How Global Family Offices Respond To Uncertainty: Building Upon Their Roots As A Family

Family offices that invest the wealth of the most affluent families account for a significant and growing portion of global wealth. In the past decade they have proliferated, as wealthy families sell their legacy businesses or decide to control their own financial activities. But in a world that’s facing increasing uncertainty and upheaval, how do these large investors avoid overreacting, keep their focus and still innovate? It appears that their adaptability rests partly in the fact that they are comprised of family members who also serve as financial partners. Their personal relationship sharing a legacy of values and concern for each other leads them to adopt a long-term and social impact perspective that adds a dimension to their nature as investment vehicles, that is rarely found in other financial institutions.

Two new studies by financial institutions offer some insight into the unique nature of family offices and how they are responding to increasing financial volatility and uncertainly. They provide an external view of the behavior of these proliferating entities.

The first study, the UBS Global Family Office Report, looked at family offices that have an average of about US$1 billion in assets. What they found is that many of these global families are retrenching, stockpiling cash in preparation for a global recession. The report also found that many of these families are focusing inward as they prepare for succession to a new generation. And their cross-generational nature has taught them to listen to diverse perspectives and acts as both a force for innovation as well as a warning about risking their legacy.

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The second study, the 2019 Fidelity Family Office Investment Study, notes that more than half of the U.S. family offices surveyed derived their assets from a family liquidity event, that 40% have been created in the last decade and that another 30% have existed for more than 20 years. Over time, their role shifts toward preserving rather than accumulating new wealth; and due to their nature as hugely wealthy and successful families, they can adapt a patient, long-term model of operations.

Family offices that have been around for more than a generation have been through major financial upheavals, including the recession of 2008. The unique experience of managing shared wealth equips many family offices with the capacity to deal with volatility and financial disruption, a skillset other investors may lack. James Grubman, Ph.D., who is the author of Strangers in Paradise and a consultant to multi-generational family enterprises, observes that family offices have a natural familiarity with significant change. As the Fidelity survey shows, the family office itself often arises from a disruption when a family sells its legacy family business or harvests wealth from an extremely successful venture. Through their resulting diversification and their generational time horizon, they have to learn what they are comfortable with as they face multiple boom-bust cycles. Grubman notes that many family offices are therefore less obsessed with “panicky forecasts of the next economic storm” and more concerned about becoming “stormproof” in their long-term approach and practices. Furthermore, they are able to tap into a very diverse portfolio of investment vehicles to ride out volatility.

However, because these hugely wealthy families highly value privacy and confidentiality, their activities are largely hidden from public scrutiny. Therefore, while these two new studies reveal external trends in how family offices are structured and invest their wealth, relatively little is known about how they work together as a “family,” and there is an intrinsic difference between newer and older family offices. Newer family offices operate under the control of the wealth creator, who has accumulated wealth from a some concentrated position—be it in a private equity, venture capital, or other investment strategy—or by creating one or more operating businesses. Family offices that have been in business longer have experienced a family generational succession event and feature professional advisors and members of the older and younger generations taking various roles. Thus there are significant differences in how a family office operates depending on whether they are under the control of an individual wealth creator or whether, in later generations, there are an increasing number of family “shareholders,” even if the assets are organized into a trust or partnership structure.

One factor that is now making family offices distinct investors is that they “are not all just groups of wealthy investors solely seeking to maximize their return on investments; instead, many are writing a new narrative, one intended to shift the investment paradigm,” notes Kirby Rosplock, Ph.D., of Tamarind Partners and author of The Complete Family Office Handbook: A Guide for Affluent Families and the Advisors Who Serve Them. The family shareholders Rosplock addresses are concerned about values and social impact as well as getting good returns. Indeed, their bottom line is fourfold: people, profit, planet, and purpose. As family members who share a legacy, values and shared public and private identity, they are increasingly more concerned with global affairs and want their investment policies to back significant and positive social, political and environmental change. Rosplock asserts that this is key to being resilient during uncertain times.

Unlike other investment groups, the owners of a single family office have a personal relationship with each other that includes a shared identity, history and legacy as a family. The family is often known for something special—certain values and roles in the community—and publicly stands for specific values. This makes their investment choices and goals more complex and fundamentally different from those of other investment groups where the investors only share a desire for returns on their investment. In many of the most successful family offices, younger generation family members, who are expected to develop into future leaders, are encouraged to test and enhance the existing policies with new ideas gained from their education and global experience and to eventually lead the office into new opportunities. To encourage this, a few family offices create what they call a “family bank” that allows them to invest in new ventures and directions proposed by the rising generation but vetted by the wisdom of professional advisors and elder family members. This type of approach and governance structure is rarely available in other kinds of investment groups.

Another distinguishing factor of family offices is that they perform many functions and carry out activities that would seem strange to other types of investment groups, and these additional tasks are a basic part of their identity. While there are many variations—and as the saying goes, “When you’ve seen one family office, you’ve seen one family office”—there are certain commonalities embodied in these institutions.

First, while only a few family members are responsible for investment decisions, the advisors, decision makers or trustees listen carefully to the concerns and desires of all the owners. Young family members, who may or may not eventually inherit significant ownership, feel that because it is their family wealth, they can express their wish to see their funds reflect social values.

A second commonality is that many family offices spend much time and energy defining family mission, goals and values, and large numbers of family members are involved in making these decisions. Some family offices have contentious meetings where older and younger generations talk about the role of social investment. The younger generations often want to look at social impact as well as investment returns. A recent study of 100 large global families that have owned significant wealth for more than three generations finds that these concerns are a major focus of such families.

Finally, the family relationships of successful family offices are kept vital not just by business and financial committee meetings, but also by the personal relationships and shared activities of the family. These offices often sponsor regular family retreats and offer opportunities for family members not just to get to know each other, but to learn and talk about what is important to them. Such gatherings and meetings also build trust, and they educate family members about their holdings and the issues that surround them. Family members are informed, and by informing them, the family leaders are also accountable for results. They are able to anticipate and prepare for change and share their choices and tactics within the family. The family office—especially the single family office that manages the assets and relationships for one or a few families— is an increasingly desirable choice of the most wealthy families everywhere in the world. In order to understand them, they must be viewed as far more than investment vehicles. They are a way for a family to have impact on future generations, express their legacy and affect society.