The family office trends for 2021 will continue to be shaped by COVID-19, advances in technology, social issues, and changing values, which impact investment strategies.
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 during the viral outbreak.
However, there are always threats, as COVID-19 has shown. Positioning and preparing your organization accordingly will mitigate the risk and ensure a smooth operation.
At the start of the year, global wealth was in retreat. Total household wealth dropped by USD $17.5 trillion in the first quarter of 2020, a 4.4% drop compared to the value at the end of 2019.
The emergence of COVID-19 disrupted economic activity and led to a stock market crash, denting the fortunes of many and threatening the livelihoods of countless others.
Despite the crash, the markets rebounded swiftly. Between a market recovery and government stimulus, global household wealth topped USD $400 trillion for the first time, according to Credit Suisse.
While those at the top saw their fortunes decline at the beginning of 2020, they have been some of the biggest winners since. The top 500 wealthiest individuals collectively saw their net worth increase by $813 billion.
And with the gradual rollout of COVID-19 vaccines, the world economy should continue its recovery, increasing total wealth levels.
COVID-19 and the effects it has on wealth, both internally and for society at large, will affect how family offices invest and operate.
As a family office trend, addressing societal issues will be one of the bigger influences in 2021.
The death of George Floyd sparked nationwide (and worldwide) protests, highlighting a range of topics to address, related to race, policing, the legal and justice systems, etc.
COVID-19 itself showed how fragile the global economy and health care systems are when faced with such disruption. In both cases, it is the lowest income earners who are hit hardest and need the most assistance.
A brief “pause” in human activity at the start of the lockdowns dramatically reduced global emissions, showing not only how much of an impact humans have on the planet, but also the power people have in preserving the environment.
While there are no quick solutions, family offices can play a role in moving things in the right direction. They have the resources that can lead to positive outcomes.
It is the aforementioned issues that will influence the way family offices spend, invest, and donate.
According to a Campden Wealth survey, 26% of family office respondents said they want to show that family wealth can be invested for positive outcomes. 24% said they believe incorporating sustainability considerations will lead to better investment returns.
Though the markets recovered from a sharp nosedive at the start of 2020, family offices still have questions.
According to a Citi Bank report, three out of four family principals and office heads indicated a “mostly cautious investment outlook” for 2021.
They are cautious because of the ongoing pandemic, as well as uncertainty over monetary and tax policies.
Overall, wealthy investors are expecting “meager” 1% to 5% portfolio returns for 2021, as stated in the report.
Though a vaccine has arrived, it will take several months to distribute.
In the meantime, most family offices will continue working remotely, either partially or entirely, as the virus remains a threat.
After the initial transition from office to remote work, 80% of family offices reported that the pandemic impeded their daily work, according to a study from familyofficehub.io.
While these organizations have surely made adjustments since, many still face challenges with security and insufficient technology, which will be discussed in the sections below.
According to Northern Trust’s 2020 Family Office Benchmarking Survey, cybersecurity is the number one concern for global family offices in 2021. Cybersecurity comes ahead of other worries like market volatility, geopolitical uncertainty, and succession planning.
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 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.”
And working from home only hastens the need for family offices to make much needed improvements.
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 has gone 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.“
Empaxis helps family offices automate their processes. Contact us if you’d like to know more.Why move from client-server portfolio accounting software to a TAMP
According to UBS, over 80% of family offices invest in private equity, and of those family offices, an increasing number of them are making direct investments, rather than going through a hedge fund.
69% of family offices view private equity as a key driver of returns.
The hedge fund fee structure is a commonly cited reason in the move away from hedge funds, and in the shift to private equity.
Here are a few reasons why family offices like direct investing:
Compared to 16% for private equity, hedge funds on average account for only 5% of family office total asset holdings.
Though hedge funds have mostly underperformed in recent years, 73% of family offices surveyed by UBS said hedge funds performed in line with or above expectations in 2020.
As mentioned above, COVID-19 and the social issues brought to light in 2020 have impacted how family offices think, spend, invest, and donate.
High-net worth families are increasingly conscious of how they are perceived by the public and how their investments affect society and the environment. As a result, impact investing has become a popular way to contribute to a greater societal good.
And of those engaged in sustainable and impact investing, these investors predict that within the next five years (2019 to 2024), one-third and one-fourth of the average portfolios will consist of sustainable and impact investments, respectively.
Helping drive this trend are the millennials, who will collectively inherit trillions of dollars in assets.
A generation less concerned with material items like yachts and airplanes, millennials are described by the The Family Office Exchange (FOX) as “sophisticated, highly educated, and well-traveled”, and they shave shown a preference to investing in environmental, social and governance (ESG) projects.
In 2019, 9 of the 10 biggest ESG mutual funds outperformed the S&P 500.Source: FT
A Biden administration should further boost the outlook for ESG investing, given its vocal support for sustainable, socially responsible policies.
57% of family offices believe blockchain technology will fundamentally change the way we invest.
While firms should consider the opportunities and risks of cryptocurrency investing, there are some inherently attractive features in blockchain.
From an investor due diligence standpoint, blockchain technology is unique in its ability to automate the processes associated with reporting and record-keeping. Furthermore, blockchain can automate procedures associated with risk assessment and risk allocation in ways humans couldn’t.
Learn more: Blockchain Explained
In the midst of the market downturn in the first quarter of 2020, KPMG noted a shift in family offices moving from a strategy of growth to one of wealth preservation and asset protection.
These findings were further supported by firms reducing risk exposure and building cash reserves in 2019.
Threats to cash flow should be monitored closely, and those threats should ultimately determine the level of risk tolerance.
As the global economy recovers, albeit in a fragile manner, family offices are keenly aware that risks remain. Assets should be allocated such that a sudden change of events doesn’t threaten the entire portfolio.
Peter Sasaki, a managing member at SDS family office, explains what (many) family offices have done during COVID-19:
“Many family offices have long been hedging their investment portfolios against increased volatility… A variety of innovative approaches are being used that cover both their liquid investment portfolios and their extensive venture and private equity holdings. Some family offices are increasing their use of safe haven investments such as precious metals and occasionally cryptocurrencies. At the same time, a large number of family offices are benefitting from the market volatility in their hedge fund portfolios and some are using the market downturns to—in their view—pick up solid investments at temporarily depressed prices.”
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:
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.”
As we are still in a pandemic, KPMG recommends firms prepare for potential additional costs related to employee medical sick-leave, in addition to subsequent losses in productivity.
Access Empaxis’s White Paper on
Making Outsourcing Work for Investment Managers
The ongoing pandemic and increased awareness of social issues from 2020 will influence family office trends in 2021.
While family offices are cautiously optimistic for 2021, they are aware that risk is still present.
Regardless of the virus, some trends will continue no matter what. The rise in direct investing, impact investing, and use of blockchain technology were under way before COVID-19, and there is little reason to suggest it stops 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, the risks can be mitigated.
Still, despite the pandemic and the economic slowdown, many family offices remain optimistic about the long term.
Family offices will continue to remain a viable and desirable way for wealthy families to grow and preserve wealth and assets for generations to come.