New Paradigm for Family Offices: Turning Data Into Intelligence

By James Lumberg Co-Founder and Executive Vice PresidentEnvestnet Inc.

Pamela Fennell JacobsPrincipal PFJ Consulting LLC

2 New Paradigm for Family Offices: Turning Data Into Intelligence

This is the second in a series of white papers discussing how the aggregation and integration of investment performance data can create a new paradigm of insightful, holistic investment advice for nonregistered investment advisors. The first paper in the series, “Endowments and Foundations: Adapting to a New Paradigm,” covered nonregistered investment advisors, such as faith-based advisory and community foundations, and how integrated investment technology can help organizations improve and expand their services—and remain relevant in an increasingly competitive marketplace.

This paper will address single and multi-family offices, which struggle to integrate comprehensive financial information for their clients. Recent developments in technology and data aggregation give these offices the ability to consolidate information on diverse investments and use it to develop a more perceptive understanding of clients’ financial situation. Equipped with more meaningful data, advisors have the ability to make more insightful decisions on behalf of the families they serve—and will be able to report back to them in a more individually customized, relevant manner.

Fueled by the increase in global wealth during the past 20 years, family offices are booming. According to Family Office Exchange, a Chicago-based membership organization of family offices and their advisors, the median family office grew revenues by 13% in 2011 and 8% in 2012. Family offices are perceived as a natural way for private, wealthy families to make investment decisions for the benefit of current and future generations while maintaining control and privacy.

Yet their structure also poses challenges. Due to families’ sprawling financial interests, it can be nearly impossible for these offices to assemble a reliable snapshot of a private family’s financial landscape that is complete, consistent and up to date. Challenges to information-gathering make it difficult for advisors and families to make important decisions in a full context.

There is a tremendous need to integrate data regarding family holdings, both public and private, into a single, overall view in real time, and to present it in ways that serve all family members and the financial professionals they work with. Advisors who can give family offices the robust information they crave are viewed as trusted allies.

Many families today are relegated to spreadsheets and manually updating consolidated financial statements. In this paper, we lay out the information management and decision making issues family offices currently face. We explain how current technology makes it possible to aggregate portfolio information from disparate

New Paradigm for Family Offices: Turning Data Into Intelligence 3

sources and bring it together in one view, and, coupled with trusted advice, makes complex decisions more manageable.

Finally, we present a case study of The Beringer Group and its investment division, which works with private families. We highlight in particular how the firm was able to show one family how technology could bring order to its mountains of account information so that it could be shared with investment managers, trust officers and accountants, thereby enabling all the family’s trusted partners to make better decisions around its wealth.

The Data DelugeLike just about everyone today, family offices suffer from information overload. There is plenty of data available, sometimes too much--but quantity does not equal quality. Much of the time, the data is not integrated, nor is it readily available when decisions need to be made. Accounts at various brokerage houses can languish for years--even decades. Other times, the sale of a business or a death in the family creates needs to be examined in context of existing portfolios.

At these junctures, families find themselves needing to bring order to their financial house. They need all the professionals they work with -- accountants, attorneys, investment bankers, trust officers and charitable consultants -- to integrate their advice. But how will this crucial information be compiled, and where will it be stored?

For a long time, family offices got by with cobbled-together solutions: perhaps a smattering of performance reporting software, some portfolio optimization platforms and back-office functions. More often, record keeping consists of little more than an Excel spreadsheet.

Without the ability to see every investment and every financial concern, and their current values and performance, families run the risk of acting against their best interests. They may have unknowingly created the wrong asset allocation or risk profile—taking too much risk or not enough for their financial situation. Liquidity, when not attended, can vanish—or muffle investment returns.

Unfortunately, the data-gathering work needed to make the most knowledgeable decisions is often seen as the “plumbing” of the investment management business—overly complex and time-consuming, and not something most firms want to undertake. Yet this is exactly where wealth managers should focus and where they can provide the greatest value.

An innovative technology solution is needed to bring order to the chaos. Certainly, consultants and advisors to wealthy families can invest heavily in purchasing the necessary hardware and software, but that entails its own risks. Technology changes so quickly that it is almost impossible to keep current. What’s more, the cost of an in-house solution can be prohibitive and require computer-savvy staff to input data, reconcile the data and continuously monitor and update the software.

We believe that family offices get more scale and efficiency from employing an outsourced technology solution. The technology provider can focus on providing a continuously updated product that serves family offices’ needs with the best practices available. An outsourcer can gather and compile data, generate customizable reports, and train staff. A family’s information would be accessible from any location. In our opinion, for the vast majority of family offices an outsourced solution is the most cost-effective and sustainable option.

