Saying It Out Loud, By Pat Soldano. November 2023.

Family Offices Must Adapt with Next Generation, Or Fade Away

By Pat Soldano

Today’s family office industry is facing a tough future: adapt or fade away.

As the Next Generation of multi-generational family businesses look at family offices, and their service offerings, they’re asking the question: is there a better way?

Next Gen-ers aren’t necessarily convinced they need traditional family office service offerings of the business founders, like household or real estate management, or even investment advice. Many believe they can become do-it-yourselfers. They often believe they can handle those actions just fine. They’re also willing to take on riskier, more entrepreneurial investment options. And, they want to know if their wealth can make a difference in the world.

The Next Generation’s entrepreneurial spirit is coupled with the often unwillingness of the old guard to give up complete control. Also, maybe the feeling is the multi-family office is just too impersonal, too big, too out of step. But the single-family office is too expensive, too small, too in control.

So, where does this leave family offices? How do family offices balance old guard needs, with Next Generation ideas ?

The average family office has six people running it, manages $365 million in assets, and costs families about 1% of that total, according to research from the Family Office Exchange (FOX).

And, according to Research firm Cerulli Associates, overall wealth transferred between 2021 and 2045 will total a massive $84.4 trillion.

So, the family office industry is bright, and worried.

What are they worried about?

The list is long: Next Generation quirks , persistent inflation, private equity investment risk, hybrid workplaces, ESG investing, crypto currency, more government regulation, cheaper operating costs, technology, AI, and generally just more and cheaper alternative options.

Two Experts POV

I recently had the good fortune of speaking with two people who know a lot about the future of family offices.

In one my recent podcasts, The Voice of Family Business, we had an in-depth discussion on the state of family offices today with Sara Hamilton, Founder and Chairman of Family Office Exchange, or FOX, and Margaret Steen, Editor of the new The FO Pro Newsletter.

Sarah is a founder of the family office industry. Some three decades ago she founded Family Office Exchange, which provides education, resources, and consulting to many family offices.

Margaret, on the other hand, comes at from a different point of view. She is the editor of the online newsletter, The FO Pro, a sister publication to Family Business Magazine. Her job is to chronicle the latest family office industry trends and developments.

I asked them about the very real challenges ahead for family offices. Fundamentally, it appears to be a battle brewing between the multi-family office (MFO family office) model and the SFO, or single-family office model.

The answers were very different, and very interesting.

Sara’s view is both models are effective, but each offer different advantages, and tool kits.

“Generally, the multi-family office has more resources, more powerful technology, and pooled investment resources,” she told me. “But the single-family model is dedicated to the family first, offers the highest service level, is in total control, and offers the ultimate in privacy,” she said. “Both models provide continuity for the family members, and both treat the office like any other business. That is critical.”

Margaret sees family business members looking for information and resources. Whether it’s new wealth or multi-generational families, she sees in a calling for just basic information on how family offices work, the services offered, and the cost.

“In my work, families are seeking basic information about family offices and which model fits their needs,” she said. “They’re looking for resources and information on services, fees, and generational needs ,” she said. “That tell me there is a great need and opportunity for family offices to fill that need.”

FO Investment Strategies

One thing is clear: the Next Generation wants different things from their family offices.

They don’t want to sit in quarterly meetings watching PowerPoint presentations. They don’t want traditional investment vehicles. They DO want creative involvement in investment opportunities. They DO want their wealth to stand for something, too. If the current family offices and their traditional models don’t adapt, survival will be difficult.

Technology. ESG. Regulation.

When it comes to technology innovation, family offices haven’t always been at the forefront. Maybe that’s changing, too.

UBS and Campden Wealth Research reports say 62 precent of family offices are using artificial intelligence (AI) or are planning to do so soon. What does AI do? It can help make investment decisions, improve risk management, enhance the client experience, and offer better tech interfaces with clients.

While family offices are wary of investing in ESG and “greenwashing,” they do recognize their resources can make a difference when they invest wisely. And the Next Generation wants more of it.

The Campden report mentions in 2022, 37 percent of North American family offices engaged in sustainable investing, an increase from 34 percent in 2021, and 26 percent in 2019.

This steady increase in sustainable investing is directly related to younger members of the family having more influence in running the family office, as the older generation moves on.

When it comes to government oversight, family offices are subject to light regulatory oversight due to the focus on personal wealth, versus investor wealth.

That could change fast.

U.S. lawmakers are considering legislation around how assets and investments are being taxed and to what degree large family office investments threaten the economy and the financial system. The challenge of educating our legislators on the problems facing successful family businesses is paramount. This is where reaching out to congressional leaders and the members of the new Congressional Family Business Caucus is so vitally important.

But as Sara Hamilton and Margaret Steen point out, successful family offices, the ones that survive, will have to be open to change, open to be flexibility, and will need to offer services that relate to each generation of the family business, from founder to cousin to Fifth generation.

How this all plays out will be up to the leadership of today’s family offices, or the Next Generation will evolve right past them.

Pat Soldano, President of Family Enterprise USA, and the Policy Taxation Group, both are non-partisan organizations advocating for family enterprises of all sizes and are the organizers of the Family Enterprise USA Annual Family Business Survey 2023.

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