By Nicole Eberhardt, Chief Strategy Officer, Ledgex

What type of firm routinely manages sophisticated centimillion dollar portfolios across multiple asset classes with only a skeleton staff? Family offices, of course, and when you layer on their multi-layered ownership structure, running one becomes particularly daunting. You’d think their complex holdings and low employee base would make them ideal for a software solution. Unfortunately, family offices have largely been overlooked when it comes to fintech innovation, as most vendors focus on the financial behemoths involved in more traditional investing.

Sure, there are many third-party portfolio software systems that could handle the diverse investments of family offices. There are also many general ledger packages that can report hierarchical ownership structures common to family offices. Lamentably, unified software solutions that can handle both crucial needs have been almost non-existent. Most offerings that support both are designed to be operated by large institutions with ample staff.

As a result, most family offices create an infrastructure by stitching together multiple portfolio software and simplistic general systems (such as QuickBooks), backed up by ad-hoc, often siloed spreadsheets. Not an ideal answer for family offices. It’s also not a healthy approach for competing in a future where the volume of high-net-worth individuals (HNWI) could increase nearly 30% by 2025 and the ability to leverage data is table stakes.

Owning It

The 2020 Capgemini World Wealth Report noted the volume of HNWI had grown to more than 19.6 million. In its 2022 edition, North America, which has the highest HNWI levels, saw that population increase by 13.2% and wealth by 13.8%. One would think software providers would be lining up to service this market. However, compared to the overall investment community, and high level of complexity and automation required, the family office market is relatively small. And vendors find it easier to shoot for simpler sales to larger staffed institutions.

Still, there is hope for family offices, whereas several vendors have recently started to pursue this overlooked opportunity. These latest offerings not only keep track of a family office’s multi-asset portfolio but also include beneficial ownership reporting capabilities. In a nutshell, beneficial ownership functionality allows the family office to maintain hierarchical percentages and can report the flow-through ownership. This is crucial in the operations of the office and previously has been handled through spreadsheets alone.

Take the following example:

• Entity A has a managed account worth $40 million
• Janie is a 20% beneficiary of Trust B
• Trust B owns 50% of entity A
• Therefore, Janie has a flow-through ownership share in Entity A’s managed account with a value of $4 million.

As you can see, in order for the office to report to Janie her net worth, beneficial ownership is vital. Having a system that can own it – automatically calculating the inflows/outflows by the family members – is a game changer. That’s because it greatly reduces the error-prone, time-consuming practice of applying ad-hoc spreadsheet results to generated reports from stand-alone portfolio software.

Reporting Time

Another neglected demand of family offices has been the ability to generate timely ad-hoc reporting. For most financial institutions, operations work on a regular schedule. Trade activity is settled daily. Indicative valuations are done weekly and distributed internally. Reconciliations are done monthly with subsequent investor reporting also generated monthly.

Family offices generally don’t have such a set routine. While activity is also settled daily, the similarities end there.  Family members often request ad-hoc reporting to support their own activities (for example, requesting a statement of net worth for purchasing a condominium).

Family offices can utilize software with ad-hoc reporting capabilities to serve the ultimate beneficiaries. Some packages do have the ability to generate reports by combining month-end finalized portfolio valuations with current ownership percentages. Further, advanced solutions offer the flexibility to report on indicative prices (aka: estimates). While on the face of it, such solutions appear to report more timely information, indicative prices from some sources can be notoriously unreliable and thus unusable for third-party reporting.

Today, there are systems that can combine finalized valuations alongside indicative pricing. These software offerings solve the unreliability problem of estimates by including a measurement of dependability – also known as “confidence.” By including a confidence level, the user can be sure they’re using the timeliest data (mixture of indicative and final valuations) without concern of misrepresentation.

A Better Look

Vendors that focus on family offices are sensitive to minimal staffing. To that end, some offerings are now hosted, avoiding the need to purchase additional computer servers, while freeing up IT resources. Hosted solutions also provide geographic flexibility in that individuals can access the information anywhere and anytime.

Simple operation, ideally automation, should be a paramount concern when evaluating software solutions. Traditionally, software installed in-house offered a more robust user interface with flexible importing/exporting capabilities. However, with recent improvements to both browsers and software libraries (such as a JavaScript library, REACT), many hosted solutions have ease of use/import/export functionality to match their in-house rivals.

Meeting the IT needs of a family office isn’t easy. With all the investment complexity of large institutions and just a fraction of the staff to oversee it, there are very few systems up to the task. For firms still hanging on to their Frankenstein mix of spreadsheets and QuickBooks, there are more attractive options available. And not only is it a better look now, you’ll gain greater insight into your data and the ability to take on more volume in future.

Nicole Eberhardt is chief strategy officer for Ledgex. The company’s multi-asset class portfolio accounting solution enables alternative investment firms to confidently and successfully manage complex portfolios with game-changing data accuracy, transparency and timeliness. For more information, please visit www.ledgex.com.