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2024 RSM Family Office Operational Excellence report

February 27, 2024

Authored by RSM Canada LLP

Ian L. FitzPatrick, CPA,CA, CBV shared this article

RESEARCH | February 27, 2024

Although every family office is unique, they all face similar challenges as they look toward the future: How do we support the goals and legacy of the family? Is our operating model set up for success and sustainable growth? How do we maintain control, flexibility and visibility across the organization?

Finding the answers to these pressing questions often leads family offices on a path toward operational excellence. But what does operational excellence mean to today’s family offices? After all, improving operational performance can mean different things to different people and generations. It can be as broad as organizing resources and capabilities to meet the evolving needs of the family and driving growth. At a granular level, it can mean optimizing processes with clear controls to increase compliance, reduce risk and costs, and enhance productivity.

Put most succinctly, “Operational excellence is making effective use of people, process, technology and data,” says Tony Wood, partner and global family office leader for RSM US LLP. “These four pillars are critical to the success of the family office organization and the entire enterprise, including the family’s operating business and investment structure.”

"Operational excellence is making effective use of people, process, technology and data."

Tony Wood, Principal, Family Office Leader

The 2024 RSM Family Office Operational Excellence report shows evolving sentiments toward operational excellence—however it is defined. RSM went straight to the source, surveying 100 family offices (FOs) across the U.S. and Canada with substantial variation across FO size, generations, respondent profile, operating business sector, years in operation and expense base. Data were collected from Aug. 14 through Aug. 22, 2023, using a sample provided by Gerson Lehrman Group. To qualify for the survey, respondents had to hold some level of authority in decision making for the FO. Additionally, the FO had to have at least $150 million in assets under management (AUM). Throughout this report, we highlight differences based on AUM using the following categories: small = $150 million to $999.9 million, midsize = $1 billion to $4.9 billion and large = $5 billion or more.

The survey responses revealed key trends including a growing interest in strategic outsourcing to increase performance and lower operating costs. Prioritizing digital transformation and cybersecurity to stay ahead of a changing threat landscape emerged as trends as well.

Driving factors behind operational changes

There are myriad reasons for making operational changes. While FOs are notoriously private—understandably—about all aspects of their organization, many are curious about what their peers are doing to address common operational challenges. 

Today’s FOs must navigate many challenges stemming from evolving tax laws, geopolitical risks, cybersecurity threats, the ongoing talent shortage and succession planning, which is further complicated by the fact that the largest wealth transfer in history is underway. Interestingly, just less than one-quarter, or 23%, of single-family office (SFO) respondents said they have made operational changes in response to current economic conditions. Instead, survey responses suggest decision making around operational changes has been internally driven and goal-oriented.

Family offices are looking to save on operating expenses

Running an efficient FO comes at a cost, and rising internal operating expenses have left many organizations looking for ways to conserve. On average, SFO respondents said that approximately 65% of their operating expenses for 2022 were incurred in-house.

Outsourcing has provided FOs with the opportunity to improve operations and overcome staffing challenges while managing expenses, the survey found. As such, SFO respondents said an average of 35% of their operating expenses are allocated toward outsourcing.

Examining data according to AUM reveals broad alignment across respondents. Regardless of size, about 60% of budgets are allocated toward in-house expenditures, on average, while roughly 40% is allocated toward outsourcing.

Further, midsize FOs said their in-house investment expenses are around 20%, which is slightly higher than their larger and smaller counterparts who spend around 15% or less, respectively. This higher investment expense ratio for midsize FOs, compared to their smaller counterparts, may result from their participation in more complex investment strategies across a broader range of asset classes, necessitating increased resources and expertise. Simultaneously, these FOs could be contending with scale inefficiencies in comparison to their larger counterparts.

Whether out of convenience or necessity due to current challenges such as the talent shortage, newer FOs founded between 2015 and 2023 outsource significantly more of their expense base (average of 44%) versus FOs established a decade earlier between 1990 and 2014 (average of 32%).

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How different family offices are viewing and using strategic outsourcing

Significant outsourcing opportunities exist to help FOs achieve best-in-class technology, address complex issues and enable in-house staff to focus on delivering value demonstrated by long-term stewardship to the families they serve.

