By Ed Beale, Director, and Alex Dean, Head of Private Wealth, IQ-EQ, and Nick Barbone, Director, Alpha Financial Markets Consulting
In today’s ever-evolving, globalised world, family offices face a complex landscape. Amid a backdrop of high market volatility, persistent inflation and increased regulation, the need to adapt and take a proactive, strategic approach has never been greater.
Here, we explore some of the challenges and opportunities for family offices. Leveraging both IQ-EQ and Alpha FMC’s extensive experience in helping family offices succeed, we look at how firms can future-proof themselves and safeguard their assets for generations to come.
Using technology to enhance efficiency
With inflation recently hitting multi-decade highs, one major challenge that many family offices are facing at present is higher costs. Whether it’s salaries and bonuses, benefits or hiring costs, more than half of firms expect staff costs to rise in the years ahead. And it’s not just employee costs that are rising. Other overheads, such as rent, software licences, cybersecurity and compliance are rising too.
In this environment, family offices should not overlook the importance of having the right technology in place. With a comprehensive digital platform capable of amalgamating the different elements of the operating model into a coordinated and holistic service, firms can dramatically increase efficiency and lower their costs.
In the past, family offices often developed tech solutions in-house due to their unique requirements, with little success and at significant cost. However, today, firms are realising the benefits of turning to a trusted partner that can unlock the power of technology to suit a client’s specific and evolving needs. Not only can third-party digital solutions help to enhance operational agility and resilience, but they can also save firms a significant amount in development costs.
Of course, selecting a technology partner has its own challenges, with a variety of similar but different offerings available on the market. The key here is to consult a range of providers and partner with one that has the infrastructure and expertise to meet the family office’s needs. Firms should look for a solution that provides comprehensive portfolio monitoring tools, data aggregation and consolidation, timely reporting, secure digital channels, protection from cyberattacks, and more. Any selection should also be based on a suitable cultural fit that will allow the family office to work productively with the technology partner for decades to come.
Identifying new sources of return
On the investment side, asset allocation is another key challenge for family offices today. The combination of volatile equity markets, falling bond prices and increasingly unstable geopolitical conditions is prompting firms to seek out new sources of return.
Sustainable investment strategies are proving increasingly popular, with more than half of family offices globally allocating here already. As the transfer of generational wealth gathers pace, sustainable and impact investing is particularly popular with younger generations, who are keen to balance financial gains with social responsibility. According to Morgan Stanley, when markets were turbulent in 2008/2009, 2015 and 2018, sustainable funds consistently exhibited less downside than traditional investment funds.
Alternative investments also continue to see a lot of interest, with firms increasingly sacrificing liquidity and raising their allocations to private equity, private debt, hedge funds and commercial property. These assets bring several benefits to the table. For a start, they tend to have a low correlation to traditional asset classes meaning that they can help to reduce overall portfolio risk. Secondly, returns can be attractive. For example, thanks to higher interest rates, many private debt investments are now offering double-digit annual returns.
Family offices are also starting to explore the crypto-asset world, with more than half (56%) now investing in this space. Digital assets are still seen as risky, however, and it’s worth noting that, of the aforementioned 56%, 38% invest less than 1% of portfolio assets.
Given the potential of these asset classes, it’s crucial that family offices have access to the necessary digital infrastructure, reporting capabilities and investment/accounting platforms as part of a robust and fit-for-purpose operating model that can handle these assets and strategies.
It’s also important to support the development of internal staff and/or find the right trusted partners to ensure that the firm has the necessary expertise and can meet the differing needs of family members across multiple generations.
Simplifying regulatory requirements
Finally, regulation is also presenting challenges for a lot of firms. Historically, family offices have been lightly regulated. However, the ‘Pandora Papers’ and the collapse of firms such Archegos Capital Management has put added pressure on regulators to act, meaning we are likely to see increased rules and regulations in the years ahead. A prime example of this has been the stance of the Monetary Authority of Singapore (MAS), which has tightened controls on the illicit movement of money.
Compounding the problem is the fact that many family offices need to take a global approach to regulation. Investments are global, which requires working with a global provider that has expertise in all major jurisdictions. These days, family members are increasingly studying, working and/or settling abroad, so firms need to be able to handle regulatory affairs across geographies.
Family offices will need to weather the growing regulatory requirements in a cost-effective way. Here, it is essential to work with a compliance consulting partner that has global expertise and experience across multiple jurisdictions.
In conclusion, family offices face a myriad of challenges today. They need to be able to provide up-to-date guidance on emerging asset classes and handle evolving regulation, all while trying to keep costs under control.
We have vast experience supporting family offices (as well as other asset owners, wealth managers and asset managers) in solving such challenges. Where there are challenges, there are also opportunities, and we help our clients take a strategic approach to allow them to prosper in the years and decades ahead.
Alpha Financial Markets Consulting is a leading global management consulting firm that offers the world’s top asset owners, wealth managers and asset managers a competitive edge through unrivalled expertise and industry knowledge. Contact Nick Barbone for more information.
IQ-EQ is a global investor services group that specialises in helping families manage their assets safely and effectively while remaining compliant and unlocking new opportunities to grow their wealth.