Historically, family wealth software options have generally fallen into two buckets:
- investment reporting software, and
- accounting software.
Let’s examine the role of each in the management of complex family wealth.
Investment Reporting Software
Imagine that you manage investments for a high-net-worth family. There are probably three questions that are top of mind to you and the family:
- How are we doing (in terms of investment return over time)?
- How much income are we producing?
- Is the portfolio allocated in a way that is in line with family goals?
While these are simple questions, deriving answers for a high-net-worth family is often not straightforward. First, on account of tax and estate planning the family has done, the family isn’t really a single unit but rather a collection of separate legal entities (trusts, family partnerships, foundations) and segregated tax-savings accounts (401ks, Roth, SEP, and Traditional IRAs), each requiring its own relationship (“registration”) to a bank or brokerage house. Second, due to modern portfolio theory, the family’s liquidity has likely been diversified into a vast array of equity and fixed income products, separately managed accounts, hedge funds, private equity funds, currencies, and precious metals. Further complicating matters, all of these investments may not be custodied with one bank but split up and custodied with several banks / wire houses. Think of all the little points of disparate data that have to be brought together to answer the simple questions posed above. Painful!
Fortunately, today’s investment reporting software packages make collecting and synthesizing all of this data relatively painless. Investment reporting systems can link up with most popular banking institutions and automatically download all pertinent investment information. These systems feature a large number of canned reports that will allow users to do everything from a) rolling up all the data into one family-wide report that shows overall return, income production, and portfolio allocations by investment type to b) slicing and dicing the data in ways that allow users to see, for example, how many shares of Microsoft the family holds across all accounts, registrations, and custodians.
Having access to these features is so important to the practice of investment management that every investment advisor uses this type of reporting software today. Family offices that don’t maintain their own license to such software will likely leverage access to the system maintained by their advisor.
While investment reporting systems are great they have some blind spots. These systems are built from the ground up with a focus on traditional investments (stocks and bonds). They do a decent job tracking alternative investments like hedge funds and private equity funds. But these systems are not built to track non-traditional investments like ownership of real estate, hard money lending arrangements, and ownership of operating business. Also, while these systems do a great job in allowing users to delve into the detail of particular traditional investment holdings, they are not helpful to the user who wants to understand the big picture, i.e., the relationships among the different entities which have accounts tracked in the system. For instance, a trust might have an account in the system, a family partnership might have a couple accounts tracked in the system, and a family member may have a personal account tracked in the system. What the user of an investment reporting system won’t be able to see is that the trust is actually a 50% owner of the family partnership nor that a year ago the family member borrowed $50,000 from the trust and pledged its securities account as collateral on the note. On account of the complexity of real-life interrelationships, management of family wealth extends far beyond tracking traditional investments and thus beyond the narrow scope of investment reporting software. In sum, investment reporting software is important but limited.
The second pillar of managing family wealth is management of cash. Cash comes in through income-producing investments and asset sales. Cash leaves on account of asset purchases, family expenses, and distributions to family members. Depending on the number of trusts and business entities held by the estate as well as the frequency of expenses and distributions, keeping a watchful eye over cash may become a priority for the family. In such a case, the family will invest in accounting (general ledger) software in order to track all the ins and outs of cash.
Many families who prioritize cash management use Quickbooks as their family wealth software because it is relatively inexpensive and user friendly. The downside of Quickbooks is that it is intended for small businesses and can be frustrating for a family bookkeeper who, unlike the bookkeeper in most small businesses, would like to maintain the books for many entities in one user interface. To solve this frustration, a handful of companies have developed accounting software designed for the cash management needs of family offices. Some of these systems are even designed to incorporate investment reporting features described in the section above as well. Of course, these more elaborate systems are more costly and can involve a steeper learning curve to use.
Like with investment reporting systems, accounting systems have their blind spots. While it’s possible to see relationships like inter-party ownership and loans in the balance sheets produced by an accounting system, it takes significant effort to see how they all connect. Certainly, an accounting system would not be helpful in identifying assets that have been pledged as collateral nor in discovering maturity dates on loans. These types of systems are simply not set up to help the user appreciate legal terms and relationships.
Complex Interests software is NOT investment reporting software nor accounting software. Complex Interests software satisfies the family’s need for a more holistic view of all the legal and financial relationships that impact the family.
The difference is probably best understood by the following analogy.
If one day you were grabbed out of the blue and made CEO of a large, multi-industry (possibly multi-national) corporation, what would you do on day 1 of your new job? For sure, it would be overwhelming.
Would you start by going to the accounting department and asking for balance sheets and income statements? It wouldn’t be a horrible idea. You would be able to learn some things, but the picture would be incomplete. For instance, you wouldn’t be able to understand much about the products the company produces.
You could go to the factory managers and get production reports that go into detail about costs of materials and delivery timelines. Again, you would learn something, but you wouldn’t get a good sense of the sales department, the marketing department, human resources, strategic partnerships, legal issues facing the company, etc.
The problem is that as the new CEO, your first job is not to break anything, and you need to see the big picture first to do that. You need to see how all the departments work together and which relationships impact other relationships so that you don’t unintentionally disrupt something before you understand it. It’s way more important for you to appreciate what elements make up the company (and why) than how exactly the company makes a widget.
Complex Interests is software for the stewardship of complex family wealth. Using the analogy above, it provides the holistic picture that the new CEO needs… but does it for families.
While the previously discussed investment reporting and accounting systems can be important for family wealth management, they only service very discrete needs. Complex Interests (and the practice of stewardship) establishes the foundation for family wealth management, laying out plainly all the legal and financial relationships. In the proper order of things, it is only after this foundation is lain that families should explore diving deep into the specifics found in investment reporting and accounting systems.