The latest UBS global family office report had one data point that stuck out, amongst a raft of information covering investment and impact. The costs of running a family office had risen in 2020, with most of the cause centered on staffing and IT costs, signifying more interest in family office technology. More than a third (39%) of family offices report significant or moderate upwards pressure on salaries, and a similar percentage (35%) do for IT.
These running cost increases aren’t necessarily a bad thing
They imply that offices with institutional-style investments and assets sizes are building staff and IT that is more institutional grade. If we relate this to our own client experience in APAC, the cost of staffing seems to be caused by the need for greater expertise in investments and operations that are outside the skill set of the family and current advisers. Mostly those that can provide due diligence on more idiosyncratic investments as they move away from public markets and coded funds into private equity, VC, and begin to focus on ESG/Impact.
The other cost is IT, which admittedly has been an expense that up until now has been put off rather than a symptom of change. As Excel is basically free, it’s no wonder that some say trillions of family office assets are tracked and analyzed using spreadsheets and pivot tables. It seems this was ok until it wasn’t. Namely, when the volatility and uncertainty of the global pandemic meant that things such as liquidity profile, factor exposure, jurisdiction, sector, etc were not easily determined as the data was not physically at hand. This has caused offices to seek a better way, and they are putting money into those solutions.
The new family office technology
Some claim that the wealth manager of the future holds the keys to manage these new complexities. One could argue that this is the case for some aspects and not for others. There is no silver bullet, as there will always be a want and need for these clients to remain independent of one counterparty. However, we are starting to see a wave of research that points to a change in the way family offices and their advisers aggregate, analyze, and incorporate the new family office technology or FamTech.
If we look at the Australian market, one thing is clear – there is a real demand for high-quality software solutions in the advice, single and multi-family office space – from tracking, trading, forecasting research, and so on. And if you believe that the incumbent service providers are satisfying the market, look to a recent article in the Australian Financial Review on a new multi-family office bringing a “unique investment style to the market”. The last couple of paragraphs mentioned Addepar as their preferred supplier of asset tracking and reporting. This was not the focus of the article, but the number of new inquiries Addepar received, as a result, was significant and immediate. Clients aren’t lacking in quality investment access but they are lacking a trusted solution to assist in the most difficult of issues, which is how to incorporate as much as possible in one independent ecosystem.
Further exacerbating this is the increased move to assets that require improved tracking and analytics due to their jurisdiction or construction. An example of this is funds with a ‘call’ structure that are based in offshore jurisdictions such as the Caymans or have a range of liquidity and pricing. The list goes on and will continue to become more complex. Add different benchmarking and return metrics unique to the space such as money-weighted return or IRR and you can see why there is a need outside the retail facing, domestic platforms.
When it comes to family office technology, one major aspect of our review process is to provide insights into what is available, what does it do and what does it cost. For a client base seeking to remain independent of a single counterparty but still intent on using them, the need for aggregation regardless of the custodian has never been more important. There is also a question of who needs access to this data once it has been gathered and analyzed – the CFO needs a different set of data outputs than the CIO and other trusted parties may need to see only specific data, such as real estate or single stocks. Family members have different levels of engagement and interest – can you provide reports that cater specially to their needs?
An aspect that isn’t covered when you meet with a new wealth management firm is that they have already made the tech decision for you and if you want to use their service you shouldn’t move outside this ecosystem. If that system doesn’t speak to your new software or incumbent advisers, what do you do? A workaround suggests that the system is not working, so the best advice here is don’t let a counterparty – one who is most likely being compensated handsomely – dictate how you should transfer data.
The future wealth
As a recent BCG Report on Global Wealth management pointed out – the next generation of ‘ultra’ clients (those with US$100M and above) don’t want to be ‘pitched’ the firm’s offering. They want you to listen, they want unique and tailored investments, and they want a digital experience that is engaging and educational. Some research also shows that they are prepared to provide private information if they believe it will give them a tailored solution.
What does this mean for Australian clients?
If you believe the data from BCG, UBS, EY, and McKinsey et al – there is already an appetite for global best-of-breed solutions which will only increase as the assets become more complex and the need of the next generation comes into play. We recently completed some work for a wealth manager looking to attract a higher net worth cohort as they were seeing larger clients asking for a more varied offering. The plan we established for them was relatively straightforward and almost immediately effective. This was due to the fact it was intentionally different to their retail offering, specific to this larger asset client type, and yet didn’t require a large capital outlay or major disruption to their current business.
The solution also leans into what BCG calls ‘supercharged relationship managers’ – ones that can tailor solutions for clients using the rich profile data that these firms can now access through technology.
The other issue facing those looking to future-proof is to build or rent. Should you spend time and potentially millions of dollars on a proprietary investment platform? No, there are plenty of great ones already funded and debugged and finally seeing Australia as a potential market. Building out and staffing a specialized middle and back office to manage the technology required for these new investments? Opt for firms such as Mirador LLC to be your outsourced admin and CTO. Seeking a custom-made solution? Look at IQ-EQ and Cosmos. Need a family view? Firms like Orca are building a new interface.
The list of services available to those willing to think outside the cookie-cutter, one-size-fits-all mentality is large and growing. One aspect should still factor into the ‘best-of-breed’ affiliate model for wealth firms, however, remember that your partners’ roster can be acquired.
Investments too are becoming easier to access. As clients move away from classic asset classes and firms move away from institutional ownership, there are niche and value-adding allocations that until recently were the sole domain of the large groups. Platforms such as iPartners allow smaller ticket sizes and access to hard-to-reach private markets. Add in the fact that technology is allowing for improved local wrappers of Cayman and 40 Act funds, and this becomes even more interesting.
What’s particularly exciting is the idea of direct indexing and how this can assist those looking to tailor an index investment, but don’t have the scale for a mandate with State Street or Blackrock. In its analysis, BCG noted a largely untapped revenue source in the ‘simple needs’ client cohort – a group with assets from $100K to $3m, uncomplicated investment needs, and somewhat limited financial knowledge. Unfortunately for them, they are besieged by relationship managers that offer the same standardized set of products. If there is one client type that direct indexing should serve better with a customized solution, this is it – specific family office technology.
A diagnostic for understanding family office technology
For our single and multi-family office clients, everything starts with a diagnostic of the current state of the investment office. Often, the client hasn’t produced a process and policy document, so this is the first time most of this has been written down. We ask to see everything that touches the investment office – platforms, research tools, accounting software as well counterparties such as asset managers, private banks, brokers, and advisers. Where is the data coming from and what are the needs in terms of exposure management asset tracking and analytics? Diagnose the gaps, segment their needs.
The second phase is selection, and this is where the priorities of the client are specific but rarely unique. Different clients have a different pain point hierarchy, that is where the difficulty lies in selecting the more appropriate tech solution – how does the client know the questions to ask?
If they are using a shared drive across multiple staff, is document storage a major component? Which platform does this best and for the right cost? Do we need deep, dive analytics or does an aggregate overview suffice? Will there be a significant amount of non-bank/serviced assets? Can we monitor our SAA benchmarks and how far can we drill down into asset class performance?
Asking the right questions can avoid the demo, the sandbox, and the switching costs if you choose the wrong solution.
As a family and as an adviser, can we access the tools for managing wealth into the future? Investments will continue to increase in complexity, the needs of the next generation are already being defined and the use of Excel and mass-market software no longer fits the bill. The question to everyone is straightforward – is a lack of investing in staff and IT worth the risk?