FEB. 15, 2023: How family offices are playing catch-up with technology
Family offices may invest heavily in the tech sector. But when it comes to investing in technology and digital tools in their own firms, many of them lag behind. Now they’re starting to catch up — considering new tools to improve financial management, succession planning and cybersecurity, Bailey McCann reports.
Also in this issue, we talked with Elizabeth Thiessen, who heads private-banking family-office solutions at Bank of America, about some of the challenges facing such families. She discusses purchasing controls, how to structure a line of credit and what makes family offices inefficient.
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HANDPICKED: How family offices are playing catch-up with technology
BY BAILEY McCANN
Family offices often lag behind other organizations when it comes to technology — but that could be changing.
More offices are considering new technologies to help improve financial management, support succession plans and protect against cyber threats.
However, few families will tell you they’ve got it all figured out.
“Family offices can get complacent,” said Melanie Schmieding, director of Baird Family Wealth, the family-office arm of the Private Wealth Management Group at Baird. “Each one has a different level of staffing in place, and each one has different entities and requirements. They’re going to prioritize based on what needs to get done right away — and if they have a system in place, even if it is not the best, if it works, it will often stay until they realize they have to make a change.”
- Family offices are considering new technology tools to help improve financial management, succession planning and cybersecurity.
- Younger generations are pushing for a bigger emphasis on technology.
- Often, their technology doesn’t meet the needs of a rapidly growing family office.
- Only 17% of family offices in North America have a robust cybersecurity plan in place, according to a survey.
A recent survey of family offices by BNY Mellon Wealth Management and Campden Wealth found that younger generations are having an impact on family offices by pushing for a bigger emphasis on technology. Nearly one-third of next-gen respondents said improving cybersecurity is going to be critical when they take over the family office.
And almost all respondents — 99% — said they are looking for expert advice on estate planning. Data in the survey indicates that younger generations are engaging with family elders on a range of modernization efforts, and technology is likely to be at the forefront of that work. For example:
- Many families still rely on bookkeepers, paper-driven processes or basic services such as QuickBooks for finances. Excel spreadsheets play a big role, too. But there is a greater push to digitize and make things easier to track by adopting platforms that can manage finances and handle compliance reporting.
- Succession plans often require new technologies. Bringing everyone onto the same platform can help make sure nothing falls through the cracks when an older generation of leaders transitions out.
- Family offices are high-value targets for cybercriminals. Older technologies are often easier to get into, and cybercriminals can go undetected for longer. Making updates and reinforcing those updates with staff training on good cyber hygene can help safeguard valuable information.
GETTING UP TO SPEED
Family offices are complex — no two are alike — which means they often have varied technology needs and often trail large organizations in installing solutions. The arrival of the pandemic, however, seems to have accelerated the conversation around the need to improve family-office technology.
During COVID-19, paper-heavy family offices were confronted with a sudden need to go remote, and that wasn’t always easy. “During the early days of COVID, we had accountants going home with paper ledgers and checkbooks in the trunks of their cars so they could pay their client’s bills," said John Delalio, a partner in the EA Outsourcing Solutions Group at the accounting firm EisnerAmper. “That’s not a secure or ideal system.”
Delalio helps families implement better internal controls that verify financial statements and ensure that necessary compliance reporting gets done. He also helps install new technology and cybersecurity solutions.
Some of the problems that commonly befall family offices depend on how their wealth grew over time, he said.
"We often see a family office with multiple entities that has a QuickBooks file for each entity, a bookkeeper for each entity, and they manage the rest on Excel spreadsheets. They end up relying a lot on their bookkeepers,” Delalio said. “Starting from a setup like that and moving to a more streamlined, technology-forward approach is possible, but it requires a bit of training and a fair bit of data conversion.
“Families want this to be a trivial problem to solve. But if they haven’t been intentional about how they manage systems, it could take a number of months to get the data, move it over and make sure everyone feels comfortable.”
RAPID GROWTH HITS SPEED BUMP
Often, the lag can be the result of rapid growth, said Baird’s Schmieding. For instance, a CFO who has been handling finance and accounting then gets asked to do a lot more. Those tasks could include reporting and other boutique family-office services that rapidly expand the role of the CFO without a lot of planning around how to support that expansion.
In recent years, Schmieding said, she has noticed that families are trying to be more purpose-driven about how they are structured and what technologies they use — but it’s a learning curve. Over time, families may desire to invest in new asset classes or need to start thinking about succession planning, and both can be catalysts for looking for outside technologies or advisers.
Rose Vitale, managing partner at the San Diego-based DRA Family Office, thinks about how best to scale. DRA is working to raise assets under management to between $3 billion and $5 billion over the next three to five years.
