Navigating ever-changing markets is nothing new for family offices. From the post-pandemic market recovery and a recession that never materialized, to ongoing geopolitical headwinds and rapidly accelerating artificial intelligence enhancements, charting the path ahead for family offices is never smooth sailing.
To truly understand the mindset of global players today, we asked 190 family offices from across the world with an average net worth of $1.4 billion to share insights into how J.P. Morgan’s family office clients manage investments, governance, succession planning and family office operations.
The results were fascinating.
Alternative investments are in favor
Family offices are diversifying their investment portfolios, with nearly 80 percent working with external investment advisors. This represents a multi-year shift that we are seeing among many family offices. They are more willing to take illiquidity risk in order to achieve greater potential long-term returns.
Notably, the average portfolio currently has a 45 percent allocation to alternative assets, targeting an 11 percent return; private equity is the most commonly held asset class at 86 percent; and infrastructure is the least commonly held at 9 percent.
In addition to the focus on alternatives, family offices are consistently developing core, liquid portfolios. On average, these portfolios allocate 26 percent to public equity and 20 percent to fixed income and cash.
Grappling with cybersecurity
Cyberattacks are on the rise — and family offices can be an easy target. Nearly a quarter of family offices surveyed reported exposure to a cybersecurity breach or financial fraud, yet only one in five noted they have cybersecurity measures in place. With that in mind, 40 percent of family offices reported that cybersecurity is a top gap for improvement.
Rising cost of operations
Family offices are focused on managing costs while recruiting and retaining top talent. Like any business, these two objectives may find themselves at odds while staffing roles and services. Outsourcing certain functions through a hybrid approach is becoming more common among family offices of all sizes.
Large, established family offices with $1 billion or more in assets under supervision have average annual operating costs of $6.1 million, making management and strategic outsourcing a priority. Nearly 40 percent of small and midsize family offices, with assets under supervision ranging from $50 million to $999 million, outsource investment management to some extent.
Preparing the rising generation
A primary concern identified by family offices regarding the upcoming generation is their preparedness to inherit wealth. Interestingly, nearly 30 percent of respondents lack a structured approach to prepare the younger generation for this responsibility. That is despite the fact that a majority of the surveyed family offices note succession planning and preparing for the next generation as primary objectives while also identifying them as areas where they need help.
Interestingly, more than one in five respondents globally say they shield the rising generation from knowing the full extent of the family’s wealth, a fairly consistent figure across regions. This approach was more frequently mentioned by smaller family offices than the largest family offices, 27 percent to 15 percent, respectively. Unfortunately, keeping interested young family members completely unaware of the family’s wealth may not be realistic in today’s global, digital world — nor may it be a good practice.
Changing face of family offices
When I talk to families and family offices globally, it won’t surprise you that managing financial assets is the number one objective. While family offices may be initially established to meet specific and often more immediate financial needs, many families look at them with longer-term views. This is evidenced by nearly 70 percent of global respondents who identify succession planning and preparing the rising generation as goals. More than 40 percent also view continuing the entrepreneurial legacy of family as a key objective.
Family offices can also support a family’s philanthropic and other legacy goals. The term ‘legacy’ means different things to different people, and our conversations with clients tend to coalesce around several themes: financial legacy for the family; continuation of the family business, if applicable; philanthropic, social and environmental impact; and a family’s standing or legacy within the community.
While these broad themes are largely consistent around the globe, our research revealed a few notable regional differences. Specifically, US-based family offices seem to be much more focused on philanthropy and impact investing than international family offices. One-fifth of surveyed US family offices report having an in-house head of family foundation or philanthropy director, compared to just 2 percent of international family offices.
There clearly is an opportunity here. In our conversations with clients, we have seen that siloed approaches to legacy considerations, such as philanthropy versus investment decisions, are becoming a thing of the past. Clients now want the entire spectrum of their wealth planning to reflect their goals. We hope to see this trend evolve as we continue to explore the views of family offices.
Natacha Minniti is international head of 23 Wall, J.P. Morgan Private Bank.
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