Family Wealth Report spoke to External IT about what it does for clients and how this ties in with wider industry trends on cloud computing.

To say that security is a big area of concern for wealth managers and family offices would be an understatement. Recent hype about “the cloud” shows that it is often the case that advisors would rather sacrifice convenience to keep their data safe. But as more and more fintech players crop up, the industry seems to be slowly warming to the idea, and, here, Sam Attias of External IT lays out some reasons why.

New York City-based External IT describes itself as a provider of unified cloud computing solutions to financial services clients including RIAs, broker-dealers, and – hot on its radar today – family offices.

“We are the IT arm of their organization – more of a partner as opposed to a vendor,” said Attias, vice president of financial services. Family Wealth Report spoke to Attias about some of the trends he is seeing at the moment as well as the firm's growth strategy and ambitions.

Concerns over the operational safety of cloud platforms clearly exist in the financial services arena. Family offices in particular have been slower than the general wealth management sector to accept cloud-based applications, reasons for which include concerns about security and a scarcity of software tools that focus on this unique segment (source: Deloitte's 2015 Private Wealth Outlook.)

“But now that data centers have become commoditized as a resource, along with pricing around it, you can get enterprise-grade level security,” Attias said. “What the mentality has always been for family offices and advisors is that IT is a cost center, and for a long time that is what it was. The industry hasn't evolved from a technology perspective where it would make such a tremendous difference on the productivity of the advisor, or help the client experience.”

But in the last five years or so there has been an explosion of developments related to applications and what family offices can do for their clients with them – and this is now impacting business models, margins and organizational productivity.

“Making the switch to a cloud-based platform is step one in all of that,” Attias said, noting however that many larger multi-family office players are indeed very proactive around technology and do see it as a way to grow their firm, attract younger advisors and enhance the client experience. “I think everyone will end up going in that direction – it's just that we're in an industry that is resistant to change,” Attias said.

Forces at play

In terms of the reasons why organizations have turned to External IT, Attias said it tends to be because they are experiencing pain in some shape or form with their current provider, or something has happened where they realized that, had they have been on another platform, it wouldn't have been a problem. They are also starting to realize the need for better security, and the advantages of having all of their applications and tools accessible securely anytime, anywhere and on any device.  

Attias said External IT is also seeing some family offices that are tied to operating companies looking to “create a brick wall” from an IT perspective between the two, as family members are increasingly concerned that their data could be compromised if there is a security breach. Meanwhile, there are firms that are simply hitting the “refresh” point of their IT equipment and realize that buying their own servers is essentially investing in hard assets that depreciate in value very quickly.

“They start looking at other cost-effective options with more features. So today, if you look at the cost of moving to the cloud over five years versus keeping it on-site and investing in the hardware and getting someone to manage it for you, it is now – most of the time – more cost-effective from a hard dollar perspective,” Attias said. “You're also getting more features and security. Comparing apples with apples, it is significantly cheaper – specifically around security features like disaster recovery, business continuity.”

Family offices are also quite simply realizing that they are “only as good as their reputation,” he added. They are increasingly aware that if they experience a data breach, for example, it can affect their client relationships extremely negatively. This is also being driven by clients, who are asking their advisors if they know where their “vulnerability points” are, and if they have partnered with a specialist firm that focuses on security, for example.

In terms of the challenges that External IT has experienced in the development of its business, Attias cited how the high-end wealth market – a “cottage industry” – is very complex, not all that tech-savvy and, simultaneously, highly demanding.

“We realized that the cost and effort to support and onboard them [these clients] is just as much as it is for a 200-strong insurance company,” he said. “So we've had to adjust our operational model to be able to serve them from an infrastructure and client service support perspective. So that was a learning curve for us. There has to be a high level of concierge support.”

Growth plans

External IT has around 400 clients today and, as mentioned above, is looking to further penetrate the family office market – the caveat being that “we need to grow smartly and invest ahead of growth,” Attias said. “We're not targeting much more than 20 per cent a year of growth in next two years.”

The other way the firm would like to grow is to deal with organizations that aggregate or have a relationship with smaller advisors; that way, it can deal with one entity as opposed to 100 individual firms, which would be more cost- and time-effective.

Attias said External IT's main competitors are the local IT firms in close proximity to the family office and currently managing their IT on-site. “The IT outsourcing industry is a cottage industry just like the family office world,” he said. “You've got about 15,000 IT service providers out there, the bulk of which have anywhere between five and ten people and the average firm has about $1.5 million in revenues. Eighty per cent of the market has under $5 million in revenues (10-30 people) and only 5 per cent has over $10 million in revenues.”

The family office sector itself is, for obvious reasons, a tough nut to crack. “It is very focused on protecting their clients and who they are, and not being in the spotlight,” Attias said. “They can't really see who's doing what, so developing trust with them, for us, goes along way. That is the biggest difference in entering the market, which slows us down. It's not so much about glitzy adds for them, it's about one guy telling another 'these guys are great at service and they have a good tool that has helped our business'.”