Thoughts
10 key challenges for family offices in 2024
4 July 2024 - In the last few decades there has been a steady growth in ultra-high-net-worth (UHNW) families choosing to establish their own offices as alternative option to the traditional wealth management services on offer. It is therefore perhaps unsurprising to see that there has not only been a corresponding growth in the number of family offices established in recent years, but also an evolution in family office models and their strategies.
Family offices are going through a significant period of change to satisfy families’ desire for greater control over their own wealth management, and their preference for customized services that are fully tailored to their needs. There are numerous factors driving this change, from the shift of UHNW families’ generational priorities and ambitions (for example, increasing focus on social responsibility, sustainability and technology), to an increasing appetite for diverse and proactive investment strategies.
At the same time, family offices have to navigate a myriad of considerations and responsibilities spanning privacy, risk, exposure, diversification, generational transfer, tax planning, geographical location, philanthropy, and more. And although the dynamics of each family office is unique and aligned to the UHNW family it serves, there are also commonalities when it comes to their focus and the most pressing challenges they are facing today.
KEY CHALLENGES
1. Succession planning
Ensuring a smooth transition of leadership and decision-making from one generation to the next can be complex, particularly when multiple family members are involved and each person harbors different (and potentially conflicting) ideas and long-term ambitions. Further to this, in some regions, such as the Middle East, Latin America and Asia, the wealth within families is still in the hands of the first generation, the wealth creators, and it is therefore vital for families to plan ahead to ensure the necessary structures are in place now to ensure a smooth transfer of assets in the future.
2. Governance and communication
With family members continuing to hold executive and C-suite positions within family offices, establishing effective governance structures including family protocols and maintaining clear communication channels is critical. It is an ongoing challenge to get this right, as the right structure and communication strategy is crucial to managing expectations and mitigating potential conflicts.
3. Next generation engagement
Family offices are paying increasing attention to engaging and educating the next generation in wealth management and decision-making processes. They are implementing programs and initiatives to educate and prepare younger family members for future responsibilities and ensuring their understanding of the global markets is robust.
4. Investment strategies
Adapting investment strategies to meet families’ desire to take a more direct and proactive approach is a considerable change for family offices who have previously adopted a more passive approach. Within this there a number of areas in which we are seeing change, including:
- Co-investment and direct deals: Family offices are actively seeking co-investment opportunities and direct deals. By either partnering with other like-minded investors and families, or directly investing in companies, they are aiming to enhance returns, exert their influence, and seeking to diversify their portfolios.
- Investment management: Navigating market volatility, identifying suitable direct and indirect investment opportunities, and achieving consistent returns while balancing risk can be challenging for family offices, especially when considering diverse investment preferences within the family.
- Impact investing: Many family offices are increasingly incorporating impact investing into their strategies, driven by the interests of the incoming, younger generation. They aim to generate both financial returns and positive social and/or environmental outcomes, aligning their investments with their values and mission. This is partly influenced by the global ESG trends which are also reflected in the selection of businesses that family offices are choosing to invest in.
5. Regulatory compliance environment
Complying with evolving regulations and reporting requirements can be demanding for family offices, as they need to stay updated and ensure adherence to legal and regulatory frameworks which are constantly changing. This task becomes more onerous when we consider the increasingly internationalized UHNW families who may live in different countries, and have their assets spread across different jurisdictions, resulting in the need for family offices having to track developments and navigate the regulatory landscape at both the local and global level.
6. Geopolitical situation
Another challenge for family offices which is arguably harder to define is the responsibility of having to monitor economic conditions, market trends, and other factors, which can have a major impact on how they behave, and the decisions they make, both globally and locally. As with the previous challenge, most families have international ties and are faced with complex cross-border tax and legal issues across the world.
7. Technology adoption
Again, in part influenced by the younger generation within UHNW families, family offices are embracing technology to streamline operations, enhance investment analysis, and improve proper reporting. They are utilizing advanced tools for portfolio management, risk assessment, and data analytics that guide them on their next steps and help them support their decisions.
8. Cybersecurity and data protection
With the rise in cyber threats, family offices are placing a greater emphasis on cybersecurity and data protection. They are investing in vigorous security measures and adopting best practices to safeguard sensitive information to mitigate risk where possible but this is an ongoing challenge.
9. Talent management
Across the industry we are seeing the professionalization of family offices and the scaling up of what has historically been smaller-sized outfits; this correlates with the increasing number of functions and responsibilities a family office is charged with looking after – including, but not limited to, accounting, legal services, investment and administration. Therefore, attracting and retaining skilled professionals with the highest confidentiality standards, who can also handle the family's financial affairs, investment strategies, and other specialized services can be a challenge.Staffing is often one of the highest costs for a family office as it covers salaries, bonuses and other benefits and compensation at a competitive rate to wider industry job roles. Finding the right candidates who have the necessary experience but are also willing to grow with the family office long-term (due to trust and longevity being valued top attributes) can be a continuously hard task to manage.
10. Outsourcing non-core functions
To optimize efficiency and access specialized expertise, family offices are opting to outsource non-core functions such as accounting, legal, and compliance services. This allows them to focus on their core competencies and strategic decision-making, whilst having the benefit of ensuring certain functions are fully taken care of. At the same time, there is an opportunity to address the talent management challenge, as retaining the services of an experienced administrator can minimize the need for filling internal roles, and may ultimately help make significant cost savings.
