Family Office Software: Practical Considerations

Family offices, entities that manage the wealth and investments of affluent families, occupy a unique position in the financial world. Their role transcends wealth management, evolving into a bridge that connects successive generations. Ensuring the smooth transition and preservation of wealth over time. But, the complexity of managing varied assets necessitates family office software systems that are equally sophisticated and adaptable to the family offices’ distinctive needs.

Unlike average investors, whose portfolios may only include traditional stocks and bonds. Family offices often own a more diverse array of investments. These include direct private equity, private equity funds, real estate, and family-owned businesses, alongside traditional stocks and bonds. Furthermore, the intricate ownership structures—often woven through tax planning and succession strategies using trusts and holding companies—add another layer of complexity to family office reporting requirements.

Brick-By-Brick

Yet, despite the critical need for advanced consolidated reporting to manage the diverse holdings of family offices. Many find themselves reacting to existing demands rather than proactively designing solutions that cater to the unique requirements of their portfolios. This reactive stance is often a result of the organic development of reporting processes within family offices. Which often begins as makeshift solutions cobbled together from the resources at hand. Whether due to the family office’s origins from a business sale or the dedicated attention of a professional advisor leaving their practice.

As a result, a mosaic of reporting systems emerges at most family offices. From spreadsheets and ad-hoc ledgers to more formal financial statements. Often without the integration needed to provide a holistic view of the investor family’s wealth. This disjointed approach can obscure the full financial picture, leading to isolated decision-making and increased vulnerability to external influences.

Enter Consolidated Reporting Software

Consolidated reporting should be an essential core function for family offices. Consolidated reporting should bring clarity and coherence to a family office reporting process. By harmonizing various types of assets into a unified reporting framework, family offices can make informed decisions that reflect the entirety of the family’s wealth. And, doing so reduces the risk of fragmented decision-making while enhancing overall financial peace of mind.

This post describes the journey from basic Excel spreadsheets to sophisticated family office reporting software. Highlighting the benefits, limitations, and considerations at each stage to equip family offices with the knowledge needed to choose the best reporting solutions for their unique needs.

Family Office Reporting is Unique

Family offices have reporting needs that are sometimes more sophisticated compared to main street investors. This is due to a few factors including:

• Family offices serve as a bridge between generations to ensure the smooth transition of wealth over time.
• The clients of family offices often have a more diverse array of assets in their portfolio because they often incorporate real estate, direct private equity, private equity funds, family owned business, along with more traditional stocks and bonds.
• The ownership structures of some family office clients tend to be more complex due to tax and succession plans. Including the use of trusts and holding companies with various divisions of ownership.

Reporting systems need to reflect the unique needs of family offices. However, when it comes to consolidated reporting, family offices are often reacting to the demands of their stakeholders rather than designing the best solution to meet those needs. The reasons why are connected to how family offices are often created.

Birth of Your Family Office

Frequently, family offices begin as an outgrowth of a business that was sold or by an advisor like an accountant, lawyer or investment professional who dedicated themselves to working full time for a single family. And so, the reporting processes initially used are often developed organically based on experience the founding team’s unique experience.

The result is most family offices use a hodgepodge of reporting systems including Excel, internal bookkeeping software, traditional financial statements, and ad-hoc ledgers generated by accountants (such as ledgers of ACBs and other capital costs). Its less common for family offices to use consolidated reporting systems that incorporate all the family’s various types of assets including: stocks, private equity, real estate, and personal real estate holdings, etc.

This lack of consolidation makes decision making tougher and may cause confusion when tax, investment, and benchmarking decisions are being made.

Break Down Silos

The danger of relying on siloed reports of varying formats, purposes, and sources is that investors miss the big picture. This makes decision making more difficult. The result is decisions tend to be made in isolation. This makes some family offices more vulnerable to framing by clever investment promoters. And, make performance evaluation and benchmarking nearly impossible.

Bringing all investment portfolio data together in unified consolidated reports where various types of assets can be viewed like “apples-to-apples” is called Consolidated Reporting. And, consolidated reporting should be a core function of what most family offices do.

The benefits of consolidated reporting include:

• Avoid making investment decisions in isolation
• Become less vulnerable to framing
• Improve benchmarking
• Better information sharing (accountants, advisors, investment committees, family members, etc)
• Increase financial peace of mind
• Support intergenerational wealth transfer

Stages of Family Office Reporting Software

For the next part of this post, we’ll describe the various stages of family office reporting ranging from Excel and PowerBI, to software like Wealthica and Addepar.

	Cost	Features	Expertise Required
Excel	Cheap	Limited	Low
PowerBI	Cheap	Limited	Medium
Wealthica	Cheap	Limited	Low
Addepar	1.5 bps	Comprehensive	High

Option #1 – Excel or Sheets

Many family offices start their consolidated reporting journey using Excel. It’s the cheapest and easiest place to begin. And, in many ways, Excel is a very useful tool. All financial professionals should be familiar with Excel, and so getting up-and-running quickly is a big benefit.

Today, Excel also includes many advanced features that make it possible to do a lot more than simply creating tables and charts. But, even though Excel can be a powerful tool, the user needs to be capable of navigating these advanced features. And, this is where many family offices hit a wall.

Especially for single family offices, internal staff usually won’t have the technical capacity to use advanced Excel features. This is because those staff members are typically financial professionals. And, family offices who do rely on Excel exclusively run the risk that their technical capacity becomes invested in a single individual. When this person leaves for a better position (since anyone with advanced Excel skills is highly valuable with lots of opportunities), the family office will be left scrambling to fill the gap.

Eventually, most successful family offices will find that Excel can only take them so far. And, so they search for alternatives that can meet their unique reporting needs.

