16 June 2019

Surviving the Data Deluge

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Many family offices are drowning in a flood of data, but new technology can also help to harness the power of that data by making sense of it, and then sending it where it needs to go.

The ‘Data Deluge’ 

Family offices, like many others today, can often feel as if they are being inundated by a flood of information. Technological advance has led to a surge in data pouring in with regard to all of their various far-flung assets and investments, which is itself hugely valuable – vital even – in terms of formulating a rational, optimized wealth management strategy. But without a way to contain the influx, like a flood, it can certainly seem like too much of a good thing.

Instead of merely treading water and getting swept along with the current though (or, worse, waiting around for their wealth to simply dry up), families can now call upon technology (and those who know how to use it) to keep the flood at bay, and to harness the power of this data by channeling it to those who can maximize its value. Moreover, with cloud-based data aggregation, they can get an up-to-date bird’s eye view of their total wealth picture when and where they need it.

But before stretching this flood analogy past the breaking point (okay, one last labored flood-related metaphor, but that’s all), let’s consider what all of this means in real terms…

The Needs and Difficulties of Managing Family Wealth 

Single and multi-family offices face many difficulties in both compiling comprehensive, up-to-date financial information for clients and integrating it into the decision-making process as part of a holistic wealth management strategy. There is plenty of data out there, but, in practice, the information that is readily accessible (and comprehensible) to families and their advisors often falls well short of what might be considered ideal in terms of timeliness, comprehensiveness, and relevance.

Instead, data is neither integrated nor available when decisions are being made, a problem which becomes acute at exactly those times when the need for accessible and complete information is most pressing, such as when a business is sold, or after a death in the family. Without the ability to take in all investments and financial concerns as a whole – including the current value and performance history of each – families miss out on any opportunity to make informed, rational decisions with a clear sense of the big picture, and thus only by accident will they ever follow a strategy that might be considered optimal if they were deciding based on complete information.

Without holistically considering the total picture, it is much more likely that they will unknowingly take on a sub-optimal asset allocation or risk profile – either taking more or less risk than is advisable based on their financial situation. Thus without careful attention, liquidity can either evaporate or hold back rates of return on investment, and accounts at different brokerages and financial institutions can languish for years or even decades.

On the other hand, it is easy to see the difficulty in keeping up with all of the relevant info. In some cases, a family office can have relationships with dozens of financial institutions or more, with perhaps no more than one husband and wife responsible for managing all of those relationships and accounts as a whole. In such cases, merely opening the mail generated thereby can require a substantial commitment of time and attention. But the task of compiling and organizing bank statements, investment statements, partnership papers, charitable transactions and other accounts can appear overwhelming, and one might just find it easier to simply ignore all of this information.

In such cases, even as the family might do well in terms of net worth, neglected portions of its wealth may be mired in bad investments, such as stocks that have peaked decades ago, or any number of scattered, open-ended mutual funds, or even funds that closed years ago with their proceeds now locked up.

Of course even with diligent attention putting together all of the information generated by all of a family office’s many accounts and investments in order to gain a current snapshot of each component of net worth and see how it fits into the bigger picture at any given time can be a monumental – if not impossible – task (at least, that is, without the technology and expertise that would make it manageable.) And if a family office cannot get a firm grasp on how these pieces fit together to make up its total asset picture, then neither can its investment managers or estate-planning attorney.

As important as it is though, these difficulties mean that the down-and-dirty job of data-gathering that is needed to make the most knowledgeable financial decisions is often neglected by advisors and clients who (perhaps rightly) view it, from their perspective, as extremely messy, complex and time-consuming. But accounting for all of this information, understanding and explaining its importance, and then making decisions and giving advice accordingly is precisely where wealth managers can provide the greatest value.

Technology-Based Solutions for Optimizing Family-Wealth Management 

For some time though, family offices and their advisors have gotten by with piecemeal solutions – some variable mix of performance reporting software, portfolio optimization platforms and back-office functions, or sometimes little more than an Excel spreadsheet.

Quite simply, that does not suffice today. To make the most of their wealth, family offices must make smart use of cutting edge technology to impose order upon the chaos, which leaves but one last important question: How?

For one, consultants and advisors can purchase the requisite hardware and software, but that requires a substantial investment, with all of the attendant risks and uncertainties that such entails. Of course technology evolves rapidly, and it is difficult and costly to stay current, which requires recruiting and maintaining specialized staff to input and reconcile data and stay on top of new developments in software.  
A sensible alternative for family offices is to benefit from the scale and efficiency made possible by employing an outsourced solution. A dedicated, third-party technology provider can deliver services using continually updated products, thus allowing for constant adherence to best available practices in gathering and compiling data, generating customized reports and employing and training specialized staff.  
For instance, cloud-based data aggregation now allows advisors to give wealthy family clients the ability to aggregate financial information from all of their various investment accounts, including alternatives and partnerships, into a single picture. Families in turn can survey their entire portfolio on a daily basis and readily share it with all of the many financial professionals they may rely upon to help them manage portions of their wealth. Moreover, such cloud-based platform solutions allow for daily net asset values and account reconciliation to be received with minimal staff effort. Also, while investment managers and custodians often report performance differently, the technology-based service provider can normalize the data to show not only a complete picture of the total portfolio, but a coherent one as well.  
Thus family offices that do not have the in-house expertise, or the time or inclination, to manage aggregation software can outsource these important functions, and thereby set about making the important financial decisions that only they can make with much more complete information. Meanwhile, an outsourced service provider can leverage the benefits of scale and efficiency in order to continually invest in new technology and intelligent, well-trained staff to operate it.  

In short, family offices and advisors often encounter difficulties in their attempts to integrate reporting on both liquid and illiquid investments, simply because technology solutions are not central to their business, and it requires substantial attention, effort, and investment to stay current with the latest technology. Finding the right partner can eliminate this dilemma though, and empower families and their advisors to plan and manage wealth in a more rational, more stream-lined, and more unified manner.

Timely data, reconciled, normalized and delivered in a way that families can comprehend, and share with the many professionals to whom they look for advice – this is the new standard for wealth management made possible by technology, and it can free families from information overload while giving them greater control over their wealth and their future. 

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