Comment: The future of the family office is virtual

Virtualisation, alongside the increasing use of data and digital functionality and services, is vital to future-proofing the family office. This has never been more apparent than now, when advisers must manage complex relationships remotely, and at a time when investors everywhere face significant challenges, says Yaela Shamberg.

For the adviser, the challenges lie in fee compression and tenuous customer loyalty. For clients, they are diminished returns and a profoundly disturbed economy. Technology must play a vital role in the future of family offices.

The global growth of multi-family offices has, until recently, correlated with the rising number of ultra-high-net-worth individuals (UHNWIs). Yet even before the pandemic, family offices faced potentially difficult business circumstances.

According to the Campden Wealth 2019 report, many family offices predicted a recession this year. Global family offices' investment performance dipped between 2018 and 2019, returning an average of 5.4%. Consequently, 45% of the family offices surveyed reported realigning their investment strategies to mitigate risk, and 42% increased cash reserves.

Add into the mix the cost of the family office. The cost of running a basic family office is often 1.5% of AuM. For an investable wealth of £50m, costs can start at £500,000 - although costs are typically lower for a multi-family office (MFO). The transparency on fees and value for money is still an issue for many clients, as highlighted in a 2019 EY survey: "Many clients do not trust that they are charged fairly by their provider, and a majority want to pay differently."

The rise of the virtual office
Many answers to the challenges facing family offices lie in the virtual family office (VFO).

A virtual family office is a single-family office that uses a greater and more nuanced degree of outsourcing to keep the staff low-cost and flexible, while optimising these to clients' financial needs. Families with $20m to $200m AuM typically use VFOs when they need a customised model without the overheads of a single-family office (SFO).

A VFO can also offer a more flexible and comprehensive wealth picture, ideal when managing disparate or displaced relationships. A VFO can also scale and broaden the traditional family office remit - providing support for managing soft assets like branding or intellectual capital.

For this to work, it requires independent advisers and professionals to collaborate closely. This means each VFO needs a solid foundation of data to supply a complete view of assets and cash-flows to ensure better and more strategic decision-making.

How does this work in practice? Middle office risk management, compliance, and accounting functions can use digital automation to be more efficient and less error prone, as can the trade processing and data management functions of the back office. In the front office, this combination means advisers don't have to meet face to face with clients. They can work remotely and liaise with clients as and when required - saving on overheads at a time when returns are diminishing.

Creating client value
For clients, the biggest value of digital is access to a holistic view of their wealth and financial wellbeing. In addition to improved client reporting, a good digital experience will deliver a comprehensive view of wealth, configured to the individual based on the sensitivity of information that can be accessed, and on their interests and level of financial literacy.

The same EY survey found that in their search for value, clients want more personalised and connected solutions. Digital is becoming more popular, yet clients feel underserved. A virtual family office should deliver these by design - but they will still have to ensure clients keep using personalised advisory services. 

Furthermore, advisers must keep clients engaged and ensure that they keep using and exploring the digital platform with confidence. This is where behavioral science, gamification and decision theory, woven throughout the client experience, pays dividends. Gamification is the process of putting in place elements that ensure repeat, regular and engaging visits, while decision theory focuses on the factors that inform and motivate people in making their underlying choices.

By leveraging behavioral science, and specifically these two dynamics, a digital platform can go from being a utility to being a powerful and engaging set of tools that help inform and empower clients and advisers, while strengthening the relationship.

This could be push notifications to inform priorities or a goals-based system to ensure all information on the client side is regularly kept up to date. Using techniques familiar to game developers ensures advisers receive a greater amount of high-quality information. For the client, these interactions mean a more engaging and valuable experience, visibility for advisers as to where clients spend their time, which in turn can be used to further refine their digital offering and add value.

One Deloitte study suggests gamification can reduce emotional disconnection with financial matters, making investing more engaging. This approach can also improve client perspectives. As we increasingly transition into a world driven by remote relationships - even after social distancing ends - digital engagement will become ever more important.

Going beyond default digital
Digitally, the industry is still undeveloped. Many advisers are still tied to legacy service providers, unable to provide the capabilities that clients are asking for. The need for greater digital services will only grow as global uncertainty and client demands define the sector.

This digital gap is closing, and social distancing has forced family offices to accelerate their digital adoption. In a cost-cutting environment, technology has a leading role to play in protecting the bottom line and engaging with clients, at a time when the customer experience has never been more important.  But it is the ones who really invest in their digital experience and services that will be well placed to lead in the future.

For family offices expanding across a greater range of geographies and demographics, it's now time to use cloud based integrated technology backed by data aggregation. This will enable VFOs to more easily and efficiently deliver real value to their clients in the midst of such a challenging time. 

Yaela Shamberg is co-founder and chief product officer at InvestCloud

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