Trends to watch for Family Offices

At the beginning of 2022, Family Offices were cautiously optimistic as pandemic restrictions began to ease in most core financial centres. But, as the year progressed, geopolitical strains, conflicts and energy crises have driven up both inflation and interest rates. As we turn our focus to 2023, Family Offices are facing a very different macroeconomic landscape to the one they began this year with.

2023 will bring a renewed focus on costs for Family Offices: building experienced teams, implementing the latest technology, and scaling operational infrastructure in-house.

For some, these costs may become prohibitive, especially for Single Family Offices (SFO). And while rising costs will have a lesser impact among larger Family Offices and Multi-Family Offices (MFO), we expect to see clients re-evaluate what can be outsourced to drive greater efficiency in their operations.

In this piece, we explore the trends and themes which dominate the outlook for our Family Office clients – and consider how they may take early steps to ensure they are well-positioned to weather the potential challenges and - take advantage of – the opportunities that lie ahead.

People problems

Top of mind for our Family Office clients at present is the perennial challenge of staying up to date with ever-increasing compliance, HR and other regulatory obligations. Doing this, requires the right team, with the qualifications, experience and crucial soft skills to thrive in a Family Office environment. Amid the ‘Great Resignation’ of 2022, the talent market has become increasingly competitive and shows no signs of shifting to benefit employers in the year ahead.

Increasingly, Family Offices are not only struggling to find the personnel with the required skill sets, but the size and cost of a fixed internal team for complex investment management operations may prove to be disproportionate when weighed up against the returns generated. Even when the right investment professionals are in place, there are other functions that require staffing, such as administration and reporting. In 2022, we saw high-profile examples of families falling into the trap of operating with an underpowered skeleton staff, increasing the burden on valuable employees, and in the long run, leaving the family underprepared - and potentially exposed - in essential areas such as compliance and reporting.

For all but the wealthiest of families and Multi-Family Offices, the cost of hiring in both operational and investment functions can be prohibitively expensive, and it is for this reason that in 2023, we expect that many will turn to increased outsourcing as a much more viable option than building an entire team under one roof.

The tech crunch

The application of technology in the Family Office space has rocketed. Although the development of new technology was in motion long before the pandemic, its arrival has accelerated adoption. With social distancing measures in place around the globe, Family Offices were quick to harness virtual technology.

This was not solely to ensure continued communications, but also to enable trade executions, data storage and report creation. Though initially introduced as a temporary measure, many of these practices are here to stay, reshaping the way Family Offices manage their money.

However, post-pandemic, many are finding that the capital and resource investment required to launch digital investment management operations are considerable. Furthermore, families understand that keeping operations in-house also means owning the associated risk. As a result, they would rather outsource this to a reliable third party, meaning that for a fraction of the cost, Family Offices can take advantage of the latest, most advanced technology, and are offered greater choice through a combination of the provider’s joint ventures with technology firms, as well as their own proprietary platforms.

The global pandemic has heightened Family Offices’ focus on risks of all types, and we expect this to continue in 2023. Cybersecurity continues to keep Family Offices awake at night, with RBC’s Family Office Report 2021 showing that 28% have been the subject of a cyberattack over the last 12 months and 55% have been the subject of an attempted scam.

Over the past decade, corporates and institutions have invested trillions in protecting themselves against fraudulent actors, and by comparison, Family Offices, Wealth Managers and HNWIs, whilst sitting on equally sizeable assets, are less well protected than large institutions and are therefore far easier targets for fraud.

The fraud threat facing Family Offices and HNWIs is often more personal than it is for corporates, meaning it can take both a financial and psychological toll, primarily through the misuse of personal data and financial information. Outsourcing middle and back-office functions to the right provider allows for the reduction and dissipation of this risk, and ensures that the manager has the right resources, processes and technologies to do so.

Pandemic indirectly fuels direct investing

Investment portfolios are where a family’s objectives are brought to life, and it is clear that portfolios are being shaped by several themes that will be focal points in 2023 and beyond.

Firstly, Family Offices are showing growing interest and greater comfort with direct investing, appreciating the higher level of control (including board positions) to enable active management, and the cost benefits that it provides.

In part, this more direct style of investing is an indirect result of the pandemic accelerating generational power shifts as older generations – who were considered a higher health risk – have sought to include the heirs more effectively in the business at a faster pace. This has been particularly evident in the Middle East, with new legal innovations and structures being put in place to support family businesses and succession planning in 2022.

We expect this to continue in 2023. In the next year, we expect to see greater diversity in the generations being served by the Family Office, resulting in new and growing demands on the investment engagement model, which is more sophisticated and faster-paced. Again, technology will play an important role in this, with digital platforms such as Contex365 and Profilir enabling Family Offices to seek out and connect with relevant investment opportunities, without being inundated with irrelevant proposals.

Not easy being green

Secondly, it is becoming increasingly clear that clients across the wealth spectrum have broader objectives than purely seeking investments with the highest returns. The Family Offices and Private Clients we administer are increasingly eager to see their personal values reflected in their portfolios, ensuring that they evaluate the ESG performance of their current and future investments. The next generation is keen to be seen to be acting beneficially for people and planet – and realise that this is possible without sacrificing strong returns.

Family Offices have been investing in line with their values for some time, there is simply now more focus and attention on this as ESG strategies have become more mainstream in recent years. UBS’ Global Family Office Report found that sustainable investing is firmly entrenched in portfolios, as more than half of Family Offices (56%) globally are allocating to ESG investment.

Family Offices in Western Europe and Asia leading the way, and this trend is set to continue – in the next five years, Family Offices are reportedly planning to increase their allocation to ESG strategies to about a quarter of their overall portfolio, showcasing the benefits of their flexibility and agility.

However, in 2022, like many institutional investors, Family Offices have become wary of investment ‘greenwashing’ with regulators, media and other stakeholders holding funds to account on their ESG credentials. As such, families are realising that investments badged as ‘ESG’ or ‘responsible’ should not always be taken at face value. In 2023, families will be paying closer attention to the companies they are investing in, demanding more sophisticated evidence, including technology-enabled data collection of positive practices and sustainability.

Given the nature of the wealth they manage, Family Offices naturally place an emphasis on risk management, and given the macroeconomic landscape of recent months, this will overlay all decisions they make in 2023.

With costs rising, we expect to see an increase in outsourcing as Family Office clients look to take advantage of the expanded range of skillsets, talent and technology that they can access through an external partner.

Technology will be a key enabler as Family Offices position themselves to weather challenges, and seize the opportunities created by market dislocation, including ESG and direct investment strategies. It is a point of inflexion and reflection for many families, as they explore the options available to them in 2023 and beyond.

This article was originally published by The Wealth Mosaic in the WealthTech 2023 Annual Report: https://www.thewealthmosaic.com/vendors/the-wealth-mosaic/news/the-wealthtech-2023-annual-report-is-now-live/