séamus Ó concheanainn, foxrock consulting
Séamus is the managing director of Foxrock Consulting, a niche management consul- tancy which provides business advisory and technology consulting to family offices, in- vestment managers, trustee companies and superannuation funds. Séamus specialises in
sTeps To success:
Technology implemenTaTion and The family office
Séamus Ó Concheanainn
W
hile private banking and private wealthcompanies – especially family offices – remain a mystery to the general investing public, awareness of this type of financial institution has risen markedly over the past 10 years due to a number of factors:
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The increased focus by financial media such as Business Review Weekly and the Financial Standard on family offices•
The increasing profile of philanthropy in the community and,•
Increasing market awareness of the software and investment deals being done by family offices and other high profile private wealth companies.Family offices, and multi-family offices (MFOs) in particular, have been notably active in the technology space in recent years – in part reflecting their new profile as target clients for mainstream investment software vendors. As their existing clientele start rolling through their third, fourth and even fifth generations – and family offices become more proactive in their marketing to and attracting new high net worth clients – the focus on technology to meet their service delivery requirements (and to manage risk) has become more pronounced.
However, significant investment in technology has not been the traditional hallmark of family offices and, for this reason, a family office must pay particular attention to how and when to implement new technology solutions. This if equally true for other private wealth management and trustee companies that offer “family office-type” services including financial and investment advice, trustee and custody services, advice on intergenerational wealth
management and transfer, philanthropy, accounting and tax. The points made in this article for family offices hold equally true for these comparable organisations.
The following is a list of steps that will serve the family office in taking the appropriate steps to ensuring a successful technology implementation.
have a real strategy
I cannot emphasise enough how important a pre-determined strategy is to the success of any technology implementation. Your strategy is your road map. One would not head out on an unfamiliar journey without a clear map (or GPS) to guide along the route – the journey cannot be successful without one. The same applies to any technology “journey”.
In articulating an appropriate IT strategy, it is usually preferable that the appropriate resources are engaged to design and deliver the strategy – mindful of the specific needs of the organisation and the industry in which it operates. A good strategist will understand not only the nature of the family office and how it constructs its relationships with its clients and delivers products to those clients – but will also understand the market for the technology the family office wishes to acquire. The strategist will be able to give advice that effectively makes the match between the organisation and the acquisition.
A valuable approach to initiating an IT sourcing or implemen- tation project is to establish a clear understanding of the potential scope of the project. Our clients’ experience has been that this initial piece of work has a number of benefits:
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There is minimal committed expenditure prior to establishing an initial business casedesigning and delivering operations and systems strategies – including for some of Australia’s most respected family offices.
Séamus has spent more than two decades in financial services in Melbourne, Sydney, Perth and Europe working across funds management, custody and transfer agency.
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The opportunity to collate and initially manage stakeholder expectations – and to document the criteria against which key stakeholders will measure project success•
It sets a clear direction for the project to reduce pro- ject risk around scope creep/deflection, costs, vendor and contract risk, introduced operational risk, etc.•
There is an enhanced capacity to optimise market and vendor engagement – leading to a more effective selection process and,•
It allows the organisation to clarify the strengths and weaknesses of the ‘status quo’ – including existing and/or interrelated services, as well as system and operational interdependencies.As part of developing a good strategy or sourcing plan for the IT project, an experienced strategist will be able to determine the likely opportunities and acquisitions avail- able, the potential costs of acquiring them, a reasonable time frame for delivering the projects and will be able to illustrate to the family office the relevant risks, opportuni- ties, constraints and imperatives for the IT project.
The primary driver for a systems strategy is cost effectiveness. Too often, organisations spend more money than is necessary building out systems capability in "silos" – often leading to:
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Over-purchasing – buying software applications with overlapping functionality•
Under-purchasing – not covering all functional areas and leaving significant gaps that have to be covered by "work around" tools and processes•
Lack of integration – systems are selected for comple- mentary or interconnecting business processes, but these systems cannot be readily integrated or costs to do so are prohibitive.Invariably, the approach should be customised to the family office’s specific needs and preferences. A ‘start- to-finish’ implemented systems strategy is usually a three to five phase process, depending on the breadth of coverage required and the depth of service needed within each component of the project deliverables.
The developed strategy should also be mindful of the expenditure required to deliver each different phase and seek to balance this against an amount that is optimally matched to the family office’s size and revenue.
