Family Office Operations & Financial Controls

Video transcript

The family office association was founded in 2007 as a peer network for single family offices. Family office operations. There are whole courses and books on financial and back office operations. Here we will share a few observations from the perspective of the unique challenges faced by family offices. Some of these points may seem obvious but you would be amazed how often they are overlooked. Financial controls and consolidated financial reporting are some of the essential operational considerations a family office must address. The language of business is accounting and having good financial reporting and strong financial controls is at the heart of any well-run family office. And like any business, a family office is only as good as its reporting and information infrastructure. Determining who is authorized to sign checks and send wires is typically the first step in designing financial controls in any family office. In general, best practice is to have all accounts payable functions under a centralized individual or team with appropriate oversight. This helps to standardize the process and makes overall tracking and management easier. Larger or more complex family offices will likely need a purchase approval process whereby the finance department generates a purchase order that is approved before a payment obligation is created and then once rendered, the finance department matches an invoice with the purchase order. Some family offices use coded phrases that change quarterly. Any purchase above $100,000, for example, requires authorization from the patriarch or matriarch with the phrase. Families who travel extensively may need a signature plate, which is a stamp inscribed with the authorized check signer signature and is used to imprint the signature on checks. Calling the family on a secure satellite phone with the correct passphrase then enables them to make large purchases without having to personally sign checks. Small or newer family offices will often rely more on outsourced solutions for their purchasing needs. While outsourcing can save money and provide flexibility, outsourced risks will need to be managed. For example, to avoid bank issues, dispersement accounts can be used to create a buffer between the primary accounts and regular payment functions. Account naming issues can be avoided by utilizing a cross reference sheet to cover all possible permutations so vendors can bill and receive payments appropriately and to minimize billing issues. Bills paid on set intervals or recurring payments may utilize automatic reminders or project management tools to help avoiduling errors. Lastly, to ensure privacy, two-factor authentication and dynamically changing passcodes are common practice now with most family offices. A single, simple, affordable, and reliable consolidated accounting and performance reporting system is considered the holy grail for family offices. Many family office technology service providers make big promises about their consolidated reporting capabilities, but there are significant challenges. For one thing, family balance sheets contain a wide variety of personal, business, liquid, and illiquid assets which are often held in entities and trusts. Family members may own different pro rata ownership of these entities and the underlying assets. In addition, different asset classes have different time horizons for information reporting. Liquid investments may be updated daily or in real time, whereas illiquid investments may only be updated quarterly or annually. And principles will have different preferences and priorities for what information they want to see on a regular basis and how it is presented. Keep in mind, everyone categorizes the world in their own unique way. For example, does a real estate investment trust go in the public equity or the real estate bucket? And lastly, standard accounting practices do not account for concepts like unrealized gains or losses. Double entry bookkeeping simply does not have a way to account for such unrealized gains or losses. The Family Office Association recently conducted an anonymous survey of members to gain insight into how family offices utilize technology solutions for their accounting needs. Astonishingly, almost half of the family offices surveyed take more than a week to produce a consolidated balance sheet. TFOA members also reported that approximately 75% of spend questions typically get answered within 24 hours. Hopefully the cycle time for answering such questions and providing consolidated financial reports will improve as technology improves. Soon we will be at the point where every family office and every family member can access the information they need instantaneously utilizing technology at a price point that makes sense for any family office. And the next evolution, which we expect to see soon, will be systems with built-in artificial intelligence that can anticipate spend issues and send preemptive alerts or payments. Thank you for listening. We hope you have enjoyed this content. Please share with others or visit tfoa.info to learn more.