Since the Great Recession of 2007-2009, the number of ultra-high-net-worth (UHNW) individuals has skyrocketed, growing by a staggering 9% in 2021 alone. At the same time, we are on the cusp of an unprecedented intergenerational transfer of wealth, as over 70 million baby boomers prepare to pass an estimated $15 trillion in assets to the younger cohorts in the next 10 years, with over half that transfer happening in the United States. Adding to the challenge of that wealth transfer: half of family offices in North America “are not prepared” for succession, according to the 2021 RBC/Campden North America Family Office Report.
Family offices work at the nexus of these events, established by UHNWs to manage and safeguard their exponentially growing wealth for future generations, and sensibly pass it to their heirs. Complicating the issues for family offices are the increasingly multinational and ESG-minded millennial generation, difficulty in finding fully capable technology to track, analyze and assess risk across asset classes and geographies (most families have long relied upon legacy systems coupled with manual processes), and tax structures that change with each new administration. Such complexities are also resulting in a convergence between private wealth requirements and traditionally institutional tools and practices, further necessitating a professional approach.
Single family office or multi-family office?
Wealthy families facing an upcoming liquidation event and/or transfer of wealth to the next generation have difficult decisions to make: do they go it alone and build their own single family office, join a multi-family office or take another approach?
While the single family office approach provides complete and direct control, it also means the family is responsible to build systems, infrastructure, hire and manage people and find specific investment expertise and other resources to ensure proper and effective care and control of the family wealth.
Alternatively, do they pool assets with other wealthy families in a multi-family office, where they don’t have to worry about day-to-day management, building systems and HR issues, but may have less investment choice and perhaps fewer resources to support wealth transfer?
Or should they take a hybrid approach, establishing a core single (virtual) family office team with certain functions outsourced: systems, reporting, fiduciary services to name a few? This approach is gaining popularity.
Often, the quantum and the complexity of the family wealth will determine the approach that is best to take. Regardless, they will want to choose the option that provides the combination of outsourced and insourced resources that best suit their needs, including the critical factors of tracking, analysis and reporting on assets in real time, and fiduciary structures to support the transfer of wealth to the next generation.
How wealthy millennials are changing the landscape
Adding geographical assets calls for an additional level of sophistication, since the ‘next gen’ cohort tend to relocate to foreign countries more often, forcing the family office to deal with not only the usual investment decision-making but also an array of complex international regulatory challenges. Further, millennials are famously more socially conscious than their parents and grandparents, with keen interest in ESG-compliant funds and socially responsible investing.
And there’s more: family offices must not only be ESG savvy, they need to stay current with new technologies that could impact the family wealth, from digital currencies to the Metaverse. Cryptocurrency and other blockchain products create complicated trust and liability questions: how you hold it, who has custody and who has the ‘key’ to unlock those assets. New financial technologies present additional complications in tracking, analysis and reporting.
Why technology is key for family offices to forge ahead
Given the trends, family offices should refresh their thinking on the role of technology in their infrastructure. They can ready themselves for the Great Generational Wealth Transfer by seeking out a system that enables them to provide the most advanced and comprehensive reporting and risk management, an accurate view of asset values and transactions in real time, and capture of performance and returns at any instant. The globalization of family offices also means they will need standardized and centralized technology to provide fast and efficient reporting across different geographies.
Also, they should be considering fiduciary services technology. In this sense the ‘technology’ is the jurisdictional and statutory advantages that one state offers versus another, or that one country offers versus another. A provider that has the experience of serving wealthy families and family offices from multiple jurisdictions is best able to support families as they move, invest and live in different parts of the world and prepare for their wealth transfer.
Wealth continues to grow (27.5% for the UHNW community during the pandemic, according to UBS) and baby boomers continue to age, so the popularity and growth of the family office will not ebb soon. Family offices must determine the best configuration for themselves: outsource vs. insource, single family office vs. multi-family office vs. virtual family office. They must ensure they understand and have the tools to make effective decisions about investments worldwide, both real and virtual. They must invest in robust tech for tracking and reporting and select fiduciary providers that can provide all important wealth transfer expertise, in addition to jurisdictional flexibility and choice.
The time is now to get in position to provide a smooth transition ahead of the greatest intergenerational transfer of wealth in history.
This article was originally published by Private Client Global Elite.