According to a recent report from Knight Frank, $90 trillion in assets will be transferred from Baby Boomers to Generation X and Millennials in the United States over the next 20 years. For family offices this means preparing to meet the needs of a more modern generation of wealth holders, the pressure is on to do so effectively during the largest wealth transfer in history.
The pressures facing family offices are highly specific, meaning that an effective solution will not be “one-size-fits-most.” Every family office is unique, with goals and needs particular to the family (or families) that established it. In other words, when it comes to family offices, “once you’ve seen one, you’ve seen one.”
In this post, we’ll explore the challenges facing family offices worldwide and the critical infrastructure they must have to prepare for the upcoming generational wealth transfer. We’ll also discuss how US-based family offices can best professionalize to maximize outcomes, achieve their goals, and stay compliant amidst growing pressure.
Demands on the family office have never been higher
Family offices are established for various reasons, including the need for privacy, control over family wealth, wealth management, legacy planning, philanthropic commitments, and the ability to make quick and strategic decisions. They must be proficient in managing investments, philanthropic activities, and the lifestyle needs of family members, providing a one-stop solution to the multifaceted—and often complex—requirements of UHNW families.
A family office may be tasked with managing cybersecurity, overseeing valuable art collections, and administering private aircrafts. The nimble personnel hired to run a family office are often proficient in all of these areas, which vary widely in the skills they require, but find themselves dividing limited time among the (seemingly) unlimited needs of their stakeholders.
Why U.S.-based family offices must professionalize
As the remit of the family office continues to expand, the need to professionalize grows in tandem. While complex requirements like managing investments and lifestyle needs continue to grow, the office must also handle day-to-day operational functions such as payroll, health insurance, and governance. These operational demands can be challenging, especially when the staff hired for investment management may not be well-versed in administrative functions.
The flat hierarchical structure of family offices often means that outside hires leave within a few years because they can never be promoted to the role of family member. With no clear upward mobility within the family office, many staff members will depart for larger companies where they can climb the corporate ladder. Retention of knowledgeable and trusted personnel is a significant challenge.
The increased burden of responsibility on the family office necessitates a shift in how these offices are resourced and managed, ensuring that executives can keep their focus on the priorities of the principals.
How third-party providers can help close the gap
The latest UBS Global Family Office Report reveals that only two-thirds of family offices have a formal process for measuring financial success, with figures dwindling from there on the percentage of offices that have adopted other professional models. These statistics are alarming, as even minor inefficiencies can divert attention from the principal’s core needs and the task of protecting and growing a family’s wealth over time.
This is where third-party service providers come in. Hiring a third party to professionalize your family office solves several problems at once, including:
- Staffing: Outsourcing operational tasks to experts ensures that the family office runs smoothly without the hassle of hiring, managing, and supporting a team directly. Services like payroll, accounting, compliance, and asset reporting can be managed by specialized firms with specific expertise, freeing up the heads of family office and staff to focus on strategic goals
- Scale: Leveraging a third-party provider, family offices can scale by incorporating more family members, including next generations as well as additional members in the case of a multi-family office—all without disrupting core family office functions
- Oversight: Outsourcing to a third party gives principals the freedom to unplug without worrying about diverting needed attention from the day-to-day operation of the family office. They can also serve as chief compliance officer for multi-family offices requiring registration and oversight from the SEC
- Networking: While a single family may not have the global relationships required to support their needs and desires, large providers have often been in operation for many years, with decades of relationships to leverage for specific lifestyle requirements. When you hire a third-party provider, brand matters – you’re integrating yourself into an ecosystem of support providers and technology
- Advisor-agnostic: The best providers won’t require you to work with any specific advisor (legal, accounting, or financial), allowing you to bring your trusted advisors with you
Conclusion
For UHNW individuals and families who want to manage their family office through the upcoming wealth transfer to maximum effect, outsourcing administrative services is an effective way to professionalize and ensure longevity for generations to come.
Ready to streamline your family office operations and enhance your wealth management strategy? As a growth partner, we’re committed to helping family offices scale and succeed. Get in touch to learn how IQ-EQ can help you achieve your goals.
About the author
Claudia is a Senior Managing Director at IQ-EQ, based in the U.S. With over 25 years’ experience in the financial services industry, Claudia is a seasoned professional with expertise in family offices, strategic planning, client relationship management and cross-division business opportunities. She holds a Master in Law degree from Columbia University and a law degree from the University of Buenos Aires, Law School.
