The family office trends for 2023 will be dominated in large part by inflation and its effects on the global economy.
All these things influence how family offices think, invest, and operate.
Establishing a family office is a great way to ensure family wealth is properly managed and eventually distributed to successive generations. There are opportunities not only to preserve assets, but also to grow their wealth, as some of the ultra-wealthy have done since the start of the pandemic.
However, there are always threats. Positioning and preparing your organization accordingly will mitigate the risk and ensure a smooth operation.
According to a report from Campden Wealth, more than 3/4 of North American families grew their wealth in 2022, and more than half of family offices grew their assets under management.
Additionally, North American family office investments outperformed global peers with 15% average portfolio returns, compared to 10% in Asia-Pacific, and 13% in Europe.
Despite doing relatively well, the report found family offices have an increasingly bearish outlook on the economy for 2023, as high inflation persists.
Indeed, inflation is a notable concern for family offices, according to a Citi Private Bank survey.
And 81% of those surveyed by Campden Wealth said investment risk is the number one threat to family offices.
Dr. Rebecca Gooch, Senior Director of Research at Campden Wealth, summed up their views:
“Family offices’ view of the economic climate has soured over the year amid sharp rises in inflation and interest rates. With that said, their investment performance has been strong in recent years, despite the pandemic. This shows that family offices are well-poised to tackle turbulent economic conditions. They are nimble investors with ample cash reserves, diverse portfolios and a long-term outlook, thus they’re able to ride economic waves while also capitalizing on opportunistic deals.”
This is a good time to reconsider strategic asset allocations (SAA’s). In this inflationary environment, holding cash and fixed income will not preserve or generate the returns a family office expects.
A diversified portfolio with a mix of real assets such as equities, gold, and real estate are a good long-term hedge against inflation, according to William Sels, the Global Chief Investment Officer of Private Banking and Wealth Management at HSBC.
He also suggests that outside of their core portfolio, family offices can align returns with specific drivers of inflation. As an example, they can look at investing in automation development or quality companies with strong margin power.
3 out of 4 family offices surveyed by Campden Wealth invested in healthcare in 2022, and 39% plan on increasing their investment in 2023.
Other areas most likely to see a rise in allocations are artificial intelligence, with 40% of those invested there planning to increase their allocations, green tech (35%) and biotech (34%).
Family offices have found the private markets to be a good hedge against inflation, as they have increased their exposure to private debt, private equity, and real estate. Private investments will be discussed in more detail below.
According to a Morgan Stanley analysis, private equity, venture capital, private credit, private real estate and infrastructure investments have historically overperformed public markets.
Family offices on average allocate approximately 45% of their portfolios to alternative asset classes.
And according to a UBS report, over 80% of family offices invest in private equity.
Of those family offices, every year an increasing number of them are making direct investments. Average allocations in private equity continued to rise, from 16% average allocation in 2019 to 21% in 2021.
And when it comes to fixed income:
Here are a few reasons why family offices like direct investing:
Similarly, many entities raising capital view family offices as good partners for the following reasons:
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?
The COVID-19 pandemic is not over, but vaccines and better treatment methods have helped return a degree of normalcy back into people’s lives.
People once again are returning to the office, but not in the way it was pre-pandemic.
According to a poll from consulting firm Agreus, 64% of family offices have adopted a hybrid working model, while 14% offer full-time remote working, and 22% have resumed full-time work in the office. 78% work from home at least once a week.
In this “Great Resignation” era, offering a flexible work schedule is no longer just a way to stand out from other firms, but to merely meet industry norms.
That said, the in-person and interpersonal communication is still an important part of the trust and relationship-building needed to run a family office. So, at a minimum, periodic in-person meetings will get the job done.
With the collapse of FTX, there is reason to be skeptical about the future of Bitcoin and other cryptocurrencies.
That said, 1 in 5 family offices are invested in a cryptocurrency. Their ownership accounts for 4% of all crypto investments, and 77% of family offices have expressed interest in digital assets.
While many family offices are willing to invest in different asset classes and take on risk, taking on too much risk is unwise, especially when wealth preservation is a major part of what family offices do.
Fortunately, just 1% of the average family office portfolio is invested in cryptocurrencies.
If wealth preservation is their goal and considering the FTX collapse, single- and multi-family offices should allocate just a small percentage of their assets into crypto, considering the volatility.
Family offices recognize they have a role to play when it comes to tackling environmental issues; relying on government action is not enough.
The aforementioned Campden Wealth report mentions that in 2020, family offices dedicated an average of 16% of their portfolios to sustainable investments. In 2022, that number grew to 20%. In 5 years, that number is expected to rise to 31%.
Part of this increase in sustainable investing is because of Next Gens, younger members of the family who are having more influence in running the family office as the older generation retires.
In 2022, 37% of North American family offices engaged in sustainable investing, an increase from 34% in 2021 and 26% in 2019.
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:
Of course, there are two sides to every story. Family office consultant and Forbes contributor, Francois Botha, provides a great analysis on the topic of family office regulation, evaluating what more or less regulation means for the industry.
Family offices certainly benefit from the advances in technology, whether it’s through using the technology or investing in it.
