The number ultra-high-net-worth (UHNW) families is rising and with them, more single and multi-family offices created to serve them. Knight Frank’s The Wealth Report 2016 tallied 187,500 UHNW families (controlling at least $30 million in assets), forecast to rise to 263,500 by 2025. Family offices need to adapt to reflect the tech savvy, socially conscious millennials about to inherit the family wealth as well as the changing investment market. Here I detail four trends I think family offices will increasingly embrace in the coming years.
A preference for socially responsible / impact investing
Socially responsible and impact investing may soon dominate family office investments. A study released this year by Spectrum Group found that “more than half of millennial investors (52%) see the social responsibility of their investments as an important selection criteria, compared with less than 30% of WWII-era investors and 42% of Generation X investors”. Over the next decade the largest transfer of wealth since pre-WWII is about to benefit millennials so any family office not engaging with socially responsible or impact investing may struggle to keep up with the family’s expectations.
A move towards direct investments…
…aligns with the long-term outlook of family offices
Something I have noticed more and more of over the last few years is family offices’ growing appetite for direct investing. Many have been moving money from underperforming hedge funds into direct investments, often in real estate and startups, in the hope of more sustainable returns but also to retain control. This is only set to rise with Family Office Exchange reporting that nearly 60% of family offices expect to increase their direct investments in the next two years.
Direct investing makes sense for family offices where the goal is to grow and preserve the wealth of their family for generations. Whereas family offices take a long-term view and can stay in investments for as long as they want, private equity funds tend to stay in investments for five-to-seven years and are judged by quarterly performance. Family offices don’t need to move with short-term markets or put time limits on their investments so cutting out the middle man means they can make long-term investments and ride out market fluctuations. Direct investing also means they avoid hedge funds fees, which can often make the difference between a return, or not.
…allows family member to hand-pick investments
Direct investing also makes sense when thinking about the move towards socially responsible investing as it allows family offices to hand-pick each investment according to their family’s own criteria for what it deems as a socially responsible or impact investment.
Also, because we are all living longer millennials are inheriting the family wealth later in life and therefore many have forged their own careers before becoming involved in managing the family fortune. Direct investing allows them to choose investments where their own expertise can deliver value.
An increase in collaboration
I also think we will see more and more collaboration on deals between family offices. I think this because families often develop their expertise in a particular market and so when looking to diversify their portfolio, may approach a family with expertise in the market they know little about and vice versa. This can significantly lower the risk element and encourages knowledge sharing.
More casual forms of communications
Finally, the Spectrum Group report I referred to earlier has found that 68% of millennial investors favour texting or instant messaging as a way of communicating with their financial advisors vs. email or phone calls. It looks like family offices will have to get comfortable with this fast-paced, all-hours mode of communication.
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