Option #2 – Business Intelligence Software

Some family offices who have outgrown Excel, look to business intelligence (BI) dashboards such as PowerBI or Tableau. This option is appealing for family offices because it enables users to access investment dashboards anywhere at anytime without file sharing. Plus, the built-in features of BI software make displaying information more elegant compared to native Excel.

But, as with both spreadsheets and business intelligence software, the family office faces the risk of investing in the human resources necessary to run the tool. And just like Excel, good data analysts are in high demand (BI skills are expensive too).

Plus, whether your family office uses Excel or PowerBI, it will still need to store the financial data somewhere. So, data management becomes a key challenge to overcome when a family office transitions to using BI software for consolidated reporting. This is where software tools designed for financial reporting start to look appealing.

Option #3 – Retail Consolidated Reporting Software

Today, there are lots of apps and software that help investors tally their portfolio in a consolidated way. Most of this software is built for the average stock market investor who is saving for retirement. And, there are currently lots of great apps and software available for this purpose.

The problem for family offices is such software’s limitations. For example, one common way portfolio tracking software falls shorts is incorporating various types of assets such as private equity and real estate. Since the asset classes used by typical portfolio tracking software are arbitrary. This won’t work for most family offices that hold asset classes not covered uniformly (think private equity, various real estate).

Another drawback is most portfolio tracking software simply doesn’t enable users to enter the granular data required to make accurate estimates of returns. And, without this granular data, users cannot generate the results they need to track results and provide benchmarking.

For example, a software like Wealthica enables users to track the value of their house or other asset into the platform. But, what happens for multiple transactions over time (like multiple capital calls for private equity funds)? Such limitations make rate of return estimates for private equity funds and real estate holdings nearly impossible.

The bottom line is that the software used to manage an average investor’s retirement portfolio does not enable the type of customization that most family offices require. From custom asset classes to the types of charts and graphs. Most of the time, software used to manage the stock portfolio of a retiree only provides a pre-packaged set of templates to choose from.

What family offices need is consolidated reporting software built for their unique requirements.

Option #4 –Family Office Reporting Software

The main difference between many of the apps used by average investors to manage their retirement portfolio and the software used by the most sophisticated family offices is family office reporting software is fully customizable. This provides the flexibility for family offices to respond to the unique reporting needs of their clients.

Software built for family offices such as Addepar, Eton, and Archway are comprehensive. These programs typically incorporate everything family offices demand. Including the ability to customize layouts, benchmarks, and delivery, that meet the needs of a diverse array of users. Such software can also digest various forms of data from various sources so that it can be displayed in a consolidated way.

But, dedicated family office software also comes at a cost typically geared to assets under management (AUM). This means a price based on the size of the portfolios being tracked. Prices might range from 1 to 2 bps. A bps is 0.01%. Which doesn’t sound like a lot. But, remember that 0.01% x $100 million is still $10,000. And, since implementing these types of software is difficult, the minimum annual fees required are often high too.

Even though the cost for family office software might be a tiny fraction of the total portfolio value. Since most family offices are dealing with large amounts, the cost for software adds up quick. A rule of thumb in the family office world is that software expenses will probably cost as much as a body (someone’s full time salary). This is where multi-family offices and firms dedicated to providing reporting services may have an edge. Since, they can spread the initial cost of the software over a larger base of clients and have developed the expertise to deliver such solutions.

Suggestions

Before diving into purchasing software for your family office, here are some topics to consider first:

• Create a list of features that matter most before evaluating software providers
• Create a budget (offer guidelines based on AUM, etc)
• Determine your level of expertise and internal capacity to manage software
• Could you share this resource with other family offices or investors like you (determine your allies)?

Our Family Office Expertise

Our family office has experience developing and implementing a variety of software tools used by our clients. And, we know from our experience that software tools can create new problems too. The difference comes when a family office operates more like a business. This means making business plans, documenting workflows, documenting roles & responsibilities, etc. Because, the most sophisticated software often requires the most sophisticated human resources to operate it.

Click here to schedule a free consultation for your family office software needs.

Conclusion

When navigating the complex and multifaceted landscape of family office reporting, it’s evident that no one-size-fits-all solution exists. From the humble beginnings of using Excel for its accessibility and ease of use, to the advanced capabilities of dedicated family office reporting software like Addepar, each option presents its own set of benefits and challenges. The choice between these tools is not just a financial decision but a strategic one that should align with the office’s long-term goals and human resources.

As family offices endeavor to enhance their reporting processes, it’s crucial to approach this task with a clear understanding of the desired outcomes. Prioritizing consolidated reporting not only streamlines decision-making but also fosters a more integrated view of the family’s wealth, reinforcing the foundations for sustainable, intergenerational wealth management. This journey requires careful consideration of the office’s specific needs, budgetary constraints, and internal capacity to manage the chosen solutions effectively.

Moreover, collaboration with other family offices or leveraging shared resources could offer pathways to high-quality reporting solutions without the full burden of costs and expertise development resting on a single entity. The evolution from basic spreadsheets to sophisticated software embodies a progression towards more strategic, informed, and cohesive wealth management practices.

For family offices at the crossroads of selecting the right reporting tools, the journey ahead involves balancing cost, functionality, and the ability to provide a comprehensive, apples-to-apples view of diverse assets. As family offices continue to serve as the custodians of generational wealth, the adoption of a system that meets these criteria is not just an operational necessity—it’s a cornerstone for future legacy building.

If implementing a consolidated reporting process seems daunting, we invite you to click here for a consultation with us. We offer a consolidated reporting service created for wealthy investors and their charitable foundations that will provide a powerful tool for your stakeholders. Our expertise in navigating the complexities of family office reporting can help you achieve greater clarity, efficiency, and peace of mind in your wealth management practices.