Often banks are the institutions that operate closest to family offices. For this reason, family offices also look to banks more frequently for guidance to ensure their family office structure is equipped to facilitate the growth and sustainability of the family enterprises that they serve.
For family enterprises to thrive in the fast-evolving modern world of business, family offices need to be acutely aware of shifting investment trends and the need to expand their attention outside of financial services and into the sphere of governance, information security, management culture, succession and specialist in-house expertise.
Two key performance enablers that demand attention within the family office structure are agility and purpose, both proving to be highly effective ingredients of successful management culture. When companies have an articulated purpose that transcends products and services and is more significant than just money, customer loyalty and employee engagement is superior, ultimately leading to improved long-term financial performance. Purpose consultant Aaron Hurst, the founder of Imperative, found that 42% of companies that were not considered “purpose- driven” experienced a decline in year-on-year revenue. In contrast, 85% of purpose-led companies enjoyed positive growth. UBS & Campden Wealth 2018 Global Family Office Report indicates that only a third of Family Offices have a clearly defined purpose statement, which is evidence of the work required to address this gap.
Agility is also essential to success. Michael Hugos, principal at Centre for Systems Innovation, estimates that companies who achieve adequate levels of agility can grow profit by an additional 2%-4% per annum. Companies should be looking at reducing structures and processes to promote flexibility, creativity and swift decision-making.
Governance And Controls
According to Emile Salawi, Head of Family Offices at BNP Paribas, “By improving governance, the whole office can be more efficient, and the succession to next generation can also be managed far more effectively.” Governance enables fast decision-making, empowering employees at all levels to make decisions according to a clear mandate. Governance structures and guidelines relating to information security and decision-making are generally more informal within the family office space, impacting efficiency and making these firms vulnerable to fraud and cyber-attacks. On this topic, Salawi claims that “cyber-security is one of the three most important focus areas for family offices. Traditionally, families have relied on banks to exercise necessary governance and compliance requirements when it comes to protecting information and funds, but the time has come for families and family offices to take more responsibility for the protection of their own data, with consideration to the entire information and document flow.”
Investment Trends Are Evolving
According to Salawi, future-centric family offices should take note of how investment allocations and investment drivers are changing within the sector. “Family office structures are becoming leaner and more focused, with increasing emphasis on direct investments, impact investing and more active participation in the management of the businesses that they invest in.” Commenting further on direct investments, Salawi adds that “very few families are taking majority stakes in businesses, rather securing minority stakes coupled with more active involvement in board decisions, and leveraging their networks to grow these companies.”
Direct investment into real estate (17%) and private equity (22%), now account for approximately 39% of total family office investments, and this allocation is expected to grow in the coming years, as funds shift into higher yielding, more illiquid assets. In the real estate space, family offices should take note of innovative investment options such as crowdfunding (e.g. The House Crowd) which are changing the way companies spread their risk and manage their real estate exposure.
Impact Investing And The Next Generation
The motivation behind investment is evolving, with social and environmental impact becoming a serious consideration. As an investment driver, impact investing is becoming increasingly popular amongst family offices, with 32% surveyed now reporting involvement in this space, a 4.2% increase versus 2017. Dr. Rebecca Gooch, Director of Research, Campden Wealth comments: “Impact investing will be an important space to watch over the coming years. Our research shows that the next generation, and millennials, in particular, are driving impact investing within the family office space.”
Explore Specialist In-house Expertise
According to Salawi: “Family offices need to understand the constraints of banks on various regulatory and compliance matters, for example concerning KYC (Knowing your customer). Hence having specialist in-house expertise as part of their family office structure can be very beneficial, eg, legal counsel, allowing for quicker reactions and decision-making.”
The Succession Challenge
Succession planning in family businesses is often not prioritized until it is too late. It is estimated that 80 to 90 percent of U.S. businesses are family owned, yet less than a third of family businesses succeed into the second generation, and only 10 percent survive into the third. If securing multi-generational participation in the family business is a priority, more focus needs to be placed on succession planning.
This challenge is something that not only affects US family firms. Around the world different regions face similar challenges. In Asia for example, succession is also a major focus area, even though the majority of businesses are now only looking at first generation succession rather than third or fourth and for this reason.
Worldwide, understanding key trends and unique opportunities, threats and emerging needs within this sector is crucial for family office structures to provide an effective, holistic service to their families and clients.