As we emerge from the coronavirus pandemic, which wreaked havoc on global markets and sowed uncertainty, family offices who were quietly taking a growth-oriented investment approach are now returning to more conservative outlooks and being patient with capital.
In 2021, many family offices went on a buying spree, investing while the stock market was low. They also looked to alternative investments, reviving their interest in hedge funds after a five-year downward trend. In 2022, they capitalized on low company valuations by buying into the private equity space. As a result of their strategic rewiring, 77 percent of ultra-high-net-worth families in North America and 72 percent globally saw their wealth increase over the past 12 months, according to a report from Campden Wealth and RBC.
The North America Family Office Report
However, it wasn't just expanding wealth, 46 percent of those surveyed bolstered their IT infrastructure, while a third (36 percent) updated their risk measures and structures to cope with a more uncertain world. Other areas of growth include an update to governance and reporting structures, building out their teams and expertise by hiring additional staff, outsourcing services and bringing services in-house.
As family offices guide families further into our post-pandemic world and prepare for the intergenerational transfer of wealth, new trends are arising that are redefining these private family wealth advisory firms.
Family offices are targeting balance
One key trend from the report is the overarching sense of pessimism about the economy. According to the report, over half of respondents (68 percent) had a negative outlook throughout 2022, meaning only a third (32 percent) felt positive vs. an overwhelming majority (86 percent) in 2021.
Forty-three percent of North American family offices targeted growth in 2021, a stark contrast to 39 percent in 2022. Nearly half (47 percent) say they're seeking a balanced strategy while one in three (39 percent) continue to pursue more growth-oriented opportunities. As a result of their pivots, North American family offices reached an average portfolio rate of return of 15 percent vs. the global average of 13 percent, acknowledging that 2021 was a strong year.
Fintech, healthcare and cleantech pique interest
FinTech is on the radar of North American family offices—not just as an investment but also as a tool. According to those surveyed, 59 percent are invested in FinTech and a nearly third (31 percent) plan to increase their investment.
Healthcare and cleantech are also growing areas of focus for North American family offices. In 2022, 71 and 50 percent (respectively) were already invested in the spaces – but 39 and 35 percent (respectively) plan to increase their investment going forward.
Cyber attacks are a growing concern for family offices
The proliferation of digital services over the past year has helped broaden the reach of hackers and digital scam artists and family offices aren't exempt from the barrage. According to the report, three in ten (32 percent) family offices in North America were the victims of a cyber security attack this past year.
However, knowing the threat doesn't necessarily equate to preparedness. Nearly one in three (30 percent) feel their family or family office isn't fully prepared for a cyber attack. Of those surveyed, 68 percent have a cyber security plan but half (51 percent) feel “their plan could be better."
Succession planning is lagging and the next generation is underprepared
Enterprising families have a general understanding of the importance of succession planning and wealth transfer but action in that area is surprisingly lagging.
According to data from the report, only half (54 percent) of North American family offices have a succession plan in place, compared to 67 percent in Europe and 70 percent in Asia-Pacific. Of the group with a succession plan in place, less than half (45 percent) have formalized it in writing, while one in ten (8 percent) have an informal, agreed-upon written plan and 35 percent have simply agreed verbally to the plan. With that in mind, it's no surprise a third of family offices (32 percent) say they're unprepared for succession.
One of the most pressing challenges for succession is a lack of qualified next-generation family members to take over. According to the survey results, 40 percent of North American family offices say it is one of the biggest barriers to succession, as well as discomfort in discussing the sensitive subject matter (25 percent) and an unwillingness of the patriarch/matriarch to relinquish control (16 percent). It's a factor that could contribute to the next generation's lack of readiness--and one that's slowing preparation for the inevitable.
Preparing for the future
The success of family offices and their investment in innovative ideas, and private equity opportunities in Fintech, Healthcare, and cleantech shows a generation of family wealth with its eyes set firmly on the future.
Agile, balanced moves by family offices in the last year have helped North America's ultra-high-net-worth grow their wealth and expand their legacy. That legacy is only becoming more important for families as they prepare to transfer wealth from one generation to the next. Understanding the trends is important—but so is being proactive. The future of family wealth depends on it.
This article was published on Nov. 14, 2022.
In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.