Designing a Systems Strategy should be the first phase of any IT sourcing or implementation project.
understand your universe
It is crucial for the family office to realise that, despite its niche client set, it is still operating in standard markets.
This is very important when understanding the construct of technology to be deployed in serving client needs. For example, regardless of how and when you advise your client to buy Australian listed securities, any trades in those securities will still settle through the same standard market practices and protocols as they would for a retail fund manager, stock broker or any other entity.
One example of where family offices may fail to appreciate the standard protocols that apply is in the issue of unlisted unit trust products – often cash management trusts. While a cash management trust (CMT) may be marketed as an investment cash pool for clients, the reality is that the majority of these are constructed as registered management investment schemes – making them subject to the provisions of the Corporations Act 2001 (Cth) and its associate regulations. This means that financial products issued under this Act will be subject to fundamentally the same standard of delivery as any retail product might be.
This is of particular importance in maintaining the register of members for a CMT or other unitised product: the family office must ensure it has deployed a ‘fit for purpose’
solution, as the regulator (ASIC) is likely to take a dim view of member registers cobbled together on spreadsheets.
Holding an Australian Financial Services Licence (AFSL) is now a common feature of family offices – who should be mindful of the obligations imposed by the regulator in how they maintain client records and ensure that the appropriate technologies and people are deployed when issuing products or delivering services.
Buy in the necessary expertise
Family offices are, by their very nature, small organisations.
Despite the best of intentions, these organisations are unlikely to have ready access to all the skill sets that are necessary to deliver significant IT projects. This creates a gap between expectation and ability: at some point in time, the family will need to acquire the appropriate expertise to deliver on its IT project.
Various types of expertise will be required at the strategy, selection, contract, implementation, transition and post project stages. The family office needs to be able to deliver expertise, as and when needed, if it is to significantly de-risk its IT project. Likely skill sets required, and which the family office might not have at its immediate disposal, will include:
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Strategy design•
Project management•
Business analytics•
IT architecture design•
Sourcing and vendor management•
Data migration, and•
Change management.Know your capabilities
As mentioned above, family offices are smaller organi- sations. Consequently, when they do deploy resources, they need to ensure those resources are optimally used.
They also need to ensure that they have the resources that are required to be delivered to a project at the point in time that those resources are required.
From the perspective of delivering a technology project, it is best that the family office makes a realistic appraisal of the skill sets at its disposal and, more importantly, its ability to deliver those resources to the project – as and The quote
It is crucial for the family office to realise that, despite its niche client set, it is still operating in standard markets. This is very important when understanding the construct of technology to be deployed in serving client needs.
The quote When the services and products are deconstructed and analysed, they are not so much complex services or products but complex arrangements of simple service and product elements.
when they are needed. It is a common refrain of ours when talking to family offices that, for some short period in the life of the organisation, the IT project will become paramount and resource allocations must reflect this.
IT projects are difficult for any organisation, even more so for smaller organisations such as family offices.
Therefore, when the IT project reaches the apex of its activity, the organisation must be able to deliver the resources it needs on time – to the furtherance of the greater good. Continually relegating your IT project to second or third place behind immediate client requirements may – on the face of it – appear to be the appropriate course of action, but it will do untold long-term damage to your IT project. This will lead to some level of project failure (if not total catastrophe) and will ultimately damage your reputation in the eyes of your clients.
We’re all unique – to a point!
Family offices deliver particularly complex services to ultra-high and high net worth individuals – usually in very unique, customised combinations of multiple services – and tailoring each outcome to the individual client or family need. Despite this, when the services and products are deconstructed and analysed, they are not so much complex services or products but complex arrangements of simple service and product elements.
You could drive through the leafy suburbs of Toorak, Vaucluse or Peppermint Grove and you would be unlike- ly to encounter too many identical houses. However, the range of bricks or weatherboards that have been used in building those houses would be limited by comparison.
Similarly, while no two family offices are comparable in terms of the discrete service offerings provided – and in no way compare with offerings to the retail or mass affluent markets – the basic “building blocks” used are the same. It is for this reason that detailed analysis of the business’ requirements is mandatory to avoid unneces- sary expenditure on highly bespoke technology solutions that are simply not warranted.
Our experience has been that the deployment of industry standard technologies – configured to meet the discrete needs of the family office – is usually the optimum outcome for the family office and its clients. It is also the least risky and the most cost effective.
