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By Alpha Research
Feb 02, 2023
Setting up a family office is a great way to manage, grow and eventually distribute family wealth to successive generations. Inflation and technological disruptions will largely influence the overall trend of the global family office business in 2023. They will determine how family offices think, invest, and operate worldwide.
Challenges and threats always accompany these trends. A family office can only position and prepare the organization accordingly to mitigate the risk and ensure a smoother operation.
This article discusses the top nine trends in family office business in 2023.
During soaring inflation, holding on to cash or fixed cash flow-generating assets will not preserve wealth or generate returns. So, family offices can reconsider Strategic Asset Allocations or SAAs.
A diversified portfolio with a mixture of assets such as equities, gold, and realty is a long-term hedge against inflation. In addition, family offices can generate returns with the catalysts of inflation outside of their core portfolio. For example, they can invest in automation development or quality companies with solid fundamentals. Health care, green technology, Artificial Intelligence (AI), and private markets are other growth-oriented investment arenas.
Processing of statements, particularly in private equities, is a manual yet repetitive process. Moreover, as family offices increase their investments in private equities, they must process more monthly statements. Automation helps to streamline the processing of reports for family offices. It also enables them and their clients to save a great deal of time and resources.
Hybrid work culture is the new normal in the post-pandemic world. In this era of quiet quitting, moonlighting, and great resignation, a flexible work schedule is no longer a unique enterprise trait but an industry norm. Although frequent direct interpersonal communication is still essential in the family office, occasional direct meetings will also get the job done.
The recent collapse of FTX raises skepticism over the future of cryptocurrencies, including Bitcoin. Although most family offices have shown interest in digital assets, only a few have invested in cryptocurrency. Since wealth preservation is family offices’ primary objective, investing in digital assets would be a considerable risk for family offices today.
Family offices have a more significant role to play in tackling environmental issues. As the younger generation’s influence grows in the family office with the retirement of the older generations, their stake in Environmental, Social, and Governance (ESG) and sustainable investing also grows. Compared to traditional investment practices, this transition can create steady returns over the long term.
Technological advancements certainly benefit family offices, whether it’s by using it or investing in it. For example, CoVID-induced lockdowns created a remote working culture hinging on cloud-based virtual meeting applications and collaborative platforms. It also helped them to manage all their data and reports in one place. On the other hand, family offices generated greater returns by investing in the technology sector through Initial Public Offering (IPO), venture capital, and private equity.
With the utilization of technology comes data privacy concerns, mental health issues, and the spread of fake information. Therefore, an efficient family office must use the best of both sides of the technology world.
Barrons states cybersecurity is the number one concern for family offices worldwide. Their study surveyed 78 family offices, and 96% of the respondents were victims of cybersecurity attacks. In addition, a 2017 survey conducted by Campden says that 32% of family offices have suffered heavy losses in cyberattacks, and nearly half did not have a cybersecurity plan.
One of the main reasons cited for the cybersecurity menace is the lesser regulation on family offices than traditional wealth management firms. Another reason is the slow pace of technological adoption in the private wealth industry.
Undoubtedly, Artificial Intelligence (AI) will be the most enormous disruptive force in every business worldwide, including the family office. If we can fully utilize the capabilities of AI, it can perform tasks at greater efficiency and speed than humans ever thought possible. So, AI can free up humans from monotonous tasks and let them focus on higher value-creating activities.
Like AI, Robotic Process Automation (RPA) saves money managers from tedious tasks and helps them create more value. For example, RPA can do repetitive tasks like data entry, gathering tax information, form filling, and account reconciliations. In addition, combining RPA with AI and Machine Learning (ML) creates greater efficiencies in business operations.
The Future is Bright for Family Offices
The current investment environment demands transformation in investment strategies, leveraging technology, social awareness, and outsourcing. Also, direct investing and impact investing have become inevitable these days. Succession planning issues are mounting, and operational costs are rising. Proper planning and execution are needed to mitigate these risks.
Despite all these challenges, the family office remains a viable option and desirable way for ultra-wealthy families to preserve and grow wealth for generations to come. However, the future is bright for family offices only if they innovate rather than go ahead embracing traditions and legacy systems.
Cloud-based solutions have no restrictions and let investment firms manage sensitive data in one place. They also allow faster yet accessible communication among staff and family members. Real-time data updates have become another advantage of cloud technology. It brings down Turnaround Time (TAT) and enhances reporting accuracy, providing family offices with the information they need to make faster yet better investment decisions.
In the upcoming years, only the firms that have transformed into digital leaders in their industry will have faster revenue growth and higher productivity than their peers who have yet to embrace digitization. Fortunately, the higher costs and complexity associated with technology have been eliminated by affordable yet easier-to-implement Software-as-a-Service (SaaS) solutions.
Justin Raj
Alpha Research Team
