General finance: In order to stay ahead of the curve in this challenging environment, there should be a proactive mindset, a culture of continuous improvement and a willingness to challenge the status quo.
- The family should conduct a periodic assessment of the office costs and benefits, including evaluating whether to support insourcing or outsourcing of services.
- Assess vendor fees and get competitive bids periodically, depending on the type of service. These enterprises can take advantage of relationship pricing by pooling family members’ needs and consolidating services.
- To be transparent with employees, the office should establish clear roles and responsibilities around staffing, and should plan for the continuing education and cross-training of employees. This can help ensure that there are people in the organization who can step in for someone who may not be able to return to work, while enabling duties to be assigned efficiently and without duplication. COVID-19 has heightened the need to focus on diversity and inclusion in a remote environment as well as employee care and well-being.
- Develop or enhance your month-end checklist to identify opportunities for automation (e.g., gathering and consolidating data, data entry and analysis, processing transactions and manual reconciliations), which can help make the finance function faster, more efficient, and more focused on analysis and insight. Most family offices also recognize the need for sophisticated data aggregation and portfolio and partnership accounting platforms, and many are leveraging cloud technologies for their cost-effectiveness, convenience and security.
Financial management (cash, expense, investments): Financial management is the core of a family office, and for many, the current pandemic has highlighted some gaps and vulnerabilities in current practices. There should be a renewed focus on cash and expense management, along with oversight of investment managers and portfolio risks.
- Cash management and forecasting should be highly automated and repeatable, and should include scenario analysis in order to dial up or down on frequency and available options/levers. There is a significant trend toward electronic banking and payment instructions, which can enhance controls and reduce the manual processing and clearing of payments. There should be formal tracking of unfunded commitments (e.g. private equity, philanthropy) and a process for estimating timing and funding options.
- The office should consider pooling family members’ liquidity to establish a central “family bank” to help address and meet different liquidity needs within the family before seeking outside funding. However, doing so will require paying particular attention to trust compliance and accounting requirements.
- Investment policy and procedures should be documented and updated at least annually and approved by the investment committee. There should be an independent monitoring and review of all investment positions, asset allocation, fees, transactions and performance, as well as trend analyses of exposures and key risk measures (e.g., beta, value at risk, standard deviation/volatility, duration, risk-adjusted returns). Performance reporting should include benchmarking, as well as contribution and attribution analysis.
- The family should understand and analyze cost drivers and related benefits of their office. Expenses should be categorized as fixed vs. variable and discretionary vs. non-discretionary to allow for proactive management. Be mindful of trust accounting requirements, proper tracking of principal and income and trust fiduciary responsibilities, along with related costs. Employ thoughtful, practical cost-allocation methodologies in order to assess the cost and benefit of services and functions.
Controls: Working remotely and communicating virtually have heightened the need to update controls and ensure they are fit for purpose in this new environment.
- Establish written policies and procedures that outline controls for family office staff to follow. Generally, these should trend toward preventative controls instead of detective controls, as well as automated rather than manual controls.
- Consider testing your controls to ensure they are designed to operate effectively.
- Workflow tools can be very beneficial in streamlining handoffs and providing automated audit trails and compliance, thus eliminating paper trails and reliance on manual controls. As your office adopts and deploys new technologies, put controls in place around security and data privacy. For example, the family and its office should have secure shared document storage for wills, trust documents, tax filings, insurance policies and other similar sensitive documents, as well as documented audit trails for access. Secure communication portals are essential to limit the amount of information being shared through email.
- Formalize your processes and operating procedures to address privacy and security, as well as risk management and contingency planning. Then test those procedures periodically and ensure they are up to date with the latest capabilities.
Reporting: Enabling access to near-real-time data and analysis for informed, timely decision-making is a must-have capability.
- We recommend standard monthly reporting for each family member. This should include, at a minimum, the consolidated balance sheet, asset allocation, performance and spending/budgeting in addition to on-demand near-real-time dashboards and ad hoc queries.
- The family office should have automated capabilities to report on the cost basis, market value and tax basis of accounting.
- Update your forecasting and expense management monthly, and conduct a quarterly reforecast with the decision-makers to ensure all information is captured.
- Establish and review key performance and risk indicators regularly. Use data mapping, business intelligence, dashboard and visualization tools to streamline and enhance reporting.
Tax: We are in unprecedented times when it comes to changes in tax regulations and compliance, and the tax function is required to be more specialized and agile than ever before.
- Given the potential complexities involved — and to help ensure the most efficient tax planning and strategy are applied across the entire estate — we recommend engaging a reputable CPA firm experienced with tax planning and compliance for ultra-high-net-worth individuals to assist in any tax-related needs. Tax professionals should be involved up front in discussions relating to nonroutine transactions, asset purchases, divestitures and changes to overall investment strategy.
- Additionally, ensure that your legal structure is tax efficient to maximize the benefit of the costs associated with your family office.
- Leading practices include tagging/categorizing transactions for necessary tax reporting at the time of transaction and standardizing the book to tax adjustments. Some general ledger and accounting packages can maintain both book and tax ledgers, providing enhanced controls and an audit trail.
- Look to automate the tax estimation process to provide quarterly updates and facilitate liquidity planning for tax liabilities. Visualization tools can be very effective in summarizing the overall tax position and highlighting various tax attributes for planning and overall business intelligence.
Finance functions are being challenged to increase value, reduce cost and manage risk for the family. These practices can help family office finance functions address challenges and contribute to the family enterprise as they operate in a changed environment.