How to gain a birds-eye view by understanding family office services

Asset management industry fees as a whole are being squeezed. Fees on hedge funds have come down by a third. In contrast, the costs of running a family office remain stubbornly high despite technology enabling us to do more with less.

Where are the costs vs value vs efficacy analysis? And how can a family office in Australia get the very best for their basis points?

When engaged by an office, one of the first things to do is to complete a systems report. Everything that touches the family office investments needs to be written down with comments, pros, and cons. Often, this is the first time this has been done and while it creates a source document for our review it can provide a moment of clarity for the family and staff on how many suppliers are currently receiving and transmitting their data and taking fees.

The list includes suppliers such as brokers, platforms, file sharing, asset managers, accounting software, research and business intelligence tools, and banking arrangements. Everything that is used to run the investment office. It’s important to work with the CEO, CFO, CIO and COO, family members, admin staff, and everyone that has a place in the overall process. This is a counterparty risk overview as much as a systems list.

From know your client, to know your supplier

Know Your Client is a well-established process across the financial services sector, which ensures that investment advisors know detailed information about their clients’ risk tolerance, investment knowledge, and financial position. Risk management, customer acceptance policies, and transaction monitoring are all crucial policies for KYC compliance.

Like KYC, KYS is a mantra that everyone should have when it comes to building out investment infrastructure. Not all suppliers provide explicit detail on your counterparty risk and total costs – and just because you don’t have your assets custodied with a reporting platform, doesn’t mean you’re not exposed to their ability to report accurately and timely.

Without a crystal ball, reputational risk is often very hard to avoid, and only without is often mitigated by questions of ownership and supply chain. Often one client referral is ok, two is better, but three gives us much more comfort. Nothing narrows the focus like sunk costs meaning it’s often a good idea to speak to those that have already had an experience with a supplier – both good and bad.

Although it’s often a little dry, to deep dive into the product disclosure document means saving some pain in the future.  We see instances of managers failing to keep to stated timelines for redemptions in the latest bout of volatility. Yet the client’s expectations can be managed if they know the liquidity risks of each investment.

When it comes to products, it’s easy to invest but can be very hard to redeem.

APAC – like their European counterparts – is often further behind the US when it comes to APIs, which is where at least some of the cost savings occur. In Australia, clients often receive reports in the form of a PDF or Excel file – when this is the case for multiple suppliers who don’t connect with each other, it can add frictional costs of data collection and aggregation. There however workarounds and improving technology within this space, which may well see the cost and risks fall further.

For family offices, it’s also important to ask for the assets in the portfolio as the ability to push and pull data is often the difficulty in curating the technology. Infrequent or no pricing, fund structures with no direct feed, rebates, and other manual components all lead to idiosyncratic structures. . Once the assets and admin process of the portfolio is mapped, there is suddenly a realisation that the total cost of investing in a particular strategy might not stop at the management fee. If you are running a cost total, you will need to add the time it takes to administer these assets. If they are administered through a supplier such as a wealth manager, check the fees you are paying for what is sometimes a relatively straight forward process.

Process and procedures, or lack thereof, can be the difference between a cost-effective, efficient office and one that probably costs a lot more than 78bps to operate. Highly credentialed staff performing data entry and aggregation can not only increase costs and potential risk of double handling, but it also causes significant frustration and potential staff turnover when the structures in place are full of workarounds and manual inputs.

By enacting a cost vs value analysis family offices can understand and articulate business priorities

Breaking it down and prioritising

The costs of investment technology in Australia should be relatively inexpensive, with a number of suppliers available to direct clients. What should be more prevalent, however, is a true cost vs value analysis. This doesn’t have to be a deep RFP style dive into the services either. As with the systems document, a lot of clients find out they can also articulate their priorities for a new office set up. This priority list can form the basis of the question What do I need, what do I want and what should I pay for?

Breaking it down to the basis point costs can make this even clearer and can be used when arguing for increased infrastructure spend. If the numbers against the savings of time and money outweigh the increased costs of technology then it is hard to argue against investing in an improved solution. Add a risk analysis of exposure, counterparty, cybersecurity, and, fraud and it becomes even more important to get it right.

The 78bps figure from the UBS report is then perhaps on the low side for a lot of Australian family offices. We see technology and infrastructure costs that would not be included in that figure – either because they didn’t realise the time and staff costs that are needed, or that they didn’t realise that it was part of their wealth and fund management costs.

Clients are often very well set up except for one or two elements. These are the most interesting cases as the gap only becomes clear when systems and assets documents have been completed.  Sometimes it’s a case of setting up a suitable data aggregation warehouse. Others need a connecting tool that can push and pull data from those platforms that can’t communicate. Some just need a more accurate statement reader or internal filing that’s not on a shared drive. But all of these are low hanging fruit that can enormously improve office efficiency – and by proxy, staff morale.

Knowing the supplier universe

KYS is about knowing the supplier universe. The battle for families is knowing what is available, what can be insourced and outsourced, and what your other suppliers don’t want you to know – perhaps that you are not beholden to their solution and that there may be a better alternative.

One of the major benefits of seeing behind the curtain for suppliers is knowing the uncomfortable questions to ask.

If it’s not a perfect solution, it may still be perfectly useful and as long as you see it through the lens of developing with your advisers, broker, fund manager, or platform rather than in isolation, you can potentially affect their pipeline of product development to fit your needs in the future. Some family offices have the assets of institutional clients, maybe it’s time they act in a similar way.

There are a lot of numbers thrown around for a minimum asset size needed to justify setting up a single-family office.  Often the burden of managing the assets is the biggest issue and one that can be decreased significantly if the right steps are taken when initially deciding on taking control of your family’s wealth.  A lot of offices wish they could go back in time and build better technology and infrastructure before making investments as the switching costs down the track can be so daunting that the fall-back option of workarounds can still look attractive.

Then how best to navigate the supplier universe? Write systems and assets list, understand each one, and ask why they were chosen. Figure out if they are the best in their class, understand the counterparty in its entirety, and then allocate true bps costs to each. It’s amazing what you uncover when you lay it all out.