In the rapidly evolving landscape of wealth management, the concept of the family office is undergoing a digital transformation, giving rise to what many are referring to as the virtual family office (VFO). This approach leverages technology to streamline and enhance the traditional family office model, providing family enterprises a more efficient and flexible means of managing their wealth.
Just as the definition of what it means to have a family office depends on the context, the definition of a VFO offers a range of conclusions. It is not just an office with a remote workforce, nor is it simply the result of outsourcing everything possible. Instead, it is a thoughtful implementation of technologies that provide an efficient and integrated platform to manage a family’s business, and often nonbusiness, affairs.
THE VFO DEFINED
In its purest form, a VFO disrupts the traditional approach by embracing technology to create a more accessible and efficient solution. This may eliminate the need for a physical presence and certainly offers a digital platform where access to information and services enables the professional staff to focus on high-leverage activities, such as one one-on-one interaction with their clients.
I am often asked how much wealth is required to justify a single-family office, with the requisite staff needed to provide the services a family requires. I often answer like a professor would because it truly depends. If you can visualize a chart with Scale ($) on the X-axis and Complexity on the Y-axis, consider that you can have a lot of scale in terms of financial resources but not much complexity in terms of the nature of the assets or the ownership structure. Conversely, you could have a lower level of assets, but the type of assets and ownership structure creates complexity. The family office structure needs to match both, which in some cases allows for a very efficient office.
A VFO offers families the opportunity to create, or in some cases retrofit, their offices using the technology available to virtualize their service model either in part or entirely, thus rendering the scale/complexity model less important.
Of course, there are always trade-offs.
Some of the benefits of a VFO are:
- It allows families to choose the best experts for their specific needs — such as investment advisers, tax accountants, estate planners, insurance analysts and concierge services — regardless of location.
- It potentially reduces the overhead and complexity of hiring and managing a full-time staff of employees.
- It provides families more control and transparency over their financial affairs and decision-making processes through digital access.
- It can provide access to a network of peers and resources that can offer valuable insights and opportunities.
I am a proponent of outsourcing to access the halo effect of broad expertise. Ryan Loughran, founder and CEO of Amplify Advisory
Solutions, has focused his firm’s efforts on developing comprehensive and integrated platforms that can provide the tech backbone of a VFO. Ryan offered that “a family office does not simply design, deploy and operate a VFO data platform. This project requires advanced data solutions expertise coupled with practitioner experience to successfully devise and deliver a successful VFO data platform.”
There are, of course, challenges with a VFO model, such as:
- It requires families to have a clear vision and strategy for their wealth management and governance.
- It demands a high level of trust and communication between the family, staff and the external providers.
- It exposes families to potential risks and liabilities associated with outsourcing sensitive information and tasks. Cybersecurity is even more critical.
In my research, I asked Jill Creager, founder and CEO of iPaladin, her thoughts: “This shift to a VFO can seem overwhelming due to data spread out over many systems. Our deep dives and experience helping offices transition to the cloud reveal a 40% redundancy rate within traditional storage solutions. Worse still, 8% to 10% of crucial documentation tends to be missing post-consolidation. These metrics spotlight the real danger of sticking with fragmented and often highly disorganized systems. Regardless of the office model chosen, outdated family office technology severely risks both data integrity and how smoothly things run.”
Creager's firm provides a digital platform for daily workflow, administration and compliance that we recently deployed at the family office I serve.
THE FUTURE
Adapting to a more virtual and tech-enabled approach now will avail families of the technological advances just around the corner. The more progressive the approach the family office takes with technology, the more accessible the teams will be to new opportunities.
Regarding benefits of blockchain technology, Jill commented that “blockchain introduces unmatched levels of trust and transparency to family office management, thanks to its strong archival and immutable properties.” Her firm has deployed blockchain as a critical component of the platform.
And of course, there is artificial intelligence. We need an entire article to cover the potential applications; but in our office, we are already actively using GPTs for research, data analysis and visualization, and document review, to name a few.
The virtual family office represents a paradigm shift in wealth management, breaking down barriers and perhaps making a family office more accessible to a wider range of family enterprises. The cost effectiveness, flexibility and scalability inherent in the VFO model align with the evolving needs of high-net-worth individuals in the digital age.