As a family increases in size and wealth so do the complexities, not least with regard to how to safeguard that wealth for future generations. With this in mind, Laura Nevitt, our Head of Family Office, spoke to eprivateclient about navigating some of the challenges families may face in 2024.
2023 was a particularly volatile geopolitical climate. How has this impacted families?
Laura Nevitt (LN): Geopolitical risk is ever present, but last year felt increasingly volatile and complex. Climate change and the energy crisis remain prevalent topics, while conflict in Europe and the Middle East continue to feed political instability. These factors, coupled with stubborn inflation, are distorting asset valuations and threatening to erode the long-term value of investments. Wealthy families, more than ever, are having to consider how best to protect their wealth – particularly with a view to transferring that wealth to the next generation.
Considering the greater complexity of the environment families are now operating in, it is vital that advisers are aware of such risks and ready to challenge the status quo, while also keeping an eye on where the opportunities lie.
It is worth noting that many families have faced these challenges in the past and are well equipped to respond. Our world is full of uncertainty and long-term investors have a built-in resilience that informs how they navigate the current geopolitical climate.
What do you see as the major challenges for family offices this year?
LN: There are a number of considerations family offices need to account for, not least when it comes to protecting reputation, maintaining confidentiality and increased regulatory and reporting obligations.
Such challenges can be exacerbated where families have only one or two employees with responsibilities that extend across both family and business but without specific expertise, for instance in tax and regulatory matters. Such arrangements can lead to heightened interest from regulators, while a lack of separation from the family business itself can prompt conflicts around confidentiality, long-term strategy, governance and succession planning.
Dedicated single-family offices, however, are not without their challenges too; attracting and retaining talent, cybersecurity threats, mounting costs, digitalisation and a greater focus on environmental, social and governance (ESG) concerns will all be creating added pressures.
Against this backdrop, outsourced specialist service providers are becoming more and more important as part of the family office operational make-up. Quality professional service providers can help mitigate many of these risks while providing an expert, independent, external guiding hand to navigate the complexities that come with such wealth, especially around the increasing regulatory requirements. At the same time, they have a trusted network of contacts on hand to provide tax and legal advice, investment management and banking services that require specialist advice.
How are the NextGen impacting investment decisions?
LN: Imminent and significant intergenerational wealth transfer is adding another dimension to the evolution in family investment needs. With the migration of decision-making to the next generation and the acceleration of ESG in general, it seems clear that even greater emphasis will be placed on sustainability, purpose, and impact as NextGen investors influence capital allocations.
As a result, structures that accommodate multigenerational requirements and that are designed with a long-term outlook, including setting out a clear succession plan, will be essential. Communication and education are key to ensuring effective governance in a multigenerational context, pointing to the need not just for structural considerations, but for cultural and behavioural change to be integrated into a family’s approach.
It is imperative that teams supporting UHNW families build strong, multigenerational relationships with their clients, both in terms of the settlors or wealth creators and the next generation of beneficiaries. This not only helps when creating bespoke investment strategies capable of encompassing a variety of increasingly diverse needs, but also fosters unity and harmony within the family.
The twin agitators of digitisation and ESG are showing no signs of abating. How can service providers support families to keep pace with the rate of change?
LN: Increasing demands around ESG reporting and disclosure, as well as rapid developments in the digital space, have prompted families to re-focus, taking a more nuanced approach to their investment strategies.
While more than half of family offices now have allocations in sustainable investments, many are hesitant to explore further for fear of exposing themselves to greenwashing. It is wealthy families, however, that have a real opportunity to make the investments that could enact lasting change and so access to expert advice, capable of helping families avoid the pitfalls can play a vital role in advancing that progress.
On the digital side, service providers will be under no illusions about their need to embrace technological developments, whether that be through the professional development of their teams, digital infrastructure, cybersecurity systems, automation of services or dedicated digital assets expertise.
What benefits does using an outsourced service provider bring to family offices?
LN: There are a number of benefits professional service providers can bring to the table, not least around cost, continuity and breadth of expertise.
Professional service providers can support families via dedicated teams with significant experience in complex family structures and dynamics. Such professionals can help bridge gaps, for instance, with establishing structures, transaction management, confidential document management systems, tax and regulatory reporting and accounting.
In addition, service providers of merit will likely have robust, sophisticated IT and cybersecurity systems in place to safeguard a family’s reputation and confidentiality.
Having professionally qualified staff operating across multiple jurisdictions can equip providers to provide comprehensive expert services from effective succession planning, asset protection, confidentiality, tax and regulatory compliance to family governance, philanthropy, education and integration of the next generation.
That sort of depth and breadth of knowledge is simply not often possible without outsourced support – but of course, it’s vital that a family selects that support from a provider that is aligned with its own values, that understands its vision and that is committed to building long-lasting relationships.
While expert service providers cannot control the headwinds of geopolitical flux, economic uncertainty, or regulatory and digital disruption, those worth their salt can do much to mitigate the threats and help families of wealth pivot as necessary, so that they can continue to thrive in 2024 and beyond.
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