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Technology-Driven Best Practices And Embedded Governance Are The Future Of Family Offices


April 12, 2023

Rob Mallernee is the founder and CEO of Eton Solutions.

Best practices are critical to the success of any organization. They help assure efficiency, access to knowledge, continuous improvement and better decision-making while reducing operational risk and cost. In the case of family offices, which manage the wealth and business affairs of ultrahigh net worth families, best practices are essential—and challenging to develop and execute.

Family offices have been operating in the United States since at least the 19th century to grow and protect the wealth of families. Fast-forward to the 21st century, the number of family offices globally has mushroomed with the rapid rise in wealth created by the technology boom, growth across Asia and other factors.

Family offices also have become more complex. Their operating models are often complicated compared to other organizations. They incorporate a wide range of workflows interconnected to other processes within the organization, with numerous dispersed assets and liabilities, complex investments, a wide range of LLCs, partnerships and other legal entities—along with multiple generations of family members to be accounted for and managed. The breadth and sensitive nature of the family office model makes best practices and strong governance critical.

To ensure that best practices and governance are engrained within an office, an organization needs to map existing processes and workflows and define how they are executed today and where they can be improved.

The complexities of these operational structures sometimes lead family offices to believe their problems and processes are highly unique to their organization and, therefore, adverse to applying industry-standard best practices. While this may be true for certain front office activities, today’s family offices should rethink the idea of customizing everything in their middle and back office and look for ways to tap into the enormous value of standardizing around best practices. If they do, family offices stand to reap all the benefits outlined above, earn greater trust from the families they serve and free up time to focus on the truly unique aspects of their office.

Best practices are essential in these times of economic uncertainty and increasing staff turnover when institutional knowledge can be lost suddenly, and new employees need to be trained quickly.

Sound operational rules should allow the office to maximize efficiency and speed across such processes as executing transactions, planning and reporting. They should enable the necessary checks and balances to protect transparency, reduce risk and ensure compliance. For example, a single staff member should never be in charge of an entire process, such as authorizing, executing, recording and reviewing a transaction. Business practices should assure that an independent staff member provides review and approval with a well-documented audit trail.

Every office seeks to develop and utilize some degree of business rules and processes. The challenge is applying them as part of daily workflows. Frequently, these policies are encoded in written manuals and referred to only sporadically because of the daily pressures of operating the office. The lack of technology makes tracking and enforcing policies challenging. When staffing is in flux, the problem can become even more severe.

Most family offices need to make a change. In today’s digital age, offices should move away from document-based best practice manuals and embed rules and processes into a modern technology platform that integrates these protocols into ongoing workflows. Key industry best practices regarding transaction processing, accounting, client reporting, data entry and reconciliation, cash management, document management and more can be automated to ensure consistency and efficiency, while delivering strong governance, transparency and risk mitigation.

Many family offices are now adopting integrated officewide systems that provide interconnectivity across all data, processes and legal entities under management, with best practices mapped and built into the system. While some established offices may have operating models that require different degrees of customization, starting with a software platform with well-defined, embedded best practices will provide greater value and speed up implementation times.

This idea is analogous to purchasing a car. The consumer doesn’t build the engine or worry about creating the drivetrain system. They let the experts do that. However, consumers do customize the car in ways that make sense for their needs (color, trim and additional amenities).

A system that drives best practices must be adapted to issues specific to the office and its family’s needs and goals. Who is responsible for approvals and execution of processes? Who are the owners within the family of various assets and investments? What is the tax status of these assets, and where are they held?

Deploying a technology platform that integrates key business processes and embeds best practices into workflows may be unnecessary for some small offices with a narrow set of responsibilities. An office with only a couple of staff focused solely on accounting and investment reporting, for example, might safely opt for task-specific applications that are less costly to deploy.

For some large offices with long-standing, internally developed processes and practices, managing the changes that come with the adoption of an enterprise system can seem daunting. Staff members can fall victim to a mindset of “we’ve always done it this way” and resist change. It’s important that an office work closely with its solution provider to carefully plan for the process changes being made. They should communicate and prepare for those changes, as well as aligning and training staff and teams. Senior management buy-in and explicit support are critical.

Finding a vendor with a deep understanding of family office operations along with a solution designed to fit into that environment is essential. Issues like cybersecurity and data accessibility and storage also need to be closely considered.

Software that is explicitly designed to support family offices, their governance and industry best practices is critical to the future of the family office. Reliance on past-generation technologies, like spreadsheets, and the manual workflows they require, is no longer acceptable—particularly for tech-savvy family members who expect more from the organizations managing their wealth and business affairs.

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