From Information To InsightImagine the value a wealthy family could derive from a technology solution that could aggregate its financial information, from all of its various investment accounts, into a single view, even integrating illiquid alternative investments and partnerships. Families could view this information in one portal to see their entire portfolio on a daily

Families need the professionals they work with—accountants, attorneys, investment bankers, trust officers and charitable consultants—to integrate their advice.

4 New Paradigm for Family Offices: Turning Data Into Intelligence

basis and share it with the financial professionals they rely on to help them manage their wealth.

Cloud-based data aggregation technology currently used by many registered investment advisors can bring this complete level of aggregated financial information into a single window. Establishing a relationship with a commercially available data aggregation platform means that families and their advisors no longer have to track down paper and online statements.

A cloud-based platform solution allows daily net asset values and account reconciliation to be received with minimal staff effort. Since not all investment managers and custodians report performance the same way, the solution provider needs to take time to normalize the data, showing a coherent portfolio view.

Family offices that do not have the in-house expertise to manage aggregation software can outsource this work and begin to have more complete information at their fingertips, empowering them to make better financial decisions. Additionally, hiring an outsourcer with the scale and capital to continually invest in new technology and intelligent resources is key.

Case Study

The Beringer Group is a privately held, independent advisory firm with offices in Radnor, PA., and Mt. Laurel, NJ, that works with families of wealth. At a meeting with a husband and wife several years ago, the principals asked the couple how they kept track of their various investments. They pointed to a three-foot high stack of unopened statements.

Aggregation technology helps turn data into intelligence

Family Office

Aggregated Account Views and Performance Reports

Data Aggregation and Performance Reporting Platform• Multi-source data aggregation• Daily reconciliation• Partnership Accounting• Performance Calculations

Account Data

Trusted Advisors

Data Warehouse

Aggregated Data File

Online Performance Report

Consultant Accountant

Attorney

Brokerage Trust Alternative Investments

Limited Partnerships

Company Stock

Charitable Assets

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This article is for investment professional use only. Past performance is not indicative of future results. The opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Information obtained from third party resources are believed to be reliable but not guaranteed.

© 2014 Envestnet, Inc. All rights reserved. ENV-WP-EF-0114

The couple joked that they argued constantly about whose turn it was to open the statements. In the end, neither did and the stack grew. Every few months, they shredded the unopened statements to make way for additional papers.

It was easy for the Beringer principals to understand why the couple was avoiding the paperwork. In total, the family had more than 100 relationships with financial institutions. They were faced with the task of organizing bank statements, investment statements, partnership papers, charitable transactions and more. And they had no way of getting a snapshot of their net worth at any given time. Neither did their investment managers or estate-planning attorney.

“It was so overwhelming that it became easier to ignore it,” says Chris Beringer, President of The Beringer Group. By utilizing a robust data aggregation platform, The Beringer Group helped the family bring all this information under one roof, in real time, in a format that was easily accessible to all members of the family and to the financial professionals who worked with them.

What they discovered was, at times, shocking. The family, now worth in excess of $1 billion, owned a sizable amount of a stock that had seen its heyday in the 1980s, a passel of open-ended mutual funds, and a fund that had closed years before and whose proceeds were locked up. Beringer and his colleagues created a diversified asset allocation, liquidated duplicate positions and engaged the best asset managers in their strategies. The couple had never been given this kind of total portfolio view before, and it enabled them to make thoughtful, holistic asset allocation decisions.

The family’s accountants and attorneys were able to use the platform as well, even allowed access to input their own data pertaining to the family’s financial picture.

“[The family’s] money needed to be accounted for, and it hadn’t been until we started using this data aggregation system,” Beringer adds.

The Beringer Group now utilizes data aggregation with four other families, helping them easily access information about their wealth.

Conclusion While single and multi-family offices can turn to many sources for investment advice and portfolio management, there are relatively few that can solve their biggest challenge: a comprehensive view of their wealth, with integrated reporting on both liquid and illiquid investments. Family offices and advisors often have difficulty sourcing this service because technology solutions are not core to their business, and it’s difficult to stay current with the latest technology.

Finding the right partner to solve this dilemma can change a family’s decision making dynamic and empower advisors to develop wiser, more cohesive strategies for managing family wealth. This is the new paradigm of wealth management—integrated, thoughtful, and informed, thanks to new technology. Showing families’ timely data—reconciled and normalized—delivered in a way they can use and then share with the many professionals they work with, can move a family from information overload to a family with control over their future.

James Lumberg is Co-Founder and Executive Vice President, Envestnet Inc., a leading provider of unified wealth management technology and services to investment advisors. Envestnet offers ideas, best practices and resources that allow advisors, foundations and endowments to deliver a broader value proposition. Our technology solutions can empower nonprofits by offering scalability, transparency, and governance best practices.

Pamela Fennell Jacobs is the Principal of PFJ Consulting LLC and serves as a consultant to Envestnet. She has worked with single and multi-family offices for over two decades.