More than half (62%) of SFO respondents agreed that having best-in-class technology is a challenge to deliver in-house. This challenge may stem from the rapidly evolving FO technology landscape, requiring specialized expertise and continuous updates that can be resource-intensive for in-house teams to manage effectively and efficiently. Additionally, FOs often face operational complexity, with myriad family priorities, preferences and business requirements. Meeting these demands frequently necessitates investments in various technology platforms which then require integration. More than one-third (35%) agree outsourcing select areas can allow an SFO to focus on delivering value. And more than half (55%) agree outsourcing is important to mitigate risk for complex estate, legal and tax issues.

Survey results showed the smaller the FO, the more likely it is to rely on outsourcing. Nearly six out of 10 (58%) respondents from small FOs view outsourcing as a method of focusing on delivering value, compared to 43% of respondents from midsize FOs and 28% of respondents from large FOs. Meanwhile, 80% of respondents from the small FOs agreed outsourcing is important to mitigate risk for complex estate, legal and tax issues, versus 63% of respondents from midsize FOs and 32% of respondents from large FOs.

A key insight is the difference in attitudes among newer and more established FOs. For example, 70% of respondents from FOs established since 2015 agreed outsourcing can allow the organization to focus on delivering value versus only 33% of respondents from FOs established before 1990. Perhaps this shows a greater understanding among younger generations about the value of strategic outsourcing, which is a newer concept that is gaining popularity in business circles.

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Reliance on service providers is expected to increase

The growing need for outsourcing has led FOs to rely on external service providers, with nearly all SFO respondents (97%) indicating they used professional services in the past 12 months.

Information technology (IT) services ranked highest among the functions outsourced by all FO respondents (81%), with one exception: Up to 82% of small FOs use a third-party provider for tax services including tax planning, tax compliance and estate planning.

Results also indicate that, among SFO respondents who use third-party providers for services related to bill pay, IT, tax planning and tax compliance, the overwhelming majority say they will continue to outsource these services in the next 24 months (98% bill pay, 93% IT, 95% tax planning and 91% tax compliance). 

Family offices need strategies to solve staffing challenges

Today’s tight labor market has FOs competing with other businesses for top talent; therefore, sourcing good candidates with the right skill sets is not as easy as it once was.

The SFOs who participated in our survey said they are experiencing at least some level of difficulty in attracting candidates across various professions, including IT (63%), tax (39%), administration (27%), accounting (26%) and investment management (26%). Moreover, SFO respondents indicated they are facing challenges in providing competitive benefits (64%) and in retaining (51%) and upskilling (70%) existing staff.

Family office AUM size also matters when dealing with staffing woes. Seventy-nine percent of smaller firms experience difficulty providing competitive benefits. Seven out of 10 midsize FOs (71%) are experiencing difficulty in attracting IT talent. Three-quarters of larger FOs (75%) experience difficulty upskilling existing staff.

During an interview with an FO senior portfolio manager, he confirmed that employee retention is a real issue that FOs need to address. His experience is that FOs often don’t have enticing incentives such as a profit-sharing plan to keep valuable employees, especially non-family members, from leaving.  “Every time someone important leaves because of a small compensation issue, you lose the historical context and the institutional knowledge that you had established, and you have to bring in someone new and repeat the process,” says the FO portfolio manager. Talent retention strategies, including incentives, may involve evaluating the FO’s current tax and legal entity structure. At RSM, we advise FOs to gain an objective, fact-based perspective to align the human capital function to the family’s values and strategic business goals.

In a separate interview with a FO chief financial officer, they described how offering remote and hybrid work options helped his organization retain key staff members. His advice to FOs is to be flexible and to foster a culture of belonging to help with employee recruitment and retention.

Indeed, it takes knowing how critical people are to a FO’s success to understand that a strategic and proactive approach to talent management is essential. When making operational changes to build a sustainable FO, thoughtfully considering insourcing, outsourcing and hybrid staffing models could enable strong returns on investment in labor, access to advanced technology and a flexible labor model that can shift with marketplace conditions.

“Most of the staff that we have are on the personal side, and that's not going to change. I don't think there's really room for efficiencies there simply because it's the personal touch that the family wants,” the CFO added. However, he says he also sees an opportunity to automate more to optimize manual processes and wants to find a system to help roll up reports more efficiently. “That's probably one of [my] main frustrations: Trying to give the most accurate information to the family.” FOs desire but are challenged by producing accurate and timely data to support strategic decision making. At RSM, we often see that this challenge stems from an overreliance on manual processes resulting from the operational complexities of managing disparate, nonintegrated systems.

