Insights / 21 February 2020
Survival of the smartest by Tony Hind and Chloë Sorda
Tony Hind and Chloë Sorda discuss the growing need for more dynamic and enduring family office strategies.
As family offices (FOs) seek to become more sophisticated, diversify their investment strategies and broaden their exposure to multiple markets, they have become one of the most dynamic forces shaping the private wealth management landscape.
In fact, the sheer scale of capital has seen FOs pose a disruptive challenge to institutional markets. In 2019, for instance, a US FO bought a shopping complex in Iowa entirely in cash. It was the second-largest amount ever paid for a shopping centre in the state, in a real estate market that is normally the preserve of institutional investors.
However, in an effort to become more institutional (e.g. through the adoption of digital platforms and movements into the alternative investment markets) FOs are arguably at risk of losing sight of a fundamental objective: to ensure family wealth is safe and able to be passed down through generations.
It is alarming that 70 per cent of wealthy families lose their wealth by the second generation, and 90 per cent by the third, according to a 20-year study by the Williams Group. Particularly if one considers that, according to estimates from Accenture,1 in North America alone, around USD30 trillion will be passed between generations in the next 30–40 years, representing a significant potential leakage of assets.
Moreover, 28 per cent of ‘next gens’ took control of family wealth within the past ten years, and 37 per cent are expected to take control within the next ten,2 making crystal clear the importance of putting robust succession-planning strategies in place.
FOs may have a greater impact than they once did; however, as they move to behave in a more institutional manner they are more at risk from those forces influencing institutional markets, such as global regulation and market volatility.
It is striking, then, just how concerned by macro issues FOs are: Brexit, populism and artificial intelligence are all big concerns, while more than half are concerned about the prospect of a global market downturn in 2020.3
So, what measures should an FO take to address succession-planning issues for the next generation; meet its own obligations and objectives; and ensure that succession planning lasts into the fourth generation and beyond?
The key message to FOs must be to have conversations about succession planning sooner rather than later. Often, talking about succession is tricky and emotive; there can be a reluctance from patriarchs to relinquish control, or there may not be a huge appetite among the next generation to think about the long-term future. It has been suggested that financial education only begins at 27 years old.4
Not opening up those communication channels, however, could be costly.
Around a third of high-net-worth families experience conflict when it comes to succession planning,5 and that cannot be in anyone’s interest. Having conversations early helps to bring key issues to the fore, sets out clear and consistent objectives and prevents conflicts from arising in the future.
The good news is that FOs appear to appreciate this challenge. There was a marked increase in succession planning last year, with 54 per cent of FOs now having a succession plan in place, up from 43 per cent in 2018.6
In addition, FOs need to embrace the expertise of external third parties and be open to the possibility of change and innovation. This can help take the pressure off some of the day-to-day management and bring some neutral, objective perceptions to the table.
A recent whitepaper 7 found that Jersey FOs are increasingly demanding ‘full service’ support to help them with both financial and non-financial aspects of life management, including citizenship, education, healthcare, insurance, travel and other human and social capital assets, with a view to ensuring their legacy is more than just a financial one. The paper also indicated a clear preference among FOs for independent advisors.
This is a hugely exciting time for FOs, which are set to continue their evolution into increasingly sophisticated organisations with the potential to have a positive impact on cross-border trade and investment through multi-jurisdictional business ventures, impact investment and philanthropic activity.
The next decade will be pivotal in determining whether they can achieve this potential. Taking a pragmatic view, drawing on the advice of independent, neutral experts and being alive to the need for difficult family conversations about succession will not only ensure family wealth can survive beyond three generations, but also ensure that the impact of the family’s legacy will be felt far beyond that.
1 Accenture, The ‘Greater’ Wealth Transfer: Capitalizing on the intergenerational shift in wealth (2012) 2 Campden Wealth, Global Family Office Report (2019) 3 Above, note 2 4 Jersey Finance, Flourishing Futures: Making succession a success (2018) 5 Coutts, Breaking the Wealth Taboo: Making succession a success (2017) 6 Above, note 2 7 Jersey Finance and Hubbis, The Evolution of Family Offices in Asia (2019)
Tony Hind and Chloë Sorda, ‘Survival of the smartest’, STEP Journal (Vol28 Iss1), p.33