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Key Advisor Takeaways from 2017 Family Office Activity

Some important implications for advisors catering to UHNW and HNW clients.

Single-family offices, the ultra-private organizations that help the world’s wealthiest families oversee their financial affairs, are often viewed as leading indicators for the broader high-net-worth and ultra-high-net-worth markets. Based on research iCapital Network conducted with this cohort in 2017 and prior years, single-family offices have a strong appetite for alternative investments and use them widely in their portfolios. Because these organizations are focused on maximizing a family’s wealth, rather than that of a specific generation, their investment time horizons can more closely resemble those of a pension or endowment than the average individual investor. That said, our findings highlight some important implications for advisors in terms of catering to UHNW and HNW clients going forward.

Offer a high-quality selection of alternatives.  

Alternatives play a key role in SFO portfolios—according to our research, an overwhelming majority (86 percent) maintain alternatives allocations of at least 10 percent. Advisors hoping to provide the family office experience that UHNW investors in particular are seeking need to be able to source, vet and make available a full range of alternative investments, including hedge funds, private equity funds (the most popular type of alternative investment, with 41 percent of SFOs investing) and direct private investments. Advisors that are not already active in alternatives or lack in-house due diligence resources may want to consider selecting a qualified partner to assist with origination, screening and administration.

Expand your portfolio construction skillset.

Advisors interested in expanding beyond the mass affluent bracket should invest in asset allocation tools that allow them to build and manage the complex portfolios required by sophisticated HNW investors, and incorporate a goals-based approach that aligns portfolios with identified short- and long-term objectives. Particularly in today’s investment environment, the illiquidity premium is more important than ever to long-term wealth creation, as demonstrated by the fact that 90 percent of our SFO survey respondents maintained or increased their PE exposure over the past year either through funds or direct deals. A HNW investor may have a property purchase or significant educational expense to fund in 10 years’ time, which could be met with a private equity allocation, as well as a need for current income, which could lend itself to dividend paying equity, higher yield fixed income or private credit strategies.

Creating a portfolio that has different liquidity characteristics allow advisors to better address such goals, but requires the right portfolio construction capabilities.

Court the next generation.

According to our research, 38 percent of second generation-led family offices maintain alternatives allocations of 15 percent or more, driven by a sophisticated subset (18 percent) that allocate over 20 percent of their total portfolios. These allocations are significantly more aggressive than those of first generation family offices and indicate strong interest in wealth enhancement, not just wealth preservation. They also parallel trends among younger investors generally; recent surveys of millennial investors have found that 83 percent are open to non-traditional investments (compared with 52 percent of older investors), and 74 percent plan to use an alternative investment approach over the next five years. Advisors looking to retain relationships as wealth transfers between generations must be aware of shifting attitudes towards advice, investments and risk, and position their practices accordingly. Millennials are native tech users and comfortable with automated wealth management solutions, so advisors must adopt mobile and other tech-enabled forms of communication and be able to demonstrate their value propositions. Many younger investors are gravitating towards a “barbell” model focused on passive and non-traditional investments, making expertise in alternatives critical. Most importantly, 59 percent of millennials will not invest in an asset they do not understand, so the ability to communicate the diversification potential of alternatives and explain how these investments function in a portfolio will be necessary to attract younger clients.

Consider offering deal flow and diligence capabilities around direct investments.

Direct deals are becoming an important part of the family office toolkit, with 66 percent of SFOs we surveyed, and 82 percent of second generation family offices specifically, planning to increase their direct deal activities over the next three years. But sourcing attractive direct investments and evaluating these transactions can be challenging, even for family offices with dedicated staff. Offering due diligence assistance and high-quality direct deal flow, including co-investment opportunities alongside fund managers, can be a significant differentiator for an advisory practice.

Review your administrative and custodial relationships.

Managing payments, documentation and reporting for private equity, commodities, hedge funds and real estate can become complicated. Not all custodians have the ability to track the contributions and distributions of alternative investments. Making sure the right service providers are in place to handle administrative and operational details ensures advisors are able to focus on investment strategy and clients.

Investors, particularly millennials, are increasingly realizing that traditional investment choices are no longer adequate to meet their needs. Advisors who are equipped to handle the growing appetite for alternatives, including high-quality origination, due diligence, portfolio construction and tech-enabled information flows, will be well-positioned to grow their practices with HNW investors and the new generation of clients.

Caroline Rasmussen is Vice President at iCapital Network.

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