May 5, 2022
Islands can be ideal vacation destinations. However, data islands (or data silos) cause significant problems when managing a family office. Created by using the wrong tools and work processes, data islands result in work duplication, reporting delays and errors, and families wondering about the true status of their affairs.
The solution may sound simple: Implement a unified system for tracking and reporting the affairs of Ultra High Net Worth Individuals — a data continent. But when it comes down to implementation, most family offices struggle to find a platform that can accommodate and unify the complex interrelationships of their client’s accounts and business affairs.
Most ultra-high-net-worth families have complicated financial arrangements, incorporating numerous family members, trusts, LLCs, partnerships, and other entities. To properly track and report on these “multi-entity” family structures, family office technology must have a comprehensive understanding of the complex relationships inherent in UHNWI finances and ownership.
When offices use a single-entity accounting software system instead of an integrated platform, each entity becomes an island of data. The office is left with multiple, separate instances of software and reports that require manual reconciliation before the office can present meaningful data to its clients. This is because each system has its own data nomenclature due to the individual master data models. The result of this consequential reconciliation process is that it is both time-consuming and error-prone.
Master Data & Meaningful Data
One of the biggest challenges in this isolated island approach involves master data: With hundreds of instances and multiple charts of accounts, merely changing a vendor’s details becomes a massive undertaking. The same changes need to be made across every entity involved. On the other hand, when there is just one data entry with a multi-entity system, master data changes are automatically shared and updated across all office data.
Simpler management of master data is a significant bonus for office personnel. It is also fundamental to meeting the needs of UHNWI clients. The family wants meaningful, current information that is easily accessible. It wants the ability to answer questions like “What am I worth?” and “How much cash do I have?” For a family office to be truly valuable to family members, it needs to provide consolidated, aggregated, accurate, and actionable, meaningful data for family members.
Using a spreadsheet—or multiple spreadsheets—to reconcile data and manage complexity is the wrong answer to the problem. Spreadsheets and single entity accounting software are simply one-dimensional and inadequate for representing a UHNWI’s entire net worth.
In contrast, a multi-entity accounting system provides a data query and reporting framework that consolidates and aggregates data across multiple entity groupings without using a spreadsheet. Family offices that transition to multi-entity accounting software see operational benefits. The risks inherent in the manual process of downloading and compiling data are minimized; the costs associated with the manual work of multiple instances are greatly reduced.
A Complex Tool for the Current Day
Single entity accounting software was created to bookkeep for a single entity, report on its financial state, and facilitate tax reporting. It is not a tool for the digital age of high-net-worth families, where building upon a relationship and servicing high-touch clients is most important. Family members expect an intuitive, accessible client portal that operates as a delivery mechanism for answering their questions and reporting. To be meaningful for clients, the portal must have the same multi-entity view—which is difficult to achieve without an integrated platform.
Inevitably, the financial life of a UHNWI gets more complex rather than more straightforward. Suppose the family office of the future is going to continue to provide relevant information and services to its clients. In that case, it must embrace a comprehensive, integrated technology platform purpose-built to handle this complexity—one that delivers greater accuracy, efficiency, transparency, risk control, and responsiveness to the family’s needs.
How Proposed Changes with Bill H.R. 4620 May Affect Your Family Office
Since a single family office (SFO) is solely tasked with managing the money of one single family, the Securities Exchange Commission (SEC) has historically allowed them to operate under different regulations from traditional investment advisors. The 2008 financial crash first prompted regulators to reconsider this exemption. Although no changes were made at that time, the more recent collapse of Archegos Capital Management in March 2021 spurred lawmakers to introduce bill H.R. 4620, which would change how SFOs are regulated
Family Office Trends for 2022
Charles Darwin wrote that the strongest and most intelligent members of a species are not the ones that survive. Instead, the strongest and most intelligent ones are those “most responsive to change.” His observation is worth considering as family offices enter the new year.
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