For years, family offices were spending more time and resources uniting their members and succession planning. But that was while interest rates were historically low, equity markets were going up, and their wealth was becoming more extreme.
Now, markets are down — along with their net worth — and family offices are predominantly worried about one thing: investment returns.
Family bonds and succession planning are important factors in preserving wealth that transcends generations, which is why family offices exist in the first place. The duties of those offices vary and are always evolving based on the needs of the family, or at least the opinions of its leaders, and markets are a factor in the priorities.
When asked about their primary focus, family offices have shifted even more toward wealth (74 percent) and investment management (55 percent), at the expense of “fostering family unity and continuity” (21 percent), according to a Citi Private Bank survey of 268 family office clients. In 2022, family unity and continuity were a top priority of 34 percent of respondents.
The results weren’t surprising to the private bank. “It is typical in challenging times for family offices to prioritize immediate needs at the expense of less pressing but highly important priorities, as we also observed during the Global Financial Crisis or COVID pandemic,” according to the report.
Family offices, like everyone else, tend to their portfolios when times are tough. Some of them realize they aren’t very good at choosing direct investments. They are also leaning more heavily on asset managers to help them make allocations and are opportunistically deploying capital.
But to focus solely on investments will be a mistake, experts say.
“To me, the most valuable things a family office can do is focus on the larger, holistic picture, and focusing on what is traditionally referred to as the ‘soft stuff,’” said Josh Kanter, the founder of Josh Kanter Wealth Advisory Services, who helps families establish family offices. “At the core of that is fostering a culture of family meetings, understanding the human capital around the family table; making sure people are involved in the discussions about why the family is doing this — whatever this is.”
“Family enterprises are dynamic, constantly changing systems. The more a family office focuses on the past or set practices, the less adaptable it may become,” Kanter added.
Mark Tepsich, who consults clients on family office design and governance for UBS put it another way: “The younger generation has heard the stories of the older generation — they heard the legend. Now, they want a seat at the table and want to contribute. It’s not about control, they just want to be a part of the family.”
More family offices have professionalized their investment management, but their other parts suffer from inefficiency, especially when it comes to leadership succession planning and educational programs for the next generation. Younger generations — who have more of their future lives at stake — still consider family unity and leadership a higher priority. Third-generation heirs were nearly twice as likely on average (41 percent compared to 21 percent) to prioritize family unity and continuity.
A tendency to focus more on the family’s wealth generation “is much less pronounced for third-generation families. Such families have weathered more storms and realize that they need to continue addressing critical issues even if others might appear more urgent for now. More than half of families’ top concerns include preparing the next generation to be responsible wealth owners and ensuring shared family goals and vision, for which they need family office support,” according to the Citi report.
If family leaders are serious about extending their wealth into generations, they must make sure they are keeping members together.
“The only way that I think the family office can stay relevant is to provide people with resources to do their own things and then to come back to the family with what they’ve learned,” said Phil Strassler, founder of the Larry Kraus Tax Institute for Family Offices and a consultant to single-family offices on strategy and business practices. “Otherwise, I think people just take their money and they run; they do their own thing. You need to provide them with freedom.”