KEY CHALLENGES
1. Succession planning
Ensuring a smooth transition of leadership and decision-making from one generation to the next can be complex, particularly when multiple family members are involved and each person harbors different (and potentially conflicting) ideas and long-term ambitions. Further to this, in some regions, such as the Middle East, Latin America and Asia, the wealth within families is still in the hands of the first generation, the wealth creators, and it is therefore vital for families to plan ahead to ensure the necessary structures are in place now to ensure a smooth transfer of assets in the future.
KEY CHALLENGES
2. Governance and communication
With family members continuing to hold executive and C-suite positions within family offices, establishing effective governance structures including family protocols and maintaining clear communication channels is critical. It is an ongoing challenge to get this right, as the right structure and communication strategy is crucial to managing expectations and mitigating potential conflicts.
KEY CHALLENGES
3. Next generation engagement
Family offices are paying increasing attention to engaging and educating the next generation in wealth management and decision-making processes. They are implementing programs and initiatives to educate and prepare younger family members for future responsibilities and ensuring their understanding of the global markets is robust.
KEY CHALLENGES
4. Investment strategies
Adapting investment strategies to meet families’ desire to take a more direct and proactive approach is a considerable change for family offices who have previously adopted a more passive approach. Within this there a number of areas in which we are seeing change, including:
- Co-investment and direct deals: Family offices are actively seeking co-investment opportunities and direct deals. By either partnering with other like-minded investors and families, or directly investing in companies, they are aiming to enhance returns, exert their influence, and seeking to diversify their portfolios.
- Investment management: Navigating market volatility, identifying suitable direct and indirect investment opportunities, and achieving consistent returns while balancing risk can be challenging for family offices, especially when considering diverse investment preferences within the family.
- Impact investing: Many family offices are increasingly incorporating impact investing into their strategies, driven by the interests of the incoming, younger generation. They aim to generate both financial returns and positive social and/or environmental outcomes, aligning their investments with their values and mission. This is partly influenced by the global ESG trends which are also reflected in the selection of businesses that family offices are choosing to invest in.
KEY CHALLENGES
5. Regulatory compliance environment
Complying with evolving regulations and reporting requirements can be demanding for family offices, as they need to stay updated and ensure adherence to legal and regulatory frameworks which are constantly changing. This task becomes more onerous when we consider the increasingly internationalized UHNW families who may live in different countries, and have their assets spread across different jurisdictions, resulting in the need for family offices having to track developments and navigate the regulatory landscape at both the local and global level.
KEY CHALLENGES
6. Geopolitical situation
Another challenge for family offices which is arguably harder to define is the responsibility of having to monitor economic conditions, market trends, and other factors, which can have a major impact on how they behave, and the decisions they make, both globally and locally. As with the previous challenge, most families have international ties and are faced with complex cross-border tax and legal issues across the world.
KEY CHALLENGES
7. Technology adoption
Again, in part influenced by the younger generation within UHNW families, family offices are embracing technology to streamline operations, enhance investment analysis, and improve proper reporting. They are utilizing advanced tools for portfolio management, risk assessment, and data analytics that guide them on their next steps and help them support their decisions.
KEY CHALLENGES
8. Cybersecurity and data protection
With the rise in cyber threats, family offices are placing a greater emphasis on cybersecurity and data protection. They are investing in vigorous security measures and adopting best practices to safeguard sensitive information to mitigate risk where possible but this is an ongoing challenge.
KEY CHALLENGES
9. Talent management
Across the industry we are seeing the professionalization of family offices and the scaling up of what has historically been smaller-sized outfits; this correlates with the increasing number of functions and responsibilities a family office is charged with looking after – including, but not limited to, accounting, legal services, investment and administration. Therefore, attracting and retaining skilled professionals with the highest confidentiality standards, who can also handle the family's financial affairs, investment strategies, and other specialized services can be a challenge.Staffing is often one of the highest costs for a family office as it covers salaries, bonuses and other benefits and compensation at a competitive rate to wider industry job roles. Finding the right candidates who have the necessary experience but are also willing to grow with the family office long-term (due to trust and longevity being valued top attributes) can be a continuously hard task to manage.
KEY CHALLENGES
10. Outsourcing non-core functions
To optimize efficiency and access specialized expertise, family offices are opting to outsource non-core functions such as accounting, legal, and compliance services. This allows them to focus on their core competencies and strategic decision-making, whilst having the benefit of ensuring certain functions are fully taken care of. At the same time, there is an opportunity to address the talent management challenge, as retaining the services of an experienced administrator can minimize the need for filling internal roles, and may ultimately help make significant cost savings.
The Citco group of companies (Citco) has more than seven decades of experience in the private wealth and family offices arena. With our dedicated team of professionals and our global footprint in key jurisdictions, we can provide comprehensive support to family offices and UHNW families when it comes to the structuring of wealth and the management of key administrative and investment functions. Citco helps clients to ensure the preservation and responsible management of family assets across generations.
Get in touch today for more information on how we can support family offices.