The family office is receiving an overhaul at Chicago-based Northern Trust. The bank, which serves roughly 300 of the country's 4,500 wealthiest families - 70 percent of which are served by a formal family office structure - is in the process of rolling out a virtual family office platform called the Northern Trust Passport for Family Offices.
Northern Trust, already a prominent player in the family office space with approximately $100 billion in assets under administration, expects that the creation of its virtual platform will help it gain even greater market share as it goes head to head with traditional competitors like Bessemer Trust, Mellon Financial Corp. and U.S. Trust. It's no wonder that Northern Trust and others have made family offices their business - these wealthy families represent more than an estimated $1 trillion in assets.
The New Platform
Northern Trust's idea for a virtual family office platform began more than two years ago as a result of a collaborative effort between the bank's wealth management and technology divisions. A traditional family office structure consists of a team of professionals dedicated to providing wealth management services to one or more generations of a single family of substantial wealth. Northern Trust provides custody, reporting, investment management and other services to these families to help run their offices.
According to Tim Theriault, president and chief technology officer of worldwide operations and technology at Northern Trust, the traditional family office has always implied the physical structure - actual offices with computers, technology and staffs of up to 90 people. He believes that the Northern Trust Passport for Family Offices product could eliminate the need for that physical structure. If Theriault is right, the platform could motivate families to dismantle their family offices and go completely virtual.
Most family offices cost upward of $1 million annually to run, and a virtual family office setup potentially could cut those costs in half. "The cost of family offices is prohibitive for families with less than $100 million," says Jaime Punishill, a wealth management consultant at Boston-based CapGemini. But, "If you remove a lot of the physical infrastructure and create a virtual support network, you could afford a family office at $25 million."
Northern Trust Passport for Family Offices is essentially a Web-based portal designed to provide the behind-the-scenes integration of all of a family office's tools in order to create a single, aggregated net worth statement, balance sheet or income statement - the Holy Grail, according to those who manage family offices. Family offices invest in a multitude of product types, including stocks, bonds, real estate, private equity and hedge funds. Aggregating the value of all investments in a single statement is what every family office wants to achieve.
But it's no easy task, particularly since investment opportunities have changed over the years. "The alternatives available to our clients from an investment perspective today are far greater than existed five to 10 years ago: hedge funds, private equity, limited partnerships," says Steven Bell, senior vice president of Northern Trust's wealth management group. "Many of these are not custody-friendly, and yet, from a reporting perspective ... what all of our clients ultimately want is a [single] financial statement."
Data at the Core
In order to better serve the bank's customers, about two years ago, Northern Trust senior vice president and solution strategist David Bailey set out on a road trip to visit many of the family offices Northern Trust serves to determine their pain points. The trip proved enlightening and helped shape the new platform. Bailey found that the family offices' common challenges involved data collection and integrating disparate technological components.
He realized that Northern Trust could solve 80 percent of those pain points by repackaging capabilities that the bank already had within its wealth management and institutional divisions. As a result, Bailey and his technology team identified where they could do some developmental work to integrate the bank's various capabilities so that a family office could use a simple Internet portal to access tools - a general ledger, partnership accounting, reporting - and deliver the information to the various parties involved in the relationship.
"We have capabilities and we're building new capabilities that allow us to ... provide all the components that are needed to ultimately produce the end knitted income statement, balance sheet [and] net worth summary," Bailey explains.