How to overcome technological stalemate in Australian family offices
Though the family office market in Australia continues to go from strength to strength, it is a challenge for software providers to see the value in expanding to a vast country with a highly idiosyncratic financial system. At the same time, there are also challenges to helping established Australian family offices to invest in a high-performing tech stack. We explore solutions to this technological stalemate.

By Shaun Parkin
Published on Simple November 30, 2020

Though the family office market in Australia continues to go from strength to strength, it is a challenge for software providers to see the value in expanding to a vast country with a highly idiosyncratic financial system. Yet despite the challenges of a high taxation, Australia has one of the largest pension pools in the world – with the superannuation assets in Australia at 2.9 trillion USD as of June 2020. And this has not gone unnoticed by asset managers.

At the same time, there are also challenges to helping established Australian family offices to invest in a high-performing tech stack. When the rubber hits the road, it’s fundamental that family offices have the necessary solutions to gain an operational view of their portfolio. Ultimately it’s a question of what is worth paying for.

Risk

We speak of risk when we talk to family office clients about building infrastructure. The risk of data corruption, of collusion, of exposure management…the list goes on and all come within the remit of accurate portfolio reporting and data analytics.

Many family offices complete the demo dance and then baulk at the fee quote. Unlike when they choose investments, there is a lack of risk vs return analysis conducted for the platform. As a result, the status quo remains. Would they baulk at an MER of that size? Wouldn’t the yearly pay of someone that ends up doing that job be better spent on future proofing the office technology?

When clients provide a portfolio, it is often a case of determining the best way to push and pull data. What platforms can communicate with others — and which ones aren’t compatible. Can we aggregate these? Or is it a case of picking the best of the legacy suppliers and building a better network around them?

If you ask any provider of wealth or technology services, they can do it all. But when  you look under the hood, you see that they are actually a network of suppliers tied together under one  label – and it may actually be better to use those firms directly.

“There is a need to connect treasury risk management and investment risk management. We cannot rely on counterparties to provide the aggregated solution that covers our main issues of robust infrastructure and proper process and systems.”CIO of Perth based Family Office

Partnerships and piecing it together.

For a lot of family offices, the stumbling block is costs; both frictional and monetary.  There is no bleeding edge direct to client solution in Australia because no one has been willing to pay for one yet.  When speaking to some of the global players, you might find that many have had conversations with families that start off very positive only to peter out when the first quote comes through. Family offices end up being the direct clients of platforms that have limited interest and knowledge of their needs, as they are more concerned with the much higher margin wealth management market.

The current tech stack shows that there is a need for partnerships and piecing together providers to create an optimal solution. Whilst it might be tempting to use one of the highly sophisticated offshore platforms, they often lack local tax integration and client service staff in the country and can be high cost when compared to the current systems.

Of the current solutions available, it’s also difficult to find a platform that is not owned by an investment product issuer such as a bank or wealth manager.  Custody banks don’t seem to be interested in providing a one stop reporting solution for the mid-market, anymore as margins are squeezed to the point of no return.

Family Office Technology

One of the oft cited reasons for setting up a family office is control and customisation of investments.

Bite the bullet

Change is often the catalyst for any review of the family office technology. We might see a family member or key adviser move away from the investment portfolio, or a younger family member increase their interest in learning more about the way the family assets are invested.

Sometimes, there is an event that causes a spike in volatility and reduction in liquidity. This provides the investment and finance office an insight into how little dynamic, accurate information on the portfolio they have and puts an unwanted handbrake on deploying capital.  Nothing sharpens the focus like a question you cannot answer. The mismatch of investment policy and actual risk profile is hard to determine when there is no ability to accurately view the portfolio as a whole.

One of the oft cited reasons for setting up a family office is control and customisation of investments. Whilst this idea is attractive on several levels,  it also requires technology that can manage the idiosyncrasies of this investment style. Unfortunately for local family offices, there is a lack of solutions that fit these criteria and most global providers are not available without a “suck it and see” attitude.

In all cases, the operational infrastructure of the investment office is rarely viewed with a critical eye – notwithstanding the  less sexy components such as data feeds, tax integration and accurate benchmarked performance.

Items that are of major importance to family offices such as corporate actions that may affect a company, they own significant stakes in, are different to that of the adviser where the investors are much more passive in their holdings.

