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Leveraging finance and accounting outsourcing for family office success

ARTICLE  | 

Finance and accounting outsourcing (FAO) is growing among family offices, as high net worth individuals’ and families’ needs evolve beyond their current structure. Leveraging this strategy gives families access to enhanced resources and technology tools to increase efficiency and document and back up key policies and processes.

In addition, an FAO provider can help a family office scale, as needs grow and streamline information from dozens of legal entities much more effectively than traditional bookkeeping methods and smaller business accounting solutions. Alternatively, an FAO provider can also help a family office scale down, when the need for a standard brick-and-mortar office no longer exists.

Next generation successor

Many family offices manage finance and accounting operations through a single individual or family member. However, as that individual looks toward retirement, the family must consider who is going to assume the responsibility moving forward. In many situations, there is no contingency plan if something happens to that person, and there are often few checks and balances and process documentations for a successor.

To maximize estate planning, family offices must maintain complex legal structures, typically resulting in additional tax filings for the families. To accomplish that, someone must manage a set of books and records that is respected, from an IRS perspective. A family office does not have the transaction volume of a typical business, but it’s often more complicated because of the necessary organizational structure. While many small to midsize businesses may have one or a few entities or subsidiaries, a family office could easily have 40-50 legal entities.

Family office complexities

The complexity of a family office becomes very difficult to manage by one person and by someone that typically does not have access to business-grade technologies to support that multientity structure. They are typically using a bookkeeping approach, when it should be more of an enterprise resource planning (ERP) approach that would exist in a business environment.

An FAO provider can leverage best practices from a business environment and implement them on a smaller scale within a family office. A third party can implement a technology infrastructure and give access to resources that a family office does not have the critical mass to support on its own. As life becomes more complex, the right business applications allow family offices to seamlessly expand and add additional trusts or LLCs with minimal disruption or extra costs.

With outsourcing, family offices can leverage the cloud and implement an infrastructure that is scalable and sharable with multiple parties. Key stakeholders (family members, trustees, other third parties and investment managers) can gain access to technology solutions for more visibility into the information they need access to. For example, families can introduce younger generations to the family finances in a way that is very specific to their needs and share only what’s relevant.

Family offices cannot accomplish this increased visibility and scalability with legacy bookkeeping systems. The rigid framework limits expansion potential and makes it very hard to engage family members on a selective basis.

Outsourcing is a fairly new concept for family offices, although some families outsource their finance and accounting to the finance department from their operating business. However, as the need for more sophisticated estate planning becomes greater, or if liquidation takes place, families need a more formal structure, as personal financial needs evolve.

Technology best practices

Often, the person tasked with maintaining the finances and accounting for the family office does not have exposure to best practices or technology. In many cases, they are using small business accounting software and creating separate databases for each entity. More often than not, outside of printing checks and making bank deposits when needed, the activity is only reconciled once a year, typically when the tax preparers come knocking. With this structure, it is difficult to maintain consistency and consolidate data for the necessary reporting.

An FAO provider can implement advanced technology and move all information to one common database that supports the needs to all entities. Cloud-based ERP solutions can increase efficiency and perform accounting and reporting in a more streamlined fashion. Through this technology, the family has access to information on a much more timely basis through one system, as opposed to dozens of different databases.

A family office can also realize increased bill pay efficiency through finance and accounting outsourcing that impacts the family, as well as the person processing payments. Instead of the family being required to sign physical checks, that process can be managed in an automated, paperless workflow, with increased security. A family office often does not have strong segregation of duties, because of manual processes and limited number of people involved.

However, an FAO provider can automate the process and make bill pay simple for the family. They stay in control and can automate processes, but they do not have to be in a specific place to physically sign checks. They can do it from any device connected to the Internet. Automated solutions save a significant amount of time, while allowing the family to remain in control.

Outsourcing options

The processes and resources in an FAO model provides a family office with options. A provider can implement new technology solutions and manage the entire finance and accounting function; however, if a family has someone in place that they want to keep involved, a provider can design a solution, then train people on effective usage and ensure reporting processes are correct. FAO is a flexible solution that can be configured to allow the desired amount of access, depending on the family’s needs and the resources they have in place.

An outsourcing provider can also track all the tasks associated with a family office. Family offices often have trouble tracking quarterly and yearly demands (such as life insurance trust notices, contract renewals, secretary of state annual filings and estimated tax payments), and it’s a big risk to work with a single person on those efforts. While they may be trustworthy, maintaining key information in someone’s head, instead of having processes and procedures documented in a system is a risky way to manage the family finances.


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