The family office has become a significantly powerful sector in the world of business, research conducted by Campden Wealth indicates that family offices now control assets in excess of $4 trillion. Despite the significant costs relating to setting up and sustaining a Family Office, EY estimates that there are currently 10,000 single-family offices, a ten-fold increase since 2008. Traditionally, wealth management has been the biggest driver behind the dramatic growth of family offices, and therefore banks have had a crucial role to play in this space. However, the family office is expanding into new areas and becoming more dynamic and independent in response to the need to drive down costs, explore alternative investments, improve governance and reporting, as well as manage inter-generational wealth preservation. Firms that provide practical and innovative tools to support the specific requirements that are emerging in this space can benefit tremendously. It is crucial for banks to keep their fingers on the family office pulse to ensure that they stay abreast of developments and remain relevant.
The following areas should be of specific interest to banks:
Changing Investment Strategies
Investment allocations and investment drivers are changing within the family office sector, and it is clear that the traditional risk-aversion approach that has served banks in the past is being replaced with a more adventurous and progressive investment mindset. One of the most significant shifts that has been observed is the increasing appetite for direct minority-stake investments and more active participation in the strategic management of these investments.
The motivation behind investments is also evolving, with social and environmental impact becoming a serious consideration, especially amongst the next-generation. As an investment driver, impact investing is becoming increasingly popular amongst family offices, with 32% surveyed now reporting involvement in this space.
Banking institutions need to ensure that they have the resources and expertise to support the new investment agenda and philosophy of family offices to remain relevant as wealth managers.
Strategic Priorities Are Evolving
Forward-thinking family offices are expanding their focus beyond the traditional objectives of profit, turnover, etc. to soft factors such as agility, purpose-driven mindset and reputation management. This shift is largely due to the accelerating pace of change which is requiring businesses to be more flexible and dynamic in their response to new trends. In order to achieve this, family offices need to ensure that they have the right structures in place, clearly defined roles and responsibilities, and a strategic planning process that facilitates efficient responses to key business requirements. Governance and secure platforms for effective communication and information sharing therefore also become increasingly important in this space.
Additionally, there are new socio-cultural influences which are forcing businesses to become more transparent and to place more priority on ethics, integrity and a purpose-driven mindset that goes beyond a commercial agenda. These elements have become vital ingredients for managing family reputation within the public domain and securing the ongoing participation and support of the next generation within a family enterprise.
Specialized resources are needed to guide and equip family offices in aligning their structures and processes to achieving the above. Furthermore, any firm providing specialized support to family offices needs to be mindful of the unique succession challenge in this space which has an influence on many of the emerging priorities, especially around the next generation.
Innovation Is Being Embraced
The costs of running a family office can be prohibitively high and often the investment does not translate into the necessary efficiencies that one would expect. It is therefore not surprising that a range of new technology solutions has been developed specifically for family offices, from cyber-security solutions to secure communication platforms and consolidated reporting tools. These tools can have a significantly positive impact on running costs and overall efficiencies and, although they assist family offices to run more independently, there is still an opportunity for firms such as banks to leverage innovation to partner more closely with family offices. The challenge will be to work within their systems and reporting tools and provide innovative services and products that will further enhance efficiencies. With open data on the rise, this is becoming a more feasible option as we progress into a new era of fintech innovation.
Time To Get On Board
The most prominent Single Family Offices have become serious players in the investment arena, capable of competing with global banks and private-equity firms on significant transactions. Now, even smaller family enterprises are entering the fray and teaming up with others to bolster the ‘purchasing power’ of the sector as a whole.
Banks shouldn’t be asking, “What products can we design to sell to this segment,” but rather, “Who do we need to become for this individual family?”
The rise of the Family Office represents a massive opportunity to firms who can re-align and tailor their offering, but its growth can also pose a risk to those firms who do not embrace a sector that is only going to become more powerful in years to come.