When lockdowns forced many to work from home, cloud-based platforms and video conferencing applications made it possible to work remotely while minimizing negative impacts.
And family offices have used our cloud-based turnkey asset management platform, TAMP1, to manage all their data and reports in one place.
Furthermore, they’ve invested in the tech sector, via public equities, venture capital, and/or private equity. Of course, they’ve seen fantastic returns.
That said, tech isn’t perfect. Users have data privacy concerns, as well as questions around social media platforms and the connection with increased mental health issues and the spread of misinformation.
Should government regulate them more or not? What alternatives do consumers have?
Socially conscious family office investors should look to get the best of both worlds: enjoy returns while investing in companies that promote their values.
Collectively, family offices can be a force for good. As investors with large clout, they can demand more from big tech and social media.
According to Northern Trust’s Family Office Benchmarking Survey, cybersecurity is the number one concern for global family offices.
Their concerns are not unfounded.
Of the 78 global family offices surveyed, 96% of respondents said they have experienced at least one cybersecurity attack.
According to a 2017 Campden research survey, 32% of family offices have suffered losses in cyberattacks. In one case, a family office lost $10 million. 48% of respondents surveyed did not have a cybersecurity plan in place.
Family offices are generally 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. Check out Deloitte’s key recommendations for family offices to protect themselves.
The Campden Wealth report found that in North American family offices, 30% of Next Gens have already assumed control of their families’ operations, and another 27% are expected to do so within the next decade.
These transfers of power reflect a larger trend of generational wealth transfer. According to Research firm Cerulli Associates, they predict that overall wealth transferred between 2021 and 2045 will total $84.4 trillion.
However, only 33% of family offices have a succession plan in place for senior leaders, and 40% feel they don’t have a next generation member who is qualified enough to take over.
And similar trends play out in emerging markets.
Setting up succession plans for family offices in emerging markets, particularly for Gulf Cooperation Council (GCC), is a concern. According to an Invesco study, “In the GCC, most wealth is first generation so new inheritance structures need to be developed for large families within local legal frameworks.”
Finding appropriate service providers for managing this wealth is often in mature markets in the United States and Western Europe, where legal and financial frameworks are better suited for these families’ situations.
If the local laws are ill-equipped to handle wealth distribution among family members, then the challenge lies within a succession plan itself. Setting up such a plan over the course of 12-24 months is a top priority, and 69% plan for an inter-generational wealth transfer within 15 years, according to Campden.
Regardless of region, transitions don’t always go smoothly:
Costs are going up… what else is new?
As rising costs and smaller returns hurt profit margins, outsourcing for family offices is one way to reduce costs and attain 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 been slow to adopt technological 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."
How dependent have family offices been on locally stored computers and servers? When staff is working from home, do they have to remotely connect to office desktop computers and software?
Remote connection issues and technology troubleshooting will slow down productivity, and the move to secure, cloud-based applications can solve those problems.
For example, our web-based TAMP1 platform gives family offices a single place to manage data, reports, investment performance, documents, and communication with family members.
Unlike legacy systems that have a limited number of licenses available for access at a single time, web-based solutions have no such restrictions.
Data updates in real time are another reason to move to new cloud-based technology. With efficiencies in turnaround time and reporting accuracy, family offices have information they need to make informed decisions faster than before.
And according to McKinsey when firms become digital leaders in their industry, they have faster revenue growth and higher productivity than less-digitized peers.
While family offices have once been hesitant to upgrade software due to cost and complexity concerns, the number of cloud-based, Software-as-a-Service (SaaS) solutions are more affordable and easier to implement, according to PwC’s Danielle Valkner Family Office Leader.
As the world goes more mobile and digital, accessing everything from their devices whenever and wherever has become normal. While older generations in the family may not be as quick to demand the latest and greatest in mobile apps and fintech, younger generations will.
If family offices, single-family offices in particular, do not make these adoptions, they “risk losing the more technically adept third generation to the MFO (multi-family office) down the street that offers a more modern client experience,” according to Craig Iskowitz.
A platform like TAMP1 can offer that modern client experience by providing a web-based portal for clients, so they too can see data and investment portfolio performance in real time from their devices.
From a UBS survey, 87% of family office respondents agree that artificial intelligence (AI) will be the biggest disruptive force in global business.
AI, when its capabilities are fully realized, can perform tasks at greater speed and efficiency than humans. While that may sound "scary" to some, the key is to look at how AI can free up human time to focus on higher-value, client-facing activity.
As forward-thinking firms will employ the latest technology to maximize efficiency, family offices that want to stay ahead of the curve will follow suit.
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."
Inflation is a hot topic, and economic pressures influencing many of the family office trends in 2023 and heading in to next year.
Changes to investment strategies, increased social consciousness, and leveraging technology, automation, and outsourcing are just some of the developments as a result of the current environment.
Also, the rise in direct investing and impact investing were under way before the pandemic, and there is little reason to suggest they stop now.
The same goes for succession planning issues and rising operational costs. They existed before, and they will still exist. But with proper planning and action, you can mitigate the risks.
Cybersecurity remains a hot topic. While those risks won’t go away, family offices can take steps to mitigate that risk.
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.
And by being socially contributors, family offices can make things brighter for the world.