“We have a lot of deal flow and other data coming our way on a daily basis,” Vitale said. “We’ve made some adjustments to our investment memoranda over time to keep pace with where the market is. We also have internal systems in place to manage that information and our relationships.
“But we’re thinking through how to scale over time. If you go from doing 10 deals a year, for example, to doing 40 or 50 deals a year, you need technology to help manage that.”
Cybersecurity issues have also compelled some family offices — rich targets for cybercriminals — to action. According to the latest Campden Wealth Report, only 17% of family offices in North America have a robust cybersecurity plan in place. An additional 51% say they know they need to improve those plans.
Families sometimes think having on-premise servers or keeping much of their work off platforms is more secure, said Robert Stover, Americas family-enterprise and family-office leader at EY. But it can also mean that bad actors have an easier time getting in and can go undetected for longer.
“If you think of the volume of emails, the volume of data, the volume of reporting that you get now — it’s accelerating at an infinite rate,” Stover said. “That’s why you need enterprise-level firewalls and other technologies that are going to keep people out. It’s very difficult to manage that effectively without dedicated services and service providers.”
Dave Burg, Americas cybersecurity leader at EY, has worked with families on cybersecurity concerns and said efficiencies can be realized by onboarding new tools. “If we’re looking across the market today, family offices can almost entirely outsource most of their reporting needs,” Burg said. “They can outsource a lot of investment data gathering.
“You can build systems for all of these things in-house, but that takes a lot of time. Regulated financial institutions are already going to have security, compliance and other critical functions in place."
Families should also think critically about the level of visibility they currently have into their whole organization and whether technology could help improve that visibility, Stover said. “Families see demonstrations of new technology or they start looking and quickly get overwhelmed, and then they talk themselves out of making a change,” he said. “But they have to look at the tradeoffs.
“Most families don’t need to get the Ferrari of enterprise systems. They just need a good Chevy.”
PEER-TO-PEER INSIGHTS: ELIZABETH THIESSEN
Elizabeth Thiessen, head of private-bank family-office solutions at Bank of America and based in Charlotte, North Carolina, has worked at the bank for 29 years. Most of her career was spent on the corporate side, ranging from treasury to transaction services and investment banking.
When you started working with family offices five years ago, what did you notice about them?
Like the middle-market companies I was working with before, they have the same types of needs for controls and efficiency. The complexity of a multigenerational family’s accounts and payments creates a similar need for global payment channels combined with robust entitlement capabilities. That means different permissions for different people to pay for different things, and different permissions regarding who can see or be notified about activity on those accounts or make changes to them.
How does that play out, practically?
All of the families we deal with own multiple properties. I can think of one family that has an apartment in New York, a home in Boston, a house on the Cape and two homes in Florida. The staff at all of those locations are making purchases every day, and so that family’s payment activity needs to be managed in a way that a business would.
That’s an example of where we’ve taken a commercial card program that our businesses use and applied that to family offices. There are all kinds of purchasing controls that you can put in place, such as alerts when reaching a certain limit, or when an individual uses a card to attempt a purchase in a category that’s prohibited for them. And those categories might align differently for different families or locations or staff. If I were to use my own corporate card to buy a Gucci scarf, that would generate an alert because that’s not related to my work. But one family that we work with uses a commercial card where they do buy a Gucci scarf regularly, when they provision their home in Hawaii for guests.
What other tools do family offices use that relate more to the business side of their operations?
There are strategic credit needs that we see clients have, where we recommend they structure a line of credit. Thinking of it ahead of time and having it there will mean they have the ability to act quickly when they want to.
For one family in Texas, the patriarch was approached by his granddaughter to purchase a local coffee franchise. She had a pitch book and was ready to invest in buying and building that business. We talked to that family about financing that through a traditional loan, but that would’ve been expensive and would have taken long enough that she might have lost the deal. That family had established a private client line with the private bank years ago, which enabled that grandfather to provide credit directly to the grandchild’s business. When they do this in advance and get that credit line established ahead of time, it provides flexibility to the family.
When families first come in for your services, what are some key ways they can upgrade how they operate?
We see family offices come in, and they’re operating in a way that I would describe as “white-gloving it.” They’re highly service-centric, with a lot of work being done by staff that could be outsourced to others or just replaced by technology and automation. What they’re doing is very manual, more paper-based. It’s not broken; it’s just incredibly inefficient.
Interview conducted by Steven I. Weiss
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HELP SHAPE THIS STORY
Built to last: We’re working on a story about how to build a family office that lasts — one with a shared mission and a succession plan to endure for generations. If you have any ideas or comments on the topic, feel free to reach out to us.