Mountains of financial data a growing problem for family advisors

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Carolyn Cole doesn’t have to reach too deep for an example of how disastrous data management can undermine a wealthy family.

“Did you see House of Gucci?” she asks.

To recap: The plot of the ripped-from-real-life film is set in motion when Gucci family patriarch Rodolfo Gucci reconciles with his estranged son Maurizio, writing him back into his will just before he dies. Rodolfo neglects, however, to sign a document transferring ownership of shares in the company. That leaves the door open for Maurizio’s wife to forge Rodolfo’s signature, giving Maurizio a controlling interest.

“That’s just basic bad data management,” says Cole, the B.C.-based founder of family-office strategy firm Cole & Associates. “Where was the share structure defined, was there an agreement, was it signed? They could have avoided the whole situation if that had been handled more clearly.”

In fairness, the Gucci example is unusually catastrophic (even if it is based on a real story). But data-management struggles — pertaining to estates, investments, properties and countless other assets — are a longstanding and growing problem for wealthy families.

“It’s not just taxes, it’s not just asset allocation, it’s not just bill payments, it’s not just document security,” says Cole. “It’s a kaleidoscope for wealthy families, often across many geographies, and when you move one thing it affects another, sometimes in unseen ways. The administration for large, complex families is brutal.”

Sometimes, of course, poor data-management situations are obvious: an entire family’s records crammed into a filing cabinet, or day-to-day operations tracked by ad-hoc spreadsheets and desks littered with Post-it notes.

“I’ve met families who have extensive investment portfolios and huge amounts of money tied up in them, but it’s all managed by statements hole-punched into a three-ring binder,” says Allison Comeau, chief experience officer with Calgary-based Grayhawk Wealth.

Often, however, it’s less obvious, but no less a threat to a family’s economic well-being. And as families grow, portfolios diversify and assets multiply, the risks of inadequate data management become ever-greater.

Lack of holistic view

So why do so many small family offices still struggle with data?

According to Daniel Trimarchi, director of family enterprise advisory at KPMG Canada, part of the problem is the iterative nature of family offices. A single-family office especially doesn’t set up with all the bells and whistles off the bat, but instead builds it slowly over time.

“The idea of having IT infrastructure, good software, good cyber-protection, all of these things often aren’t urgent,” he says. “It’s only when something goes wrong that they become a bigger consideration.”

One of the most significant risks for families practicing poor data management is the lack of a holistic view of assets. That means more chances for investment opportunities to pass by, and greater risk of over-exposure to certain sectors and asset classes. (The recent Nasdaq pullback has made abundantly clear the risks of over-exposure to one sector.)

Most entrepreneurial families, after all, didn’t make their wealth by investing. Asset management is far from their core competency, and they may preferentially invest in sectors that have proven reliable in the past, or display a tendency to over-invest in the sector where they built their wealth.

Cole cites as one example a family whose patriarch had taken to spending most of the family’s capital on real estate investments, leaving little cash to live on and little investment in other assets that might have generated revenue.

“When I sat down and brought together their net worth, their real estate assets, the non-revenue-producing real estate, it was stark,” she says. “He could almost not pay the property taxes for all the land he owned, he was so asset-rich and cash-poor.

“It’s astonishing how common this is.”

Security and fraud are growing concerns

There’s also the opposite problem: a family using multiple investment managers who are not working collaboratively to pull their data together into a holistic picture.

A growing data concern also revolves around security and fraud. According to Campden Wealth’s 2021 North American Family Office Report, 28 per cent of family offices surveyed experienced a cyber-attack in the past year. With substantial assets yet an often-unsophisticated understanding of cyber-security, families offices — especially smaller, single-family offices — are an increasingly attractive target.

“I’ve seen examples where they’re just running off Gmail accounts and no real security setup,” says Trimarchi.

What, then, are the solutions?

Trimarchi describes a four-stage process: scoping the problem (i.e., identifying your biggest data-management challenges), designing the solution, building the solution and, finally, sustaining it in the long term.

“And then, in that design phase, there’s a lot of technology and services out there that can help build something bespoke,” he says.

That’s what led Cole in 2020 to co-found Family Office Administration Services, which helps guide families through this process. The challenge, she says, lies in the gulf between what families want and need and the technology available to address those needs.

Bespoke solutions needed

In recent years, data platforms including Masttro, Eton Solutions and Addepar have begun helping smaller family offices harness the power of data aggregation. But none of these are one-size-fits-all, meaning a technology solution still has to be complemented by good talent that can flesh out a truly bespoke solution, which is itself a challenge.

Comeau says, “Because family office is newer in Canada, we don’t have as many experienced people to draw on from a hiring perspective. A lot of what we see is taking somebody from PwC or one of those firms, but there aren’t a lot of people who can say, ‘I’ve worked in a family office before and I’m bringing that experience to helping you structure your data.’”

In the long run, Cole thinks the Canadian family office sector is about five or more years from getting a better grip on the data-management dilemma. In the meantime, the best approach is a proactive one: hire experienced bookkeepers, design your own unique system, and combine new technological solutions in a way that makes sense for your family.

“Don’t expect one system to do it all for you,” says Cole. “Ensure that you’re diligent and reviewing your reporting on a consistent and regular basis. This will take manual work, and that will take money. But it will save you more in the long run than you could ever imagine.”

Next month, Canadian Family Offices will look at some of the emerging tech and software solutions to address these issues.