Bricks and mortar – know the difference
Family offices need to recognise that fundamentally IT vendors are brick sellers. This is what they do best:
they create “bricks” for you to buy. Technology “bricks”
are solid, fixed pieces of technology that form the basic ingredients for any construction. Vendors are very good at creating bricks, but the bricks come in a standard shape and form. Often you will need more than one brick – and from more than one brick-maker – to construct your whole solution. That is when you need the mortar to hold the bricks together.
IT vendors make very significant returns on professional services and these are usually the source for major project cost blow-outs. Unanticipated need for professional services – particularly in customisation or in integrating disparate software applications – can be extremely expensive and time-consuming and is the major source of organisational dissatisfaction with IT projects. These professional services are the ‘mortar’ that bind the bricks together – and are usually not adequately factored into project budgets.
The family office should understand from whom it acquires its core software solutions and, separately, how best to integrate them. Integration is critical; building your solution on core applications alone, while it sounds good in theory, can leave you with an unstable and cumbersome final outcome.
For this reason, as stated previously, it is very important to have a clearly articulated strategy well in advance of commencing your IT project. This will allow you to understand how to source your vendor applications and from where you should source your integration services.
Integration services can be very expensive if bought at the last moment; software vendors thrive on selling customisation, integration, translation, migration and all sorts of ‘-ations’ as professional services (and at very expensive daily rates). This is the most common trap for the unsuspecting purchaser of vendor technology, be they a family office or any other organisation type.
It is not recommended that family offices become dependent on their software vendors as the primary source for the acquisition of software integration tools.
There are many better, more effective, and cheaper resources from where one can acquire integration tools.
The family office needs to understand how, where, when it can access these resources.
understand your purchasing power
Understanding purchasing power is very important for any organisation when it seeks to acquire information technology. Do not accept that the first offer that you get from any organisation is necessarily the best – or the best offer that organisation will make.
The family office should be aware that is has a certain bargaining power which is predicated on a number of factors: current marketing conditions, the exposure of that software vendor into the family office market and the “brand name” of the organisation’s (primary) family – which is often underplayed. The family office understands how to parlay this brand name capability into market bargaining power – without creating the vendor expectation that the family office is the foundation family itself! This is a common confusion that often results in IT vendors hiking up the price for their software to unaffordable levels.
Understanding that you may be providing a lever for a software vendor to access a market that it is previously relatively unexposed to can also be a useful tool for creat- ing bargaining power.
Know your budget
No different from any other organisation, the family office should be able to determine what an appropriate budget for its IT project should be. The budget should be determined by reference to the three business impera- tives for any business project:
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Cost reduction (or revenue increase) – there should be a reduction in cost or, if not, at least some increase in revenue as a direct consequence of the project•
Service enhancement – the IT project should ultimately deliver appreciable service enhancement or should enable new revenue streams, and•
Risk mitigation – the project should significantly address the reduction of operational and financial risk in manual processes, legacy systems and other associated risks.Usually, a balance of the three imperatives (with a skew in favour of dollars) will predicate any successful IT acquisition and implementation.
In structuring the project budget, you need to be mindful of a number of influencing factors. Usually the family office would have grown up on a budget that does not necessarily marry to a comparable organisation in the market; it is often a lesser budget.
Consequently, family offices tend to service client families at a cost that is not otherwise considered commercial. If the family office tries to balance its project budget against this uncommercial reality, it is unlikely to allocate sufficient funds to the project.
On the other hand, software vendors tend to view family offices not as an organisation with its own budget and financial outcomes (as they would view any retail fund manager, for example), but rather as having unbridled access to the total family wealth. While this is not ordinarily true for single family offices (SFOs), it is even less so for MFOs. The overall funds under management are assets that the family office has no ready access to, any more than a fund manager would be able to dip into the assets of its investment funds, at will, to pay for new software acquisitions.
In deciding a budget for IT acquisition or implementation, the family office should strike a balance between what an over-excited IT vendor would like to receive and what an underwhelmed foundation client family might wish to spend. The budget should be struck based on being appropriate to the software being acquired – and the purpose for which it is being acquired. This should ideally be determined at the strategy design phase.
As an aside, it is very important to make sure that all stakeholders are appropriately educated in formulating the budget – not just the vendors, but also the stakeholders of the organisation that will fund the project. The organisation needs to understand what the appropriate budget should be for a project of the nature being undertaken.