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Family offices have a critical need for data and technology

For FOs, transparency and real-time access to information are crucial not only for day-to-day operational efficiency but also for enabling strategic decision making. The SFOs surveyed indicated they rely on various technologies to perform routine tasks and streamline key functions. The following charts highlight technology use among SFOs.

A key insight is the differences in technology usage by FOs based on when they were established. For example, 80% of respondents from FOs founded between 2015 and 2023 indicated they used cloud technology versus 67% of respondents from FOs established in the 1970s and 1980s. Conversely, 71% of respondents from FOs established in the 1970s and 1980s indicated they used automated investment reporting versus 35% of respondents from FOs founded between 2015 and 2023. This dichotomy is interesting and, at first glance, may be nonintuitive. However, in these instances, RSM often sees that FOs may be augmenting legacy systems with additional platforms or processes to specifically streamline the investment reporting process—implying that technology and process often go hand-in-hand.

Furthermore, what is also interesting here is that many vintage FOs still operate on legacy systems. Technology modernization and optimization is a significant undertaking that requires careful consideration. Retaining an advisor with solutions to help you plan, design and build a tech infrastructure that best positions your FO for the future can be a wise move.

Also noteworthy is the level of sophistication—or lack thereof—of existing FO infrastructure. Only 3% of SFOs have what they consider to be leading-edge investment and operational technology, suggesting that opportunity exists to make technology improvements.

When asked about their biggest areas of concern related to technology, respondents ranked cybersecurity at the top of the list (71%), followed by cost (56%) and security of cloud-based tech (36%). More than three-quarters (77%) of SFO respondents indicated that cybersecurity is their No. 1 concern. The level of concern increased by FO size: Cybersecurity is the second biggest concern for 62% of smaller FOs (trailing only the cost of new technology at 71%) and is a top concern for 69% of midsize and 86% of large FOs.

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Mitigating cyber-risk is a priority to help safeguard family offices

Operational risk management is an integral component of operational excellence. It can help FOs identify areas in need of performance improvement to avoid loss resulting from inadequate internal processes, people and systems, or from external events including cybersecurity threats.

The majority (83%) of SFO respondents cited a cyberattack or data breach as their biggest operational risk, and one FO respondent went so far as to say data theft is the biggest challenge of our time. Survey results show that the larger the FO, the greater the concern. While more than half (65%) of smaller FOs said a cyberattack or data breach was their greatest risk, the proportion jumps to 83% for midsize FOs and 89% for large FOs. In truth, all FOs are at risk; the fewer security measures in place, the greater the risk.

The issue of risk management was discussed with the FO CFO mentioned earlier. He noted that the complexity of a FO, and the fact that many don’t have the governance or enterprise risk management strategy that is expected from a public company, makes them particularly vulnerable to cyberattacks.

Family offices of every size and type can serve as unknowing gateways to sensitive data and personal information due to their extensive financial dealings and relatively low maturity in cyber preparedness. These vulnerabilities make FOs attractive targets to threat actors who may not even need sophisticated hacking skills to compromise an organization’s security.

The real threat to family offices is what happens after a cyberattack

Perhaps an even greater operational risk is the business disruption that could occur as a result of a cyberattack or data breach. Regardless of FO size, respondents ranked business disruption as their next biggest concern after a data breach or cyberattack (53% for smaller FOs, 46% for midsize FOs, 39% for large FOs).

Interestingly, the newer the FO, the lower the perceived risk of business disruption for respondents (35% for FOs founded between 2015 and 2023, 39% for those founded between 2005 and 2014, 43% for those founded between 1990 and 2004, and 50% for those founded in the 1970s and 1980s). A possible explanation is that FOs of more recent vintage and with newer infrastructure feel better prepared for a cyberattack than perhaps smaller FOs with fewer resources and/or older technology.

As further proof of this point, “failure to upgrade technology” tied as the second biggest operational risk at 39% for FOs founded between 2005 and 2014. Meanwhile, FOs founded between 2015 and 2023 ranked it a much lower concern at 20%.

When asked what measures their FOs have in place to mitigate operational risk, most SFO respondents said backup servers (79%), followed by data security policies (53%) and business continuity plans (51%).

Again, in terms of preparation, data security policies are much more prevalent among larger FOs and less so for smaller FOs (61% in place for larger FOs, 51% for midsize FOs and 38% for smaller FOs). The same goes for backup servers (86% in place for larger FOs, 77% for midsize FOs and 71% for smaller FOs).

