The COVID-19 pandemic as well as regulatory and political changes in some territories have prompted several key trends for family offices. From our many conversations with high net worth clients and their family offices, these triggers have brought with them unanticipated risks as well as opportunities to improve connectivity, take stock of legacy infrastructure and ask some fundamental questions.
Questions such as - should our family office goals and priorities be different after the pandemic? Are the people wealthy families employ to run their affairs really focusing on the right things? More specifically, what should family offices be doing themselves, and what should they be seeking to outsource and why?
Some notable key areas where there have been shifts since the start of the COVID-19 pandemic include: governance, transparency, cybersecurity, investments, NextGen/succession and philanthropy.
A reshaped landscape and mindset…
- Governance
For those family offices operating globally, there can be added complexities such as where to reside, the number of jurisdictions involved, management of local employment and tax laws etc; this has been brought to bear particularly as COVID-19 has restricted travel.
Many large family offices have very sophisticated governance structures, however, many medium to smaller sized family offices are also beginning to appreciate the benefits of best practice governance.
As discussed in the context of wealthy families in a blog by Brittney Saks, PwC Global Private Wealth leader, PwC US, “Professionalisation” is an emerging trend with wealthy families and their family offices. To this point, the need for more robust internal controls can be positively correlated with size, and therefore complexity of a family office. This is compounded where there is greater separation between the founding family (particularly first and second-generation family offices) when transitioning control to third or fourth generations. Independent directors and advisors have also gained the value of external, independent views and experiences, which bring critical insights.
- Family office governance and NextGen – a wider gambit of asks
Around the globe, particularly in Asia and many high growth countries, the need to educate the next generation (“NextGen”) is becoming increasingly important for family offices. Structured education programs are being offered by many family offices, leveraging internal or external resources, alliances or programs, to provide more practical insights. Topics range from the fundamentals of explaining how to read a balance sheet and what a Trust is, to more sophisticated insights around negotiation skills, communication, investment insights, impact and philanthropy.
The current COVID-19 global pandemic has also brought into sharper focus the importance of best practices in the context of estate and succession planning. Defining how control will pass, to whom, and how the NextGen will make decisions (unanimous, majority, super majority - and on what terms) has been reprioritised on the agenda for many family offices.
- Transparency (including tax oversight)
Governments around the world are demanding more transparency from large organisations.
This is not limited to multinational corporations, as many single-family offices are having to comply with increasing Ultimate Beneficial Owner (UBO) regulations. Many tax authorities around the world are formalising review programs for high net worth individuals which naturally extends to their family offices. Without adequate structure, good governance and regular oversight, material tax risks can emerge.
- Succession & planning
COVID-19 has also brought more focus to the importance of estate and succession planning. In several countries, there are specific rules for the succession of the operating business that could be up for review, which is an added complexity in addition to the current torrent of uncertainty brought about by COVID-19. This is directly linked to the topic of business continuity and is an area that family offices should develop, including family statutes etc.
- Cyber security
COVID-19 has also brought more focus to the importance of estate and succession planning. In several countries, there are specific rules for the succession of the operating business that could be up for review, which is an added complexity in addition to the current torrent of uncertainty brought about by COVID-19. This is directly linked to the topic of business continuity and is an area that family offices should develop, including family statutes etc.
- Globalisation – greater investment opportunities and complexity
Strategic asset allocation has become a priority for most of the family offices that PwC works with and it is a cornerstone for long-term wealth preservation. We are seeing increasing globalisation of investments and growth in the sophistication and diversification of investment strategies. As family offices continue to see private equity as a key driver of long-term returns, there is a corresponding trend where additional capital is being allocated to unlisted, private equity-type investments, often cross border. This trend further increases the international tax complexity for investments as well as the need for more specific due diligence skills and experience. The focus on sound international tax requirements and regulations and thorough due diligence are essential to realising the investment potential.
Co-investment in “club deal” arrangements or syndication structures are also on the rise - typically with one family office leading the due-diligence, based on strength or familiarity in a specific sector or industry. Previous generations may not have had experience dealing with locations such as Latin America and certain parts of Asia, however, these regions are becoming an increasing component of many family office’s global balance sheets. Either way, more sophisticated currency hedging strategies, tax, regulatory and due diligence specialist skills will likely be considered a “must have” to ensure investment success.
Sustainable investing (ESG driven criteria) and “Impact Investing” is on the rise with most families seeking to understand more about the impact investments within their portfolio have on climate change, sustainability, equality, health and the environment. This trend has emerged with intergenerational leadership change. Interestingly though, when “Impact Investing”, return on investment is not overlooked and remains a priority.
- Philanthropy
Increasing social awareness and desire to have an overall positive societal impact through more active giving is a strong trend. This shift resonates with investment strategies, where total impact (purely societal or ESG) is increasingly married with financial returns to varying degrees. However, there is less reliance on attendance at fundraising events and more focus, especially from NextGen, on active involvement with charities the family supports.
Charitable foundations are proving a useful entry point for the NextGen to on-board and become more involved in decision making. Next generation involvement requires an increased understanding of governance, reporting, regulation and investment decision making, and can be a useful way for relatively young family members to be introduced to the responsibilities that come with wealth.
- Rewarding – wider array of metrics, closer alignment with family goals
At the heart of a sustainable family office, is the alignment with the family enterprise that it serves. Changing the emphasis of the reward structures includes aligning performance metrics and ultimately rewards for members of the family office. This can be achieved in many ways but typically considers roles, responsibilities, asset allocation, compliance, tax
and legal matters. From monthly salaries and annual bonuses to short-term and long-term incentive plans including carry and co-investment opportunities.
- Geographic structures
For larger family offices, having a hub and spoke model in place is becoming more common, and this not only relates to the services being provided, but also where the offices, people and technology are located. For example, having a main office in the “core”jurisdiction with satellite offices where family members and/or key assets are located.
Are there calmer waters ahead?
It’s clear that the rate of sociopolitical and technological change isn’t going to slow down, but will continue to accelerate, however, it will not equally impact all family office functions. We have discussed some dominant trends that will likely continue to change around the world. There will be winners and some will encounter collateral damage, but the family offices that adapt and thrive in an unprecedented time of increasing change and technological complexity, will be those who have made the strategic decision to embrace complexity and incorporate key aspects into a robust business model and into their “business as usual” operations. This level of adaptation translates into competitive advantage and a strong foundation from which to approach the “new normal”.
By Glen Frost, Partner, PwC Australia; Niels Govers, Partner, PwC Netherlands; Richard Geldart, Partner, PwC Switzerland; and Alex Jovanovich, Senior Manager, Global Private Wealth, PwC Switzerland
