Family Office 2020 - Grappling with Change

Jessica Schädler
Jessica Schädler
Director, Head Trust Advisory
Family Office 2020 - Grappling with Change

Shifts in society, geopolitics, technology and environmental ethics are global trends that will inevitably shape the future of family offices.

The first family offices have emerged centuries ago as stewards of royal wealth, but never have there been so many and such large family offices as we see today. What drives them and what global developments will affect their businesses in 2020?

 

 

The world is on the move and it seems to be faster than ever. Shifts in society, geopolitics, technology and environmental ethics will inevitably require family offices to rethink their strategies and to adapt, while keeping their main purpose at the center of their development: the preservation and proliferation of family wealth.

This article explores five areas that family offices need to focus on in 2020.

Family governance and succession

With the increase of the complexity of global business environments and growth of family businesses in the recent past, some – especially larger –  family businesses started to adopt distinct succession and governance strategies and mechanisms. The most sophisticated ones have their own family office in charge of managing, organizing and preserving family wealth.

KPMG Enterprise and EFB professionals expect one of the world’s largest ever intergenerational transfers of wealth over the next 5 to 10 years. Globally, USD 15.4 trillion is expected to be handed over from Generation X to Generation Y, the Millennials.

While not all family business have their own family office, within those who do, a global family office survey revealed that only 34% of all surveyed family offices had formal written succession plans in place. In a similar vein, almost half of all respondents felt that the next generation were either somewhat or very unprepared for future succession, suggesting that targeted training, mentoring and education is recommendable.

Technological developments and business strategy

The last decade has seen a rocket-speed development of technological innovations inevitably shaping investment behavior (think high-frequency algorithmic trading, robo-advisors tracking our spending and investing, sophisticated investment products based on algorithms, and so on) creating new forms of managing and doing business. This development will affect family offices, especially as new generations step into the picture. The millennial mindset values access over ownership, our workplaces exist anywhere, we want access to our dashboards anywhere and anytime and meetings can be held via video-conferencing to ensure real-time information flow. The setup of family offices is likely to change, move away from a physical head-office to a virtual space where executives have 24/7 access. Family offices and family businesses will adapt to the requirements of the new generation where co-operation, flexibility, innovation, impact and technology are driving motivations. PWCs 2017 Next Gen Study found that only 7% of next gens think that their family business has a strategy fit for the digital age. In a similar vein, 82% of next gens think that innovation is key but only 15% think that their family business has a clear plan.

Realigning investment strategies

According to the 2019 UBS Campden Wealth Global Family Office report, more than half of the surveyed family offices are expecting to enter a recession by 2020. In preparation, 45% started in 2019 to realign their investment strategies to mitigate risk. In 2020

  • 46% of the family offices intend to invest more into direct private equity
  • 42% intend to invest more into private equity funds
  • 34% intend to invest more into real estate and
  • 30% want to decrease their cash reserves (interestingly, 26% want to increase their cash reserves).

There are other voices with a slightly more optimistic approach, at least for the imminent future, saying there is no recession in the immediate future, it is just that the current economic recovery is one of the longest and slowest recoveries history had ever seen and it is likely to slow down further in 2020, until economies will ultimately take a hit.

While there seems to be an agreement that we are facing a downturn, opinions and forecasts differ when it comes to determining the timing of the next recession. The only thing that seems certain is that we live in a VUCA world and that family offices are well advised to keep a close eye on market developments.

Risk Management

Risk management ranks high in family office governance priorities: 64% of family offices see effective risk management as their current top governance priority. While they traditionally focused on investment risks, family offices increasingly put non-financial risks into focus. Since the Panama Papers families are preoccupied with reputational risks. Not only can a family’s reputation suffer by bad investment decisions but also decisions of how to structure family wealth, which jurisdictions to choose for investment holding vehicles, and ensuring tax and regulatory compliance throughout all jurisdictions can have detrimental effects on a family’s public reputation.

Last but not least, digitisation, digitalisation and worldwide exchanges of sensitive data, IT and cyber-security risks are high up on the risk monitoring priority list.

Regulatory compliance

When asked in a recent European Family Business survey for their three biggest worries, 63% ranked the quest for talent as their biggest concern, followed by 62% being preoccupied with declining profitability. The third biggest worry, causing 60% of the respondent’s sleepless nights, are regulatory concerns. These concerns not only encompass political uncertainties, family businesses also keep a close watch on regulatory developments such as the global efforts to increase tax transparency and the impacts these efforts have on national legislation and regulation.

From a Swiss point of view, there are several regulatory challenges to meet in 2020. You will read a summary of the most important ones in my next Wealth Advising blog-post.

 

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