Optimizing Operational Design for the Family Office and Private Wealth Management

By: Tomas Edwards

Whenever we discuss organisational structures and business models with our family office and private wealth management clients, one thing is very clear: regardless of size or complexity, these clients share a common desire to increase the efficiency of operations. When margins are tight and returns diminished, more emphasis is placed upon operational improvement as a means of increasing performance and returns. This should come as no surprise.  At SS&C GlobeOp we keep it at the forefront of our minds as the principal driver for our involvement when we consider operational design.

Without economies of scale, middle- and back-office functions become laborious and expensive. Relatively low transactional volumes and the fluctuating temporal demands placed on internal resources mean that family office operations are difficult to industrialise. Transaction costs remain stubbornly high, contributing significantly to the cost of operations and the reduction in generated returns.

Furthermore, our clients find recruiting and retaining the right talent to be increasingly expensive. Individuals experienced in middle- or back-office functions relating to trade processing and administration, who also possess the requisite education and ancillary skills and knowledge to be “let loose” to face clients, are few and far between. Holding on to them and helping them meet their own goals and aspirations is a worthy but challenging endeavour.

In addition, self-maintained systems and processes can create an unnecessary burden that draws time and expertise away from the core functions of the family office business, and this is a source of thorny debate when cost and value-add is questioned

Thoughts about the most appropriate organisational design for operations are, not surprisingly, varied, since they are typically developed through an experience, cost/benefit and preference paradigm.  When multiple opinions have a bearing on such a decision, the outcome can be sub-optimal. 

This is one of the principal reasons family offices are increasingly evaluating the risks versus the benefits of outsourcing their operations. Whilst there is no standard model to suit every situation, most family offices have considered this at some point during their evolution. To understand whether an outsourced model is appropriate, the business needs to evaluate the risks, costs and capabilities of the tasks performed in-house. Sometimes, the answer is obvious, sometimes not. Today, you may manage everything in-house successfully. Tomorrow, should technology and reporting demands increase, will this remain the case?

In our experience, the decision for any family office as to whether or not to outsource has been one of balancing perceived risks, such as handing off control or protecting data privacy, with the measurable, financial and strategic benefits of engaging an outsourcing specialist to provide their expertise. Outsourcing can convert fixed costs to variable costs, reduce capital investment and create a model that is scalable across a number of dimensions. These include:

  • Staffing resources and domain knowledge
  • Systems capabilities that can support organic growth, expansion into new asset classes or compliance with  statutory/regulatory change
  • Freeing up executives from non-differentiating, mundane middle-office activities, which allows them to focus on the core differentiating aspects of the business
  • Leveraging the outsourcer’s risk management framework, which will normally reflect best practices
  • Providing the benefits of major system upgrades without the risks and challenges of undertaking them in-house
  • Driving qualitative improvements in capabilities, which may enable the introduction of new products or entrance to new markets
  • Replacing legacy in-house systems with lower-cost open systems architecture

Decisions will be guided by the business model, the investment strategies employed and the current state of the office’s operations. Middle-office functions, in particular, tend to reflect the unique character and core activities of each family office.

Developing the necessary confidence and trust in the outsource provider is vital.  An attitude of partnership that is focused on outcomes, rather than transactional management, is the key. Any family office or private wealth manager evaluating outsourcing options should consider the following:

  • Can the vendor provide the full range of software and services (front, middle and back) in modular form if necessary, such that the risks of a “big-bang” approach are mitigated?
  • Can the vendor match their service to your business model, rather than force your business processes to change to match their rigid template?
  • Does the vendor understand your business? The vendor should be willing to show evidence of providing middle- and back-office services successfully (and probably globally) for a long time and has accumulated a sizeable client base that may be referenced
  • Is the fee structure flexible enough to allow service charges to start low and grow with the business?

Those who direct the family office need to be clear about the outsourcing objectives and ensure they have the appropriate expertise to define requirements, manage the selection of a service provider, negotiate a favourable contract and manage the transition of in-scope activities to the selected service provider. In the end, the overarching goal should be to build a strategic partnership that delivers sustained value to both parties.

We would enjoy sharing with you our experience of providing outsourcing solutions for our leading wealth management clients. For more information, please contact Tomas Edwards at tedwards@sscinc.com.