What’s good for the client

In Australia, we have found that adviser focused platforms and wealth managers will try to ring fence assets or become a custodian of these assets. If it’s aligned to a product provider, or you will often start to see that advice creep in too.

Sometimes, there is a simple goal for the client – move away from manual entries and key staff risk. Direct platforms are only as good as the information you input. You’re required to maintain and administer yourself, but they can mean a more bespoke and controlled solution for the family.

We review a lot of client’s infrastructure and whilst the oft used phrase “once you’ve seen one family office, you’ve seen one family office” mostly rings true, there is also a significant amount of homogeneity when it comes to how the investment office is managed – in particular the need for accurate portfolio reporting, automation and data analytics.

One major element is Excel. With most family offices starting as the result of a post-liquidity event, we often see the same thing – investing first, infrastructure second. This often means that the portfolio is run off the legacy accounting software and Excel, until it becomes obvious that there is significant risk associated with this method.

The same clients want to retain control and outsource the more time-consuming elements such as applications and redemptions, account opening and supplier interactions.

Again the main platforms are set up for advisers and therefore custodised assets. This is an issue for direct investors and those that hold non-vanilla assets such as direct property, PE and other comparatively niche investments than your financial planner or UHNW client.

What can they do? Offerings such as Praemium and Sharesight are providing direct clients with options and differing levels of client admin. The emergence of limited power of attorney firms such as Integrated Portfolio Solutions has meant there is now a viable middle ground between SaaS and custody, but we are still beholden to software’s major adviser clients.

Global Players

All of this makes us look outward to offshore platforms, some of which see the Australian market as a possibility if they can find the right domestic partners that facilitate integration. In our experience, there is no shortage of families that would benefit from this more sophisticated software. But often the major impediment is cost and trust that it can provide a locally integrated service.  There are several families that have gotten to the pointy end of discussion and can see the benefits only to recoil at the costs of these solutions. When they’re used to using a free service and making do with workarounds, the move from towards the higher end – potentially six-figure per year options – is often a bridge too far.

So where is the best place to start? The low hanging fruit is in moving off Excel into a cloud-based aggregator and should be considered as the first step.

“It’s better than Excel, there are good features and the ability to see and store transactions in one place has been a big help. Just using Excel is an issue for risk, the simplicity of this solution for a small staffed family office like ours has been great”CIO of Sydney based Family Office

Once family offices  see a reduction in cost and risk, it’s often a case of now looking at those more sophisticated options with improved data analytics and customisations and doing a proper cost benefit analysis – just like they would any new investment.  As the family office space in Australia matures and becomes more institutional in its process, there is a place for increasing the firepower of the reporting and data analytics to the level of sophistication that better reflect the asset size which can range between one hundred million to multiple billions of dollars.  Early movers in this space include Private Wealth Systems, a US firm getting traction with it’s very powerful platform and Mirador LLC, also based in the US, attracting interest in its “best of breed” technology model that allows access to some of the most sophisticated global tech firms that may not see a direct engagement as commercial viable.

Family offices with a dedicated middle office function want control and to keep operations in-house as as much as possible and not rely on customer service that provides an IT ticket or takes days to return calls. Those with smaller staffing want to outsource a lot of the heavy lifting that comes with administering and tracking the portfolio so that they can concentrate and control on the actual investing.

“A lot of Family Office CEOs I have spoken with underestimate the risk associated with loose handling of data and overestimate how good their internal checks and balances are, in particular when it comes to potential insider fraud”Sydney-based Family Office Security Consultant

The risk is that they see this as all too hard and stay with the workarounds and the use of Excel. We see this as one of the major issues that is not being addressed by maintaining the status quo. There are challenges to helping established Australian family offices to invest in a high-performing tech stack, but fundamentally we see the accurate tracking and reporting of a portfolio as a major pillar in the risk reduction framework. When the rubber hits the road, it’s fundamental that family offices have the necessary solutions and truly understand how technology can supercharge their operations.

About the Authors

Shaun Parkin

Shaun Parkin

Investment Operations & Technology

My central philosophy is that of a Sherpa. I believe in acting as interpreter, educator, assessor, and advocate for family offices – whilst still being independent.

Connect with Shaun ParkinView Shaun Parkin Profile

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