Macroeconomics, technology, growing risks, and the continuous search for new opportunities will largely shape family office trends for 2024, influencing how these entities think, invest, and operate.
The overall outlook for family offices is positive, as the number of establishments continues to grow, reflecting rising wealth globally.
Indeed, setting up a family office is a great way to ensure family wealth is properly grown, preserved, and distributed to successive generations and other desired recipients.
In light of the optimism, running a family office has its challenges and risks, and in 2024, there proves to be no exceptions.
But with proper awareness, foresight, and protectiveness, single- and multi-family offices can capitalize mitigate the risk and ensure a smooth operation.
As global wealth increases, so does the number of family offices, driven in large part from Asia.
Credit Suisse estimates there are as many as 10,500 globally, and these entities are pushing their collective weight around in the investments space.
These high net worth individuals and families handle many of their investments internally, avoiding management fees with a traditional wealth manager.
And the nature of family offices makes for ideal investors, given their long-term outlook and ‘patient capital,’ which differs from a hedge fund or asset manager, aiming or the highest returns in the shortest time windows to satisfy investors.
And when it comes to family office staffing, they’re now competing directly with large financial institutions for talent.
"Family offices have maintained a consistent pattern of augmenting their allocations to private markets.”
According to a survey of North American family offices conducted by Campden Wealth and RBC, these FOs had more investments allocated to private markets than public markets, 29.2% vs. 28.5% respectively.
This is the first time in this annual survey that allocations to private markets were greater than public stocks.
And many plan to build on those allocations.
41% plan to boost allocations to private equity funds, and a third plan to put more money into direct private equity deals.
Family offices are emerging as viable alternatives for capital as other investment sources (institutional) have been constrained, resulting from persistently high interest rates and market uncertainty.
And real estate has been a favored asset class for family offices. According to a FINTRX’s Private Wealth Data Report, North American family offices have nearly 20% of their wealth in real estate.
2024 will prove no exception for the value that family offices place in real estate. Similarly, due to conditions of constrained capital across other sources, attractive investment opportunities may be offered, including favorable terms for lending.
In light of recent slumps and scandals, cryptocurrency as an asset class has shown its staying power.
And some family offices are “ramping up their investments in crypto assets,” according to a Goldman Sachs report.
With digital assets in general, 32% of family offices are invested in that area, and the proportion of FOs invested in cryptocurrency has increased from 16% in 2021 to 26% (in 2023).
At the same time, for those that increasingly show interest, another set increasingly shows no interest. The Goldman Sachs report revealed that 62% of FOs are not invested in the sector and are not even interested, compared with 39% in 2021.
Over the next 20 years, $84 trillion in assets will change hands and given to younger generations, in what is known as “The Great Wealth Transfer.”
And family offices will play a major part in facilitating those transfers.
According to a UBS report, the primary goals of most family offices is to support the transfer of wealth from one generation to another (63%) and provide income for family members (55%).
However, only 42% have a wealth succession plan for family members, and equally only 42% have a governance framework.
Family offices haven’t always been known for being at the forefront of technology adoption, but that notion is changing.
A report by UBS and Campden Wealth Research revealed that 62% of family offices are currently using AI or are planning to do so in the near future.
AI can help in areas like investment analysis and decision-making, portfolio allocation, risk management, and analyzing data, among other workflows.
Learn more about how family offices can make use of AI.
“The cost of fixing a problem can easily be a factor of 100x compared to an investment into measures that would have prevented the issue in the first place.” - Tobias Jaeger, CEO of Falcone International
Digitizing workflows is still one of the most important things a family office can do for its long-term strategy, but firms must know how to avoid the risks.
According to a Boston Private report, 26% of family offices have suffered a cyberattack.
And at the time the report was produced, 2/3 of those cyberattacks happened in the 12 months prior.
Family offices are less regulated than traditional wealth and asset managers, and in these situations it’s not uncommon for FOs to have fewer formalized procedures around data security and controls.
These findings further support the very reasons cybercriminals pursue family offices. They go after entities with large sums of money that are perceived to have weak cybersecurity.
Prove the criminals wrong. Francois Botha from Forbes wrote about how family offices can protect themselves from cyber threats.
“Family offices sometimes fall through the cracks of being big enough to be specifically targeted, but not having in place the strong risk management measures typical of bigger organisations, hence leaving them very vulnerable.” - Kevin Hulbert, Senior Adviser at Dentons
3 in 10 didn’t have a business continuity plan in place before COVID-19, and over a quarter said “implementing secure remote working protocols is one of their top risk management challenges.”
The report mentions that family office leaders must change their mindsets, citing underestimation or complacency towards risks.
Additionally, they should develop continuity plans and partner with a risk consultant to carry out these computer-simulated, ‘what-if’ scenarios that identify vulnerabilities before real threats emerge.
From there, they have a mindset and framework of which to address these risks.
Compared to Registered Investment Advisors, family offices are subject to light regulatory oversight.
