Family Investment Offices Retrenching Against Market Disruption

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The S&P 500 index yielded a negative return of 4.83% in 2018. Family offices (businesses that provide wealth management services to high- and ultra-high-net-worth individuals and families) returned 5.4% last year.

The data was reported Tuesday by UBS and Campden Wealth Research in the Global Family Office Report 2019. The report provides a glimpse into a largely private world of old and big money. The researchers surveyed 360 family offices around the world, each with an average of $907 million in assets under management.

Ernst & Young has estimated that the total number of family offices numbers more than 10,000, and Dominic Samuelson, CEO of Campden Wealth, estimated that family offices currently hold more than $4 trillion in assets under management.

The growth in the number and of the assets was pushed along by the U.S. Securities and Exchange Commission’s adoption in 2011 of what’s known as the Family Office Rule, which exempts the offices from the registration requirements of the Investment Advisers Act. That lack of regulatory oversight allows the family offices “to preserve a significant level of control and privacy” compared to other operating structures, according to a blog post at the Fordham University Journal of Corporate & Financial Law.

According to the new UBS/Campden Wealth report, the best-performing investments for family offices last year were private equity, which offered an average return of 16% on direct investments and 11% on funds-based investing. Real estate assets returned 9.4%.

Sara Ferrari, UBS’s head of global family office group, commented, “While family offices are concerned about the uncertainty in financial markets, they remain convinced that longer-term investments can deliver superior returns.”

Campden Wealth’s director of research, Dr. Rebecca Gooch, added, “Family offices have been navigating volatile markets, and this is reflected in disappointing investment returns across most asset classes. The notable exceptions were illiquid investments, which continued to perform well.”

More than half (55%) of family office executives expect a market downturn to begin no later than next year. Nearly half (45%) are realigning their investment strategy to mitigate risk and another 42% are taking advantage of opportunistic events. Dr. Gooch note, “While the average family office hasn’t made wholesale changes to its portfolio, many have been building up cash reserves and deleveraging their investments in anticipation of disruption ahead.”

A full 80% of family offices believe that the world’s wealthiest families “will play an increasingly active role in helping address global challenges historically reserved for governments.” Two-thirds (65%) say they have a role to play in reducing economic inequality, and just over half (53%) consider climate change the single greatest threat facing the world.

Over half (54%) have a succession plan in place, up from 43% in the prior year. The most often-cited challenge to developing a succession plan is discomfort in discussing a sensitive matter (37%), followed by Next Gen successors still too young to plan for their future roles (36%), the matriarch/patriarch won’t step down (33%) and the Next Gen of leadership is not yet qualified to manage family wealth (31%).

The troubles of managing $907 million in assets calls to mind F. Scott Fitzgerald’s opening sentences of his 1926 story, “The Rich Boy”: “Let me tell you about the very rich. They are different from you and me.” The rest of the paragraph is less flattering to the rich.