Ryan Eisenman, the CEO of the digital admin software company Arch, discusses how family offices can best leverage technology for tax filing and investment benefits.
Family offices try to be at the forefront of smart investment decisions. How do you think they can have a more complete view of their portfolio?
It’s wild that a significant percentage of family offices and other sophisticated investors don’t know key information on their portfolios. This can include the value of their investments; how their investments are performing; and their total unfunded commitments across private equity, which amount to future payment liabilities. With the sheer volume of private investments that we’re seeing from our hundreds of family office clients, it’s becoming increasingly important to have a smart workflow solution that offers unique insights into individual investments and portfolios.
How can family offices minimize pain points in their tax reporting?
Don't delay the process of getting tax-ready. The collection of K-1s and other documentation is an extremely time-consuming process. There is also the potential for the documents you receive to be inaccurate or instances where you were not the intended recipient. It's important to have structure to tackle this burdensome administrative responsibility.
Get to know the nuances of the hurdles that come along with private markets investing. For example, funds of funds historically provide their tax documents later than other vehicles. This is because they are unable to prepare a final K-1 until they receive all underlying K-1s of their investments. Once you have a stronger understanding of the different pieces of the puzzle, like K-1 arrival dates, you can ensure you don’t run into any unforeseen challenges.
What are the common mistakes you’re seeing families make when it comes to taxation?
It's critical to understand the complete picture of your private markets investments. Most investors do not have an accurate view of the after-tax return for their investments, let alone the actual return for their investments.
There are various opportunities for families to minimize their tax burden based on the investments they're allocated to. For example, within real estate investments, there is the option to report depreciation of assets for possible tax deductions. Additionally, if an actively traded hedge fund reported losses, those may also be disclosed for potential tax benefits. Overall, it's important to have a tax expert on your side that understands these complexities and who can ensure they are addressed appropriately.
What do you see as some of the most difficult challenges family offices face today?
There’s more optionality, information and complexity than ever before. Markets move quickly, and the types of investments available to family offices are also evolving quickly. It’s easy to get bogged down in a deluge of paperwork and logistics.
What does the future hold for private markets investing, in your opinion?
We’ll continue to see the proliferation of alternative investments, where private market investments will increase as a percentage of an individual or family’s overall asset allocation, to where they may make up the majority of a portfolio for many investors.