Factors including governance, organizational structure, risk management and technology are causing family offices “of all types” to gravitate towards a more institutional structure, a new report says.

While there is no uniform definition for what constitutes a family office, wider wealth management industry trends as well as evolving client needs and desires are changing how they are structured and affecting the services they provide.

According to the Deloitte Center for Financial Services’ private wealth outlook for 2015, a combination of factors including governance, organizational structure, risk management and technology are causing family offices “of all types” to gravitate towards a structure more akin to their institutional wealth and investment management peers.

Taking a broad view of the sector, the “Big Four” professional services firm predicts that many family offices will continue to evolve away from operating like small business as they formalize their governance and organizational structures and implement tighter risk management programs and controls.

To begin with, the report asserts that effective governance - defined as the processes, policies and procedures under which a family office operates - requires clearly defined roles, responsibilities, goals and accountability.

“A leading practice for family offices in 2015 will be to define or refine precisely their mission and then build or improve the governance structure around it,” Deloitte said. “This may be a painful and challenging exercise and might expose fault lines among family members. However, once identified, the family can deal with these fault lines proactively, in a constructive and healthy manner, rather than during a time of stress and crisis.”

Meanwhile, in terms of organizational structure, Deloitte said it has observed a growing need for “sophisticated expertise,” highlighting the segregation of duties as a further sign of industry institutionalization. Notably, the firm anticipates that family offices will increasingly outsource key roles and functions, which it added can strengthen controls because third-party vendors provide an “extra set of eyes.”

Those that are expanding into alternative investments are increasingly outsourcing investment management, while others are opting to outsource roles like the chief financial, investment and/or technology officer. Although the latter approach can also offer built-in succession planning - a highly talked-about industry issue - the report warns that family offices should consider the associated costs and loss of direct control.

The formalization of risk management is also described in the report as a major sign of how family offices are becoming more institutionalized, with “risk sensing” - which combines human analysis and technology to analyze data - cited as a “rapidly emerging trend.”

“By embedding risk sensing in a firm’s operations, an FO can anticipate reputation-impacting events, allowing the firm to adjust its strategy,” Deloitte said. In particular, the firm recommends that family offices make cybersecurity a top priority in 2015, saying: “Firms that focus on risk will need to make some up-front investments, but the returns can be very valuable.”

Similarly, while fraud is not often covered in the news due the sensitive nature of the sector, the report emphasizes that it does occur and that family offices are prime targets - particularly in the areas of expense accounts, payroll and accounts payable.

Establishing a culture of fraud awareness - and implementing the right controls to combat it - is crucial and doesn't need to be an overly intrusive or expensive process.

“The solution is finding the right balance between trusting employees and verifying that they are being trustworthy,” Deloitte said. “Fraud education, a risk assessment, and updating the staffing model are great places to start and can have an immediate impact. The controls can be thought of as the guardrails of the governance structure that confirm that the objectives of the family are being met.”

The last dimension covered in the report is technology - specifically of the rise in the acceptance of third-party cloud-based applications. It notes that family offices have been slower than the general wealth management industry to accept cloud-based applications, reasons for which include concerns about security and a scarcity of software tools that focus on this unique segment.

But today there are “more tools than ever to choose from,” it said, adding that although security is of course still a major concern, the comfort level around cloud applications has grown substantially. “Expect adoption of cloud applications by FOs to continue to increase next year, especially in the areas of client and tax reporting.” Click here for a write-up of the technology panel at the Family Wealth Report Summit last October.