Embracing Digital Transformation In Family Offices

Rob Mallernee is the CEO of Eton Solutions.

Digital transformation is a technology-driven movement impacting business efficiencies and outcomes across virtually every industry globally. Some businesses, however, are lagging. Surprisingly, one industry that has been slow to adapt to technological change is the family office industry. These are the firms that manage the wealth of ultrahigh net worth families globally.

The number and net worth of wealthy individuals and families have grown dramatically over recent decades. As of 2022, the number of billionaires in the U.S. has reached 735.

The number of billionaires worldwide reached 2,755 in 2021, with a combined net worth of $13.1 trillion. Their numbers declined slightly this year to 2,668 and a net worth of $12.7 trillion. If you want to be more inclusive, individuals worth at least $30 million numbered 295,450 in 2020 with a combined worth of $35.5 trillion, according to the Wealth-X World Ultra Wealth Report.

The rapid growth in ultrahigh net worth (UHNW) families has engendered a burgeoning family office industry. Ultra-wealthy families are establishing or utilizing family offices to efficiently manage the growth, preservation and transfer of wealth across generations and to supervise a wide range of services, from wealth and property management to charitable giving, estate and tax planning, legal affairs and more. The number of family offices, both single-family and multifamily, has grown dramatically in recent years and was estimated to be around 10,000 globally in 2016, according to Ernst & Young.

Despite managing trillions of dollars in wealth, most family offices lack the sophisticated technology systems and business process efficiencies that are common in many other industries. Far too frequently, offices depend on manual work processes, using rudimentary, arcane tools to manage the complex affairs of clients. Services such as general ledger and partnership accounting, managing and tracking investment performance, tax reporting, capital commitment tracking and bill payment are often managed in disconnected systems.

Aggravating the situation is the complicated nature of family offices. The family’s financial affairs typically involve a complex web of interdependencies with numerous multi-entity and multigenerational family structures and far-flung assets, liabilities, accounts, LLCs, partnerships and other legal entities.

To keep track of it all, office staff must duplicate data entry across multiple systems, using spreadsheets to reconcile and consolidate that data for reporting and analysis. These inefficiencies lead to long reporting delays, potential data errors, overworked high-value office personnel (who should be spending their time providing advice and counsel to clients) and frustrated family members who feel they lack transparency into their wealth and office operations.

Like any enterprise, operational efficiency, agility, risk avoidance and decision-making suffer without trusted and timely insights. These challenges are compounded by the confidential nature of the data and the need to provide access to data on a need-to-know basis. Those are challenges with which I am very familiar. As a founder of a multifamily office and an executive who spent many years managing the wealth and business affairs of ultrahigh net worth families, I grappled with these same issues.

My experience has led me to believe that family offices take three distinct approaches to leveraging software to solve the challenges discussed above. The first is using Excel and QuickBooks. For some, this is sufficient. But for most, this lacks sophistication and requires significant manual work. Second are the innovative, best-of-breed solutions. These include specialized software focused on document management, customer relationship management, general ledger and more. These technological evolutions have driven real improvements in family office productivity and have modernized the family office industry.

However, although these solutions are phenomenal at what they do, the lack of interconnectivity between each solution creates problems when data analytics, insights and security are paramount. The third approach is an integrated platform that adopts an enterprise resource planning (ERP) approach. I will discuss this approach in more detail as I believe it is where the future of the family office is headed.

The advent of modern enterprise resource planning (ERP) systems has delivered greater efficiencies, agility and insights for businesses of all kinds. Today’s ERP software integrates various processes and data within the enterprise into a single system to optimize operations, reporting and analysis.

At a high level, modern ERP systems integrate a variety of discreet but connected services that allow people to perform distinct tasks and business processes, such as finance, investment management, HR, client services and others. These are all integrated with a centralized data repository to manage and monitor relevant business information.

To be sure, creating an integrated ERP platform for managing family wealth and business affairs has unique challenges. An integrated platform will most likely not have all the specialized accessories—the bells and whistles—compared to a best-of-breed solution. Furthermore, it requires a flexible data model to accommodate the complex interrelationships of ownership between family members and legal entities as mentioned earlier.

This kind of integration of tasks and stakeholders needs to seamlessly connect everything happening in the office—an arduous task. Despite the lack of all the bells and whistles and data model complexity, once a family office has implemented a truly integrated system, the stage will be set to achieve new levels of efficiency, value creation and transparency.

For example, rather than waiting weeks after a period close to view their net worth, individual family members can get customized insights as often as daily. The office achieves much greater operational leverage to improve productivity and profitability. Rather than constantly looking backward at what happened in the past, office personnel is empowered to be forward-looking. They can concentrate more time on planning and strategies to preserve and grow family wealth.

The financial and business affairs of UHNW families are growing more complex with the increased globalization of assets and new types of investment vehicles and strategies. Family offices must embrace digital transformation to keep pace, beginning with evaluating their software to ensure transparency, data quality, efficiency, cybersecurity and responsiveness to family needs.