The family office industry has grown tremendously over the last couple of decades. The immense rise in assets under the management of individual family offices has highlighted the importance of providing a continuous and thorough insight into the financial picture of their clients and their entire portfolio. This has made consolidated reporting one of the basic necessities for developing an effective wealth management plan.
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The Importance of Financial Reporting for Family Offices
Before we get into consolidated reporting, we must first understand the modern-day necessity of family office financial reporting as a whole.
Family offices have an extremely complex operational structure that is personalised to handle the extremely sensitive needs of their ultra-high-net-worth clients and their stakeholders. These services, in a broad sense, can be divided into investment management, wealth transfer, tax services, family meetings, and administrative services. Therefore, family offices should, ideally, prepare regularly updated and personalised reports for each of these services so that the families can make decisions on their holdings at both the macro and micro levels. These reports are also used to create a well-defined audit trail for general compliance reasons.
The following are the 5 basic types of financial reports that every family office should have in its arsenal:
- Financial statements including tabulated balance sheets, income, and cash flow reports.
- Risk assessment of the entire family’s wealth. This is vital to identify and lower exposure to high-risk/illiquid assets.
- Asset exposure overview – This includes detailed reports of the complex asset ownership structure within the family and across generations. It must include separate insights for both traditional as well alternative assets.
- Performance overview of the family’s investments across public and private platforms as well as that of various advisors and fund managers.
- Budgeting and forecasting overview – This includes detailed insights into the spending patterns of each family member and forecasts for future budgeting and expenses planning.
The key challenge with traditional reporting is managing the huge compilation of data across multiple platforms and third-party service providers. This is further complicated by the inherently complex nature of modern family portfolios that usually span across multiple asset classes, markets, and investment structures in an effort to diversify for higher risk-adjusted returns. It is easy to see how family office reporting can be an extremely time-consuming process that is also prone to significant human errors when performed manually.
A Digital Solution
As family offices tread the waters of increasingly volatile markets, the need for accurate, easily accessible, and up-to-date reports is now greater than ever. Modern families require consolidators that can:
- automate the data aggregation process and present multiple data streams through actionable reports.
- provide data analysis tools for fast-paced decision-making.
- have the ability to generate ad-hoc and customised reports at any time.
Modern family office reporting software like Masttro and ETON Solutions simplify the data aggregation process to a large extent while others like FundCount package consolidated reporting into their holistic suite of accounts management technology.
However, despite the ubiquity of third-party providers in the market, family offices must consider the following factors before appointing one:
- Cost – Since the key responsibility of family offices is to generate revenue, the operational costs must not be unfeasibly high.
- Compatibility with existing systems – The third-party consolidated reporting software must be compatible with existing family office systems to minimise the chances of data corruption and unnecessary delays.
- Data privacy and security – Family office portfolios are highly sensitive in nature. Any data leakage can cause severe and sometimes irrecoverable reputational damage to their clients. Data privacy and cybersecurity should, therefore, be a top concern when appointing aggregators who will have complete access to internal systems and data in order to be able to provide their services.
Consolidated reporting is expected to play an ever bigger role as the global wealth shifts to the younger generation who have a higher appetite for risk but a lower tolerance for delays and data inaccuracies.
However, despite the ubiquitous nature of software and automated systems that can make the entire experience seamless, most family offices still rely on manual workflow and/or legacy systems to generate their reports.