That’s because these entities manage personal wealth, not external investors’ wealth.
However, U.S. lawmakers have considered legislation around how family offices operate. With heightened awareness around wealth and wage gaps, large amounts of unregulated capital present many questions:
Some regulations will require more transparency among family offices, submitting beneficial ownership information (BOI) reports for their corporation or LLC entities, in an effort to prevent money laundering and other illicit transactions.
Additionally, family offices may have to disclose investments in a Reporting Company or if they hold significant ownership of companies.
And despite 2024 increases on annual gift tax exclusion amounts due to inflation, there is a possibility that the estate and gift tax exemption will be cut by approximately one-half on January 1, 2026.
Any changes in regulation will encourage family offices to make use of the exemptions are no longer available.
You can read more about potential regulatory changes this year and how they affect family offices.
Family office consultant and Forbes contributor, Francois Botha, also provides a great analysis on the topic of family office regulation, evaluating what more or less regulation means for the industry.
The private, somewhat secretive nature of family offices makes it harder for them to find talent.
How will promising talent show up if they don’t know the organizations exist or how to find them?
And inner network referrals to fill jobs can only go so far, as there is certainly a talent shortage, especially considering the growing number of entities that compete for the same expertise.
Family offices must position themselves in a way to show they are present, relevant, and indeed a worthwhile opportunity and career move.
Whether it’s establishing a presence at top universities or financial industry networking events, there are for these entities to be front and center for top talent.
Similarly, sites liked LinkedIn and ZipRecruiter are places to post jobs and meet with potential team members.
Costs are going up… what else is new?
As rising expenses and smaller returns hurt profit margins, outsourcing for family offices is one way to reduce costs and attain greater operational efficiency.
Leveraging the technology and expertise of third-parties can mitigate the risk associated with in-house functions.
According to Rick Flynn, a managing partner of Flynn Family Office:
"More successful family businesses are today relying on outsourced family office services providers to achieve greater control and cost savings while managing toward defined family wealth objectives."
Empaxis helps family offices reduce costs by taking care of their operational processes.
The private wealth industry has historically has been slow to adopt technological change, and that needs to change.
As Craig Iskowitz founder and CEO of advisory consulting firm Ezra Group, puts it, “If (family offices) choose not to innovate, they risk going the way of Sears or Blockbuster."
And according to McKinsey when firms become digital leaders in their industry, they have faster revenue growth and higher productivity than less-digitized peers.
In many cases, family offices have a patchwork set of systems that don’t interact well with each other. Exchanging data across platforms becomes a major challenge, leading to inaccuracies as well as manual copying and pasting of information into different systems.
A lack of quality, centralized hubs makes it harder for family offices to get the most accurate view of everything relevant to them: investment portfolios, bookkeeping/accounting, legal, taxation, family details, etc.
Quality data is foundational to analysis and decision-making, and single- multi-family offices need better setups.
They should certainly leverage the digitized and automated tools that make it easier to manage investment portfolio data, reports, and documents.
Even if they lack in-house expertise and don’t know where to start, that’s ok. Many wealthy families are in the same situation.
Family office digital transformation and technology experts like Empaxis can help. Our systems-agnostic, start-to-finish approach means we help family offices at every step of the way with any systems they use. The support , includes data migration, software and application development, as well as testing/QA, implementation, and ongoing maintenance.
Automating routine, manual tasks is another technology-related opportunity for family offices.
Predictable and repeatable tasks once done by humans can now be done by bots. This allows employees to focus on higher-value activities.
To learn more about Robotic Process Automation, check out one of our posts on how RPA helps money managers.
Danielle Valkner of PwC shared a few more examples of how RPA helps:
"The most widely used examples of RPA include data entry/form population and account reconciliations. When you combine RPA with artificial intelligence (AI) and machine learning you can gain even greater efficiencies. One real example of this which all family offices will recognise is gathering of tax information and populating tax forms."
As family offices increase their allocations to private equities, they have more statements to process every month.
It’s a very manual process with repetitive steps for these alternative investment statements: downloading, renaming, formatting, storing, extracting data, and sending report notifications.
Sometimes these statements come in all at once, and it’s overwhelming to deal with, especially when there are tight deadlines.
We at Empaxis have automated development automation tools to streamline these processes for family offices.
Our clients benefit tremendously from the time and resources we save them.
Interested in learning about automating your private equity statement processing?
Family offices are certainly hitting their stride, as they increase in number and prominence globally.
There is opportunity to take advantage of technology, but insufficient and improper use of technology can present threats and hinder productivity.
Furthermore, lack of prep for succession plans, looming regulations, rising costs, and talent shortages make it harder for family offices to get the support they need.
But they can overcome some of those challenges by partnering with third-party investment operations and systems integration services providers like Empaxis that know how to deliver the solutions and results that single- and multi-family offices need.
Overall, the family office structure will continue to remain a viable and desirable way for wealthy families to grow and preserve wealth and assets for generations to come.
There are some current challenges, but the future is bright.
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