When thinking of the last few years, one word comes to mind in describing the political, economic, and financial developments which have been unfolding: “uncertainty.”
Since 2020, the macroeconomic environment has become increasingly volatile. The main enemy has been inflation. Across the world, key economies have been afflicted by a general rise in prices unseen in decades.
Extraordinary fiscal and monetary stimulus packages deployed during the COVID-19 pandemic, as well as geopolitical tensions in Eastern Europe, which further destabilized global supply chains and energy markets, have been the main sources of higher inflation. The new threat has prompted policymakers and investors to reassess their priorities.
In 2022, for the first time in more than a decade, central banks across the world began to increase interest rates and to shrink their balance sheets. The tightening campaign, which continues today, has been causing bouts of market volatility, forcing allocators to reassess risk and reconsider how their portfolios are positioned.
In this environment, institutional investors need transparency over their assets, control over their costs, and flexibility to respond to the changing macroeconomic backdrop in the right way and at the right time. A slow or incorrect response in today’s volatile world can result in huge costs for investors. Allocators need full visibility and control of their own money. As we say to our clients: “If you don’t know where your money is, you don’t own your money.”
Navigating Turbulent Times
Oxford Economics and LexisNexis have recently published a report on the cost of compliance for UK financial services firms in the current market regime. The study found that it costs the respondents about £34 billion per year to comply with regulations. One of the biggest factors behind this huge figure was how data is being handled.
The time it took to gather, assess and act on critical information was an important element behind a financial institution’s compliance bill. Granted, the sample included more than asset managers and institutional investors.
However, when it comes to the backbone of a successful family office business, compliance is right up there with accounting: failure to put in place and maintain a robust, efficient, and dynamic set of accounting processes and tools can result in huge costs that may be exacerbated by the market volatility. As such, employing inefficient accounting tools may even hinder the ultimate goal of a family office – to look after and grow the wealth of its clients.
Traditionally, however, family offices have relied on spreadsheets or manual processes. For example, in our latest Family Office Focus report, we found that about 42% of a 40-hour work week in a family office is spent on such processes. Indeed, collecting, reconciling, and consolidating data can take weeks, if not months, for a family office in this situation.
Recent studies have shown that more family offices are begging to realize downfalls posed by the old approach to accounting. Increasingly, these institutional investors are exploring novel solutions for their accounting needs which enable them to focus on their core competencies while reducing costs and mitigating risks.
Navigating Turbulent Times Oxford Economics and LexisNexis have recently published a report on the cost of compliance for UK financial services firms in the current market regime. The study found that it costs the respondents about £34 billion per year to comply with regulations.
Accounting Solutions Matter
From recent conversations with family offices, we have learned that accounting is the backbone of their operations. These sophisticated institutional investors need accounting tools which provide them with automated processes and integrated workflows and which enable them to access timely, client-specific reports.
We understand that in today’s fast-changing market regime, family offices cannot afford to fall behind market developments, nor can they rely on old accounting methods to ensure operational efficiency.
The reason behind this is clear: accounting is the only source of knowledge about a family office’s assets and cost base. Without a firm grip on where the money flows, no institutional investor can successfully navigate the current macroeconomic environment.