Often, in tandem with conversations on cybersecurity and operational risks, there is a focus on processes and controls surrounding cash movement. Remarkably, 71% of midsize and larger FOs surveyed noted that dual authorization of payments was not currently in place at their organization. This number was slightly lower for smaller FOs, at 65%.

The findings emphasize the importance of proactive measures and signal an opportunity for FOs, irrespective of size, to reconsider their payment authorization protocols and fortify their operational resilience, particularly when considering the prevalence of concerns around cybersecurity and data breaches—areas where bad actors routinely focus on gaining access to a family’s cash.

Family offices are skeptical of their ability to prevent cyberattacks

While only a small percentage (12%) of SFO respondents said their FO experienced a cyberattack in the past 12 months, the number of attacks was higher (20%) for midsize FOs. Nonetheless, most SFO respondents said they were only somewhat confident (71%) when asked about their FO’s ability to prevent a cyberattack.

Among the SFOs who experienced a cyberattack, below are the most common types and consequences of those attacks. Due to small sample sizes, the data below should be interpreted directionally.

Most common types of SFO cyberattacks

  • Data theft
  • Malware
  • Ransomware
  • Identity theft
  • External data breach
  • family member data breach (e.g., personal email account hacked)

Most common consequences of SFO cyberattacks

  • Data breach
  • Financial loss
  • Disclosure of personal information
  • Network or system outage
  • Reputational harm

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More areas of opportunity for family offices to make improvements

When considering operational risk management, it is impossible to ignore the importance of succession planning to fill positions and retain skills and knowledge when senior leaders leave an organization. As part of the current extraordinary wealth transfer, older generations, particularly baby boomers, are transferring wealth, and leadership of this wealth, to their heirs and beneficiaries.  This is putting pressure on the need to identify and train the next generation of family leaders—hence the need for next-generation education platforms.

Concurrently, FOs are also under pressure to rethink their operating models and proactively engage in their own succession planning to provide operational confidence for the next generation of family leaders and to ensure that the FO of today is both resilient and sustainable. This is further underscored by the fact that 53% of surveyed SFOs indicated decision-making authority is already in the hands of the next generation and beyond, signifying a critical juncture in the evolving landscape of FO dynamics.

We asked another survey respondent, a FO chief investment officer, what the biggest challenges and opportunities are within the FO space right now. She said, “How to integrate the next generation amid the intergenerational transfer and how to stop fighting among family members.” Given her response, it is interesting that more than half (55%) of the SFOs surveyed do not have a succession plan in place. Among those SFOs that have a plan in place, a large portion (37%) specified they have a formal written plan, while roughly one-third (34%) said they have an incomplete plan still under development. Another 20% said they have a verbally agreed-upon plan and the remainder (9%) said they have an informally agreed-upon plan.

These results come as no surprise because succession planning can be daunting. It requires FO stakeholders first to be willing to engage on the topic and then to agree on successors, predict future needs, initiate change management, and balance enterprise goals with individual aspirations and development. In RSM’s experience working with FOs, succession planning is most effective when it is based on an agreed-upon framework for decision making, often referred to as “governance” documentation.

“Meticulously designing a family succession plan should be done alongside a focused approach to governance—both for the family and for the FO,” says Chris Dickson, senior manager within RSM’s FO enterprise advisory practice. “This paves the way for effective operational oversight and the implementation of strategic risk management strategies and ensures alignment of vision across stakeholders throughout the entire enterprise.” 

"Meticulously designing a family succession plan should be done alongside a focused approach to governance—both for the family and for the family office"

Chris Dickson, Senior Manager, Family Office Advisory practice

The most popular forms of governance documentation that SFO respondents said they have in place include conflict resolution mechanisms (44%), codifying the family history (43%), establishing a family constitution (42%) and compiling a FO handbook (39%). These are all key to an effective FO governance framework, which is often developed under the guidance of an experienced advisor.

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Operational excellence is critical to the success of every FO and requires making effective use of people, process, technology and data to build a foundation for growth. As FOs look to the future, they must balance enhancing operational performance with protecting the family legacy.

The driving factors behind making operational changes appear to be internally driven and centered on maintaining control, flexibility and visibility across the organization. Growing trends include strategic outsourcing to increase performance and lower operating costs, and prioritizing digital transformation and cybersecurity. Ultimately, survey results and sentiments suggest a common goal among FO respondents toward continuous improvement, with the understanding that operational excellence is an ongoing journey, not a destination.

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