At Deloitte, we have the opportunity to interact with many single-family offices (SFOs), and an ongoing trend we see with these clients is the continuing institutionalization of the space. Many are evolving into very sophisticated wealth and investment management organizations.
There are several drivers for this trend, include transitions of control, succession planning and the desire for a more formal governance structure from an internal standpoint. External drivers include the acceleration of technological change and investment complexities resulting in enhanced concerns about risk and fraud.
We expect this institutionalization trend to only grow in 2015, especially in the following four areas:
Increased Focus on Governance
Governance is the processes, policies and procedures under which a SFO operates. An ideal governance structure begins with a mission statement that sets the vision for the SFO. This process forces the family to prioritize what’s most important, what their goals are and what they want their family’s legacy to be.
The governance structure is then built around the mission statement to ensure that the SFO operates as close as possible to the long-term vision. The governance process should afford protections, foster communication and input and support effective business operations. Activities in the governance process can include planning for succession, detailing the authority of family members, establishing guidelines for partnership operating agreements and setting controls over who has investment authority.
The true value of the governance structure tends to come through in a time of crisis when it can bring a clarity of purpose and a focus that otherwise might be missing.
Renewed Focus on Organizational Structure
As many SFOs undergo a shift from a family business to an entity that more closely resembles a professional services firm, they need to re-examine their organizational structure and staffing needs. They’ll likely find themselves in a challenging position. Although they’re usually smaller operations that strive to run as leanly as possible, they must also face the demands that larger organizations typically address, such as the need for top financial and technological capabilities.
The good news is that SFOs are responding with creative solutions, such as outsourcing and hiring experienced outside talent. There’s not a single best practice or “correct” solution for a SFO; They’re far too varied in their size, structure and goals for any one recommendation to fit. The key points are that SFOs face a complex and challenging environment across several aspects of their businesses, and operating with a “business as usual” mindset may not produce optimal results. A periodic reassessment of the organizational structure and operational model is a healthy practice.
More Formal Approach to Risk Management
SFOs are now more focused than ever before on managing risk. This may best be accomplished by establishing a master risk management framework; By doing so, a family can help ensure that the organization will endure for the long term. SFOs tend to have a wide variety of sophistication and maturity and, therefore, their risk frameworks tend to vary widely. However, one common trait is that it takes the entire organization, the family, the board and the employees, working together to properly manage risk.
A key risk that SFOs should focus on is fraud. Fraud, like water, flows in the path of least resistance, and certain areas are most susceptible for abuse, such as expense accounts, payroll and accounts payable. The prudent approach is to use the mindset of setting up the proper controls that can prevent or limit damage. Only by assuming that there are “enemies within the castle walls” can an effective fraud prevention program exist.
Risk sensing is rapidly emerging as a way to combat risks. It involves a combination of human analysis and sophisticated technology that continuously analyzes massive amounts of structured and unstructured data in near real time. By embedding risk sensing in a firm’s operations, a SFO is more likely to anticipate reputation-impacting events, allowing the firm to adjust its strategy. SFOs can also combat risk in a variety of ways, including increasing education on fraud and performing periodic tests of controls and the entire operating environment.
Evolving Approach to Technology
While the promise of newer technologies is compelling, the rate of technology change, the cost of implementation, the challenge of integration and the need to attract and retain technology talent will continue to be major concerns. This is leaving SFOs in the unenviable position of realizing that they need to upgrade their technology suites, but often being unable to do so with the current staff and budget.
One of the most important developments in the SFO industry is the increased acceptance of cloud-based applications. We expect that adoption of cloud applications will continue to increase in 2015, especially in the areas of client and tax-related reporting. We also believe that the use of mobile applications will rise as more applications are developed for SFOs.
In many ways, the key to effective use of technology at the SFO is the ability to access, analyze, manipulate and report data. Executing on this can make almost every part of running the SFO operations – especially tax, financial and client reporting – much more effective.
Julia Cloud is a partner with Deloitte Tax LLP, leads the Deloitte’s private wealth sector, which focuses on the needs and challenges of the buyers and providers of private wealth management services. Sean Cunniff is the investment management research leader at the Deloitte Center for Financial Services.