For all kinds of reasons, single-family offices have not rapidly embraced technology, although Covid-19 has jolted some into action. We talk to a variety of individuals about the market.

Single-family offices are often founded by people who have sold a firm or have quit the daily business grind. They aren’t happy to receive sales pitches from tech vendors and others trying to make money from the SFO space. 

That’s understandable. Unfortunately, however, single-family offices, collectively overseeing trillions of dollars in assets, are targets for thieves, and also need to embrace digital technology to remove paper-based processes that can also lead to costly mistakes.

Technology companies, consultants and lawyers who talk to SFOs know how difficult it is to get these discreet organizations to talk about back-office efficiencies, investment platforms and other business requirements.

So what’s the best approach? 

“If any service provider acts like the proverbial 'used car salesman' s/he deserves this wariness – and not getting the business! As vendors we must be consultative and wholly focused on their needs. This will defuse this feeling and move toward win-win,” Mike Slemmer, LP sales director, Dynamo Software, a firm that can be found here, told Family Wealth Report. 

One of the largest challenges, Slemmer said, is for family offices to move away from the â€śunsecure and very inefficient tools of the 90s” – i.e. QuickBooks, Excel, and other programs â€“ which he said “simply cannot scale for today’s complex investment and accounting needs.”

But the drumbeat of noise around new technology, including areas such as Artificial Intelligence, is going to be hard for even the most reluctant SFO principals to ignore. 

“I do think that AI, robotic processing and the superior integrate-ability of systems will force even the most change-averse FO to finally move from those systems of the 90s and embrace a more holistic approach. It won’t be that one system has it all as these advances make integrating best-of-breed (individual) systems much easier to talk to one another,” Slemmer said. 

A person with an insight into the challenge is Rob Mallernee, founder and chief executive of Eton Solutions (see an interview about the business here.)

“If I look at most family offices, then almost all are run by lawyers, accountants or a CFA. They have little interest or experience about the mid- or back-office technologies. These are smart people who realize they need to have technological skills to distinguish from one system or another. There is a fear they have of making costly mistakes,” Mallernee said. 

“It is very hard for them to get up to speed on this and you are typically trying to do all this with a small team of people,” he continued. “We think 'family office-as-a-service’ is a huge deal down the road and it is probably where we will end up.” FOs will, with this model, retain control and authority but many specific functions will be outsourced. “We think this is going to be the way for the future,” he said. 

What’s at stake
The industry has a challenge. According to a research study from Family Wealth Report in 2019, FOs waste huge chunks of the working week on manual workarounds as they struggle along with generic software for accounting and investment analysis. They spend a fifth of working hours on manual processes on average – rocketing to two-fifths for larger ones – because they are trying to run high alternatives allocations and scores of legal entities through multiple non-specialist systems. With multi-family offices, they allocate 44 per cent of assets to alternatives and single-family offices devote 60 per cent, with the latter’s greater adventurousness underscored by an average allocation to private equity or hedge funds of 21 per cent against 17 per cent, and direct standing at 27 per cent for MFOs and 38 per cent for SFOs.

Some areas of spending are easier for FO principals to appreciate than others. Cybersecurity attacks have a way of focusing minds, although often only after a breach has happened. 

“When it comes to security and risk management, families sometimes choose to downplay or self-diagnose threats unless something `bad’ has happened in the past (cyber breach, theft, stalking, etc.),” Edward Marshall, global head, family office and high net worth, at international law firm Dentons, told FWR. “Combined with the pressure for rapid response time on family requirements and confusion around what security is (or should be) `actually necessary’, it’s a recipe for potential problems,” Marshall said.   

“Families who may still be adjusting to the reality of their wealth may initially underestimate the ease of how an open source plus internet search can reveal to others much about them,” Marshall continued. 

“Coming to terms with the reality of new wealth can be a challenge, especially if the liquidity event is large and occurs in a short period of time of running a business.  Families unaccustomed to the unwanted attention that significant wealth can bring sometimes underestimate the protections they should take as to business partners, service providers, advisors, employees, and others, until an `event’ occurs.

“This goes to the heart of the question on hesitancy around making sweeping changes in the components, strategy, and operations of their family office.

“Some of the challenges that families want to solve with setting up and having a family office are quite mundane. Let’s face it, there are many reasons to build your own single-family office or `rent’ the services of an MFO but, at its core, families take this step to make their lives easier,” Marshall added.

Being sold to
Will Trout, director, wealth management at Javelin Strategy and Research, said the FO sector in the US remains one where many tasks are done by hand.

“Family offices get sold to…they are fairly visible in the States. They do tend to be a bit penurious and don’t like to spend a lot of money…a lot of functions are done manually,” Trout, based in Houston, Texas, told FWR. For example, he said that some SFOs still enter data on Excel spreadsheets and the like rather than using more modern systems for processes such as bill payments and other tasks. 

“There are opportunities around consolidated reporting and syncing things up from a data hygiene and workflow perspective…the vendor landscape is still a very fragmented area,” Trout said. 

Can the industry improve decision-making? What can membership and peer-group organizations do to move the dial?

Peer networks are great but again this comes back to the question you pose about being `sold’ to. The willingness of wealthy families to pay to join an 'FO networking club’ can vary widely, Dentons’ Marshall said.

“Some families will join these groups for a few years and then leave because they feel they have received most of the benefits of membership. For a family who is new to wealth, actively trying to source deals, or looking to take a big change in the direction of their family office, joining any kind of peer group can generate valuable new connections amongst families and with FO industry professionals.”

“In my view, American FOs are being somewhat more open to new ideas. There are more single-family offices going down this path. In certain cases, this can be driven by their active involvement in investing or because of a philanthropic effort,” Marshall said. It remains the exception to have strong public visibility as a single-family office, but for those FOs transitioning away from managing family capital only to now managing external capital as well, it can be a powerful branding strategy. This is especially true if the family wants to portray itself as being timeline agnostic when it comes to making investments,” Marshall said. 

Trout says the industry has a way to go. “With US family offices, particularly those with $1.0 billion or more in assets, they are having to deal with multi-generational families and a variety of stakeholders in the SFO. That certainly puts a premium on their getting high-quality reporting. But at the moment the technology used to communicate with the end consumer can be quite basic.

As for Marshall, he doesn’t expect rapid change in this sector any time soon.

“There isn’t a 'killer app' in the single family office world. I don’t think we’ll see one in 10 years for a number of reasons such as small market size, desire for hyper-customization, low willingness to pay for FO tech. However, there will be incremental improvements on tech solutions that help families benchmark against other families, and help them with knowing what state of 'readiness' they are in.”