A comprehensive, full-service family office serves a myriad of needs, from investment management to education and governance, accounting and taxes, estate planning and philanthropic management, and more. Staying in step with how these needs evolve and change (and change is on the way) is vital to success.
A family office must retain critical mass to recruit the talent and deliver the services that today’s high-net-worth (HNW) families demand. Issues and solutions have become more complicated. Tax regulations and compliance, along with technology and communication, have grown in complexity, requiring a more sophisticated service delivery model, with a high level of talented professionals. In addition, as wealth shifts, the “Next Gen” brings a different perspective to the equation and, potentially, a lot of assets.
In multi-generational families, there’s a stronger demand for governance and education. Families want their children to be financially educated—for good reason. These children are expected to inherit $59 trillion from their parents. The technologically advanced Next Gen will challenge the delivery of services, methods of communication and investment decision-making. Understanding how to engage and retain young clients will be imperative. Building their trust will be paramount.
The family office business is all about trust. Traditionally, trust was built through person-to-person meetings, handshakes and conferences held under the light of a power point presentation. Modern trust building requires different communication methods. Understanding how best to communicate with the next generation, which is increasingly reliant on smart phones, for instance, may take time. Contrary to many stereotypes, research has shown that face-to-face meetings and personal connections still hold great value. But, the next generation will think and operate differently; so, they’re going to invest and communicate differently as well.
Communication preferences, along with constant innovation, not only pose a challenge for a family office, but also create a learning curve. Younger clients may be unaware that some forms of communication, such as texting or online access, may not be allowed or may be limited due to regulatory restrictions. A family office needs to take the time to agree on the best, most efficient ways to meet and communicate with young clients.
Just as the next generation has its preferred forms of communication, it too may have different values. Many younger clients show far more interest than their parents in the specific impacts of their investment and the positive change they will create. While it’s true that family offices often invest through their values, this unofficial rule will likely have to become more codified to meet the needs of next gen clients. Impact investing and socially responsible investing will experience an influx of money. A Merrill Lynch Private Bank and Investment Group survey reported that 29 percent of millennial investors believe values-based investing is an important factor in choosing a wealth management firm.
Today, family offices—and all wealth management firms—face more regulation than ever before. Especially with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), wealth managers are finding that compliance is consuming more of their time and talent.
This drain can affect single-family offices (SFOs) as well, if they don’t fall under the exemption. Under Dodd-Frank, an SFO may have to become a registered investment advisor and be regulated by the Securities and Exchange Commission, which is expensive and complicated.
Within the framework of Dodd-Frank, online services have also changed, setting up new technological challenges for both families and advisors. These challenges intersect with how the family offices and wealth managers deliver services. It’s possible the services won’t be as personalized and customized—a point of pride for family offices and wealth managers—because of the regulations to which they must adhere. We’re still going to talk and communicate, but government regulations have infiltrated the relationship.
For example, the government requires families to receive written statements from their investment managers, even though the family office also receives their statements. This well-meaning safeguard of third-party checks and balances results in piles of mail. “Why,” the family wants to know, despite copious explanations, “am I receiving all this mail when I have a family office in place?” Regulations make it harder for a family office to offer the bespoke services for which it was likely created.
Many SFOs were formed in the early 1990s, and a number of those family office executives are facing succession or retirement. Unfortunately, many of those family offices aren’t prepared for this change. There may be a void in those positions.
Family members will be seeking replacements, which could change the business model of the SFO. SFOs could determine that they should disband, decide to join a multi-family office (MFO) or co-opt with other SFOs to form an organizational buying unit.
This ties back to the generational shift of wealth that’s also transpiring. Many of these SFO executives were “dad’s guy.” Now, the younger generation will inherit the money, and the patriarch’s family office executive will retire. What’s going to happen to the SFO?
Will the children take their money and set up their own SFO? Join an MFO? These are scenarios that need to be considered. The sustainability of the SFO will be challenged with these dual generational shifts.
This is an adapted version of the author's original article, "Make Way for a New Generation," in the January issue of Trusts & Estates.