Family Offices and the Advantages of Beneficial Ownership Technology

As the Number of UHNWI Clients Expands, Gaps in Technology May Hinder Growth at Firms That Serve Them

Ultra-high-net-worth individuals (UHNWI) have a minimum of at least $30 million in investable assets. It’s an exclusive club, yet its ranks have been growing. For family offices who serve this group with alternative investing – handling intricate hundred-million-dollar portfolios, spread across asset classes – it’s a mixed blessing.

While the real estate consultancy Knight Frank projects the body of UHNWIs to climb 27% from 2020 to 2025, technology for the space has failed to keep pace. Family offices with small staff and lean resources are at a crossroads for serving clients. This is in large part because many software and fintech vendors have overwhelmingly focused on more traditional, lucrative investment giants.

While third-party portfolio software systems do exist, as do general ledger products for hierarchical ownership structures, it is all but impossible to find solutions that adequately handle both for family offices. And if they do, they were designed to be used by large institutions with lots of staff.

What’s it Worth?

In recent years, a handful of vendors recognized this overlooked market and began developing purpose-built solutions for family offices. These tools can track multi-asset portfolios and feature beneficial ownership reporting. With this development, family offices are able to determine hierarchical percentages and report flow-through ownership.

So, let’s say Entity #1 has a managed account valued at $50 million, and Bill is a 20% beneficiary of Trust A, which owns 50% of Entity #1. That means Bill has flow-through ownership in Entity #1 of $5 million.

In order for a family office to report net worth, beneficial ownership is a must. In the past this has been a taxing, error prone process. A system that can automate inflow and outflow not only drives greater efficiency and accuracy – the time to produce reporting is drastically reduced.

Family offices often have infrastructure that’s been stitched together, comprised of varied portfolio software, general systems and often-siloed spreadsheets. It’s far from the healthy, unified platform required to do more with less and compete in a future that’ll be dramatically more challenging, and very profitable if approached correctly.

For family offices, the ability to arrive at worth faster and more accurately serve UHNWIs can pay dividends.

Timely Help

Another longstanding bugaboo for family offices has been conducting ad-hoc reporting in a timely manner. By contrast, most financial institutions have set schedules where everyday trade activity is settled, indicative valuations are circulated internally weekly, reconciliations and related investor reporting is done monthly.

Aside from settling daily activities, family offices work entirely differently, centered on the needs of beneficial owners. For starters, family members regularly require reporting for their own purposes, whether it be purchasing a boat or buying a car.

Some software offers ad-hoc capabilities. Some suites generate reports by merging month-end portfolio valuations and up-to-date owner percentages. Some solutions provide indicative price estimates. However, regarding the latter, the information only seems more timely: Indicative prices can be unreliable so they’re often not used in third-party reporting. 

There are also systems able to bring together final valuations and indicative pricing to increase the timeliness and accuracy of data.

Risk or Reward?

In a recent survey conducted by Schwab and TD Ameritrade, over 37% of advisors said finding talent is a problem. Nearly three quarters said they’re hiring now to develop skills they will need down the road.

Many family offices don’t have such deep pockets. But thankfully, the class of vendors building products for them are tuned into staffing. In fact, hosted offerings can reduce in-house IT resources and eliminate the need to buy more hardware. These services also allow 24×7 user access from virtually any location, which is advantageous for today’s fluid workforce.

When seeking software solutions, family offices should keep user and IT ease at the forefront. Automation should be a priority – you want to raise cost-efficiency and free staff from rote tasks so they can apply their skills to more important work. While in-house software was once synonymous with a strong user interface and flexible importing and exporting, advancements to browsers and software now provide hosted solutions with the same power.

This all said, as the volume of UHNWIs increases, keeping a family office together and growing in the years ahead will be challenging. The potential reward is great, but for firms hoping to compete with spreadsheets and QuickBooks, the risk of being left behind is greater than ever.

Nicole Eberhardt is Chief Strategy Officer for Ledgex, a wealthtech firm and software solutions provider for portfolio accounting