Work from the ground up
It is very tempting for any organisation to look to acquire technology which will provide some great service deliv- ery – such as performance analytics, integrated client reporting or web access for families. However, it is im- portant to understand how and where the true benefits of technology can be delivered for the family office.
The greatest benefits in technology are to be acquired from ensuring that all data used in serving clients can be fully relied on at all times. Any enhanced reporting or analytic capability is meaningless until the family office and its clients can depend on all data to be timely, accu- rate and available. It follows that the greatest IT benefits will initially be derived in the following areas:
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For family offices with high trading volumes – auto- mation of trade order and execution management•
For any entity settling significant numbers of ASX trades in its custody operations, there is a need to give active consideration to becoming a participant in CHESS1 – this has been the main source of efficiency and risk mitigation for some Australian family offices•
Book of record – having an appropriate portfolio ad- ministration system that can cater for the variety of asset classes managed on behalf of clients – as well as for the Australian investment taxation regime – is critical to adequate client service•
Cash payments – we have seen significant benefits derived from the automation of payment processes (for MFOs and trustee companies), including the in- troduction of BPAY and a quantum shift away from manual cheques•
Reconciliations – the importance of being able to en- sure that all client, portfolio, custody and accounting records are complete cannot be overstated, and•
Unit registry – where unitised products are being is- sued. One of the single biggest risks to family offices – particularly when cash management trusts are at stake – is when unit registry is managed on spread- sheets or in unsuitable applications such as MYOB or overseas products that have not been customised to the Australian environment.Know your client
The concept that a family office should “know its client”
is surely unusual; what organisation would know its clients better than a family office would?
However, when selecting and implementing technology, the requirement to know the client is ratcheted up a notch or two – even for a family office. As the person charged with delivering the technology, you will need to ensure that you can reasonably future-proof your IT investment for at least five years post-implementation. To know your client, you will need to understand:
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Who will my clients be in the next three to five years and where will they come from?•
What will they want to invest in? What will I be advising them to invest in?The quote Any enhanced reporting or analytic capability is meaningless until the family office and its clients can depend on all data to be timely, accurate and available.
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How will these assets be held? By the client? In custody by the family office?•
How will client families access their portfolio information? Where from? How often?fit for purpose
Family offices and private wealth managers are notoriously conservative – as are their clients. The very notion of inherited wealth and intergenerational wealth transfer relies on ensuring that no single generation squanders the wealth. As an adviser to a private wealth or family client, you would not recommend that your client invest in a novel, unproven asset with no track record – so why would you take a comparable risk with your core technology?
Historically, many Australian family offices have made a critical error in pursuit of the objective to achieve a low-cost outcome: they have become ‘guinea pigs’ for international software vendors whose software solutions do not cater adequately for the local Australian market environment and conditions.
Family offices are not alone is this regard; many an investment or fund manager has acquired portfolio administration, investment reporting or trade ordering systems that do not cater for the very basics of the Australian environment:
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Capital Gains Tax including discounting•
Dividend imputation credits•
45/90 day rules for income tax credits, and•
GST, GST claw-back, etc.All of these are key considerations when implementing technology and, similarly as for any other wealth manag- er, the family office must ensure that it is not a guinea pig for new technologies in Australia. It is not so much being the guinea pig that is the painful experience; it is the cost of paying for the customisation of the untried software that is the painful experience. Regardless of whether you choose software that meets the regulatory environment or not, the obligations to meet it do not change.
It is critical to your project’s success that you choose and implement technology that:
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Meets your needs in data and risk management•
Meets your clients’ needs in function and service delivery, and•
Meets the market in compliance and capability.finally
It is important to note that, especially post-GFC, the wider financial market has moved dramatically in how it views technology. Technology has moved from support service; to being an enabler for service; and now to being THE product. Your family client is acquiring your expertise – a significant part of which is now formed by your technology solutions. And technology will only increase in importance over the coming decade.
Family offices may be comparably smaller organisations – but they are more agile in their capability to select and implement technology. Many will not be pre-committed to expensive, legacy software that is still being ‘run down’ on the corporate accounts.
Family office shareholders will have been exposed to the potential risks of the past five years and will have a materially enhanced appreciation of the role of technology in helping mitigate risk. This all bodes well for an expected increase in technology projects for Australian family offices over the near term. fs
Note:
1. Clearing House Electronic Sub-register System – the ASX’s share trade clearing system
The quote Your family client is acquiring your expertise – a significant part of which is now formed by your technology solutions.
And technology will only increase in importance over the coming decade.
