the accounts are set up as a master/feeder structure

Publicly-traded investments and separately managed accounts (SMAs) can also be managed on the investments module of a trust platform. The trust accounting platform can provide analytical investment tools and improved decision-making through rebalancing, as well as other investment alert systems

Hedge fund and private equity investments are managed within the hedge fund accounting platform

A chart of accounts is created within the general ledger system

Once everything has been set up within the three systems:

The transaction data from the trust accounting system feeds the general ledger system

All income, expenses, gains and losses flow from the general ledger system to the hedge fund accounting system where allocations between entities are calculated

These allocations are in turn fed back to both the general ledger and trust accounting engine as necessary

Reports are prepared on a client-centric basis, whether they be individuals or other reporting entities

Family office members and staff have access to their information through both internet and smart phones

One additional benefit: if the family office decides to utilize a solution similar to one described above, very often the complete solution can be outsourced to a third-party vendor. These vendors range in size from a small trust operations outsourcer to State Street.  The family office staff simply sets up the assets and relationships, then instructs the outsource provider in matters such as distributions and expense management.

Of course, all publicly-traded investments can be maintained at the family’s choice of custodians and reported in a variety of currencies.

The result

The net result from tying these three systems together in the manner described is that there is no asset class or intra-family relationship (personal or corporate) that cannot be managed. Family offices can invest in all complex asset classes including hedge funds, private equity, and commodities such as oil and gas, and timber. Meanwhile, productivity for the family office skyrockets due to full integration and the decreased amount of time spent manually calculating shares and performance on spreadsheets. Questions of accuracy are also greatly reduced, and family members can rely on the statements and performance reports generated by the system. Other benefits are that strong compliance and account review capabilities ascertain that the various goals and objectives set by family members are met and reported on, and family office staff time spent reconciling account statements with custody reports is greatly reduced through auto-reconciliation features. These new generation systems that have already been developed to support extensive integration decrease the expense of the family office, and perhaps staffing, while improving accuracy and, hopefully, investment performance.


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