The 3 most critical questions to ask when selecting family office technologies

The 3 most critical questions to ask when selecting family office technologies

Publish Date Oct 26 2023

Private Wealth Systems, a global financial technology company that is revolutionizing the way private wealth is analyzed, reported, and managed. Private Wealth Systems has been named a FinTech Top 20 Company by American Banker, and Top FinTech Innovator by CIO Review.

You don’t have to look far these days to see impressive financial dashboards showcasing consolidated wealth with interactive pie charts and dynamic dashboards. For family offices and ultra-high net worth (UNHW) individuals, selecting the right technology platform from many attractive options is especially daunting due to unique needs that differ significantly from the needs of average investors.

While it might be tempting to simply pick a system that’s visually appealing or well-known across the market, it’s crucial to exercise caution when making a decision. It’s human nature to be swayed by appearances, but the true efficacy of a technology platform is based on capabilities that aren’t always visible.

The right technology empowers you to protect and grow your wealth across all market conditions by providing unbiased transparency into who and what is driving your gains and losses. Making the wrong choice can have disastrous repercussions including significant loss of wealth. To ensure you make the right decision, ask these three fundamental questions that dig into crucial areas:

Question 1: How do you define data accuracy?

Family offices usually prioritize data accuracy and trust in their data above everything else.  Technology providers know this and will claim they have the most accurate data. To figure out if there’s any validity to this claim, family offices need to find out how the provider defines data accuracy. 

Many family offices are surprised to discover their vendor contracts explicitly state they’re not responsible for data quality. If data accuracy is your family’s most important requirement, ensure success by finding a technology partner that contractually defines and commits to reconciliation.

The long-term consequences of using platforms that generate or perpetuate data errors can be financially disastrous. Inaccurate data results in making decisions without knowing the truth behind what’s driving risk, return, fees, liquidity, gains, and losses. This can ultimately erode or even wipe out an entire family’s financial legacy.

Some banks have error rates approaching 18% a single day, with errors replicating across multiple custodians and holdings.

The right technology platform, built based on decades of domain expertise, will capture and correct bank data errors before they impact you. The ability to do this depends on three components.

The first is an in-house aggregation engine with a “unified” security master (USM). USMs will unify the same holding at multiple custodians with a single price, single corporate action treatment and timing for accurate manager-to-manager analysis, gain/loss, and performance.  Without this feature your platform can generate double-digit errors.  

The second is the ability for the aggregation engine to feed into a multi-asset portfolio accounting ledger that runs in parallel to each bank and manager each day. This ensures any anomalies are researched and resolved in real time.

The third component is a platform that performs proactive start-of-day reconciliation for you, as opposed to a reactive client support team that corrects errors after you find them.   

Accuracy is also about correctly calculating investment performance. This requires a technology platform that’s built based on transactions. Most platforms are built only on positions but display “static” transactions. This leads families to believe they are getting a powerful system when that’s not the case at all. This limitation can result in performance analysis inaccuracies and tax-lot-level evaluation errors.  A family office should ask vendors if they have performed side-by-side performance comparisons with other vendors, and if there have been multiple third-party performance calculation audits.

Question 2 (if working with a consultant): Why is one platform being recommended over another?

This might be obvious, but you should always scrutinize the source of recommendations. If a consultant advises you to purchase a specific platform, it may be because they receive financial compensation from the vendor for their recommendation in the form of referral fees, implementation fees or even equity in the company.

Uncovering these biases and conflicts of interest will help ensure your technology platform truly benefits you and your family’s specific goals.

Question 3: What is the domain expertise of your founding team?

The power of any technology platform hinges on the expertise of the founding team. Their industry knowledge and experience solving financial challenges ultimately determines whether the platform will address your specific needs. Ask if the system was designed by a chartered financial analyst or a software engineer. The answer to this one question will give great insight into how the platform approaches solving the industry’s financial data challenges. 

The founding team always creates the platform’s foundation. While leadership may change over time, the foundation will always remain the same—it can’t be changed.  Recently the CEO of a family office noted that technology is like a building; it may look great on the outside, but if the foundation has cracks the building will fall in time.

A founding team with decades of domain expertise understands the root causes of the industry’s problems and how to solve them from day one. These teams require less capital and time to create a platform that can demonstrate its ability to solve industry challenges through independent reviews. If data is the challenge, then the founding team must have data experts designing the solution from the very beginning.  

Look beyond the flashy pie charts

In a world characterized by market volatility and global tensions, preserving family wealth is a complex but indisputably critical challenge. Successfully tackling it requires a multi-asset, multi-currency consolidated investment performance platform that supports the most complex investment portfolios. These sophisticated platforms uniquely enable optimal financial decision-making with accurate data and analysis.

Family offices that invest the effort to ensure their chosen technology platforms are supported by domain experts that can demonstrate industry-defining data accuracy are well-positioned to preserve and grow wealth for generations to come.