Beyond the Numbers Blog

What Does Transparency Mean for Family Offices?

Posted on January 3rd, 2015

Recent financial scandals have made transparency one of everyone’s new favorite buzzwords. But what does transparency mean? That everybody can see through your operation and understand what goes on inside.

While every family office should provide their members with transparency, what deliverables and actions you use to implement that transparency is very specific to your situation.In order to be effective, it needs to be a core philosophy of your office, to maintain trust with your family and to make sure they understand what actions you take with their money. There’s two general ways you can be transparent: how the family office handles family members’ money and how the office operates.

Being transparent about your family’s assets usually includes telling them exactly what they own. Most families want this at a minimum. But the details, especially when dealing with multiple entities, can be trickier. Finding their holdings in each asset class across all entities or their exposure to a specific sector means aggregating the portfolios of multiple partnerships and accounts, pulling data from multiple systems, integrating into Excel, then building out a complex report.

Transparency about their assets can also mean proving that their money is invested in the way that they want. They have their investment philosophy and they need something to verify that you are following it. That something is called a target to actual report – you compare their target allocation to the actual allocation. It involves a lot of data aggregation, especially if they want to see their total allocation across all entities.  But if you have software that can pull this together quickly, that’s a lot of power. See their true diversification — across sectors, asset classes, geography, and more — in a single chart and know in an instant whether it meets their goals.

Your family may have much more specific requests. Maybe they don’t want any oil holdings, or maybe they just want to exclude a specific company. They are going to need you to verify that you are in fact complying with their requests. You need two things: accurate records and reports that show their portfolio is in compliance. Without some sort of technology to sort through all the data and match against predefined rules, this ends up being a lot of busy work.

The right technology makes all these reports easy to produce and includes a solid information database that can make finding information for special requests easier. Any family member interested in what you are doing wants the best information now. Don’t make them wait while you search your Excel files.

Being transparent about what happens in the office can be trickier. Having internal checks in your workflow can catch mistakes and malfeasance before it affects clients, as well as let your family know that their assets are safe with you. But traditionally, this meant writing down everything that you did. Every action, every check, every report. Software with audit trails and security controls can make this process easier.

Here’s a few steps you can do to institute financial controls:

  • Follow the Money. When someone records a financial transaction, your system should automatically record that. Then, when something unexpected shows up on the monthly statement, you can track down the mistake, correct it, and help the person who made it avoid those mistakes in the future.
  • Use multiple step workflows. If one person initiates, approves, enters, and reconciles a transaction, it becomes much easier to propagate mistakes or hide fraud. Have multiple people in your organization fill these roles. If everything is done within the right software, these roles can be defined within the program itself, ensuring that the right people have the right tools available, and the people who don’t need to access a function won’t even see in their screen.
  • Maintain system security. Limit who can work in your front and back office systems through user controls. While you do want more than one person working with data to ensure mistakes are caught, too many people can create more headaches. Good user security makes every action in your system auditable.

With a little work, you can make sure your family office is transparent, while at the same time securing your assets and reputation. With the right software, this work becomes negligible. FundCount has spent more than 10 years developing accounting software for family offices. To explore how we can assist you, contact us today.