The family office has served as an integral part of wealth management since ancient times, although the modern form of the family office was born in the late 19th century with the Rockefellers. In 1882, John D. Rockefeller created an office to organize his many lines of business and oversee his family’s investments; this office managed the Rockefeller wealth as an investment portfolio, rather than individual businesses. Though this setup was never described as a “family office,” it’s similar to the concept today. In essence, a family office is an organization, typically made up of financial professionals, who help wealthy clients and their families manage their money and make sound decisions about their investments and financial futures.
In 2020, according to a recent Forbes report, the idea of the family office will continue to evolve and grow in response to cultural, economic, and financial trends. This structure still will help individuals and families build and preserve legacies, amass inheritances, and protect family businesses. However, many family office providers will need to rethink think their structures and purposes in response to a changing world, according to Forbes.
Here are six trends that will affect the family office in 2020.
Family offices already are preparing for a recession, according to Forbes. A UBS Campden Wealth Family Office Report published this year notes that more than 50 percent of family offices are prioritizing increasing their cash reserves, mitigating risk, and taking advantage of opportunistic events. Almost half of the family offices surveyed are also increasing their contributions to direct private equity investments, while 42 percent are prioritizing private equity funds and 34 percent are investing more in real estate.
Transitioning family businesses
Many families now are selling their established businesses or buying other family businesses, while others are moving from managing companies to managing large wealth portfolios. This trend is increasing the need for family offices, as families seek to preserve their wealth and legacies for future generations, according to Forbes. Family offices are providing support and structure for wealthy families transitioning into new stages of wealth management.
Advances in technology and changes in global economic patterns have created a new phase in globalization that some experts are calling “Globalization 4.0.” Trade in the global south is growing quickly, and the developing world is playing a greater role in international trade flows. In addition, automation, artificial intelligence, Big Data, the Internet of Things, and other paradigm-shifting technologies are impacting markets and trade, giving rise to a trend that’s seeing more products made locally, close to their consumer markets. For family offices, this shift can force rethinking about where individuals and families want their holdings located and how they will structure their governance.
New family office structures
Wealth is shifting as the number of billionaires worldwide declined by around 5% amid market changes and slowing economies. However, more family offices are being created, according to Forbes, as businesspeople who started companies in the 1990s sell and tech entrepreneurs are preparing to put their companies on the market. Much of this influx of wealth will be invested, and for individuals and families, a family office can be an excellent structure to manage assets and chart a financial future.
How will this impact family offices? This influx of investors looks different from previous generations. Instead of a single or multi-family office, investors are looking for new structures, such as virtual and private multi-family offices or on-demand resources. The sharing economy has also made its way to the family office, as some investors now are interested in pooling their resources with other families to open more investment opportunities.
Prioritizing other risks
Family offices now are increasingly factoring in non-financial risks when making decisions about their investments. Climate risk, for example, is now part of the World Bank’s risk management strategy. Since the publication of the Panama Papers, which exposed the innerworkings of some family offices’ investments, the threats to an individual’s or family’s reputation is more frequently considered when assessing risk. Another important factor is the risk surrounding succession, which fails two-thirds of the time. According to Forbes, half of family offices do not have a succession plan. This is clearly a risk that more family offices will need to prioritize.
The role of banks and financial advisors has diminished as digitization has given family office holders more access to systems and information. Often, family office members can manage their own investments and transactions, which can give them complete control over how their portfolio grows.
Digitization also is affecting wealth management services that work with family offices. Families are demonstrating growing concerns about the security of their information and are asking for greater access to their transactions and portfolios. To meet these demands, wealth management services must increasingly utilize software and other digital tools to store data in a centralized, accessible location. They must also provide regular, open communication with clients, as well as more tailored, customized solutions.