Managing a Family Office – It’s More than Succession Planning!

The largest generational wealth transfer in history is upon us. Over the next two decades, an estimated $84 trillion in assets will be passed down, marking what some have labeled as the greatest wealth shift ever recorded. According to a recent study by Cerulli Associates , most of these assets—around $72 trillion—will flow to Generation X, Millennials, and Gen Z, primarily from Baby Boomer parents. The remainder is expected to support various charitable causes, reshaping the philanthropic landscape. (1)

As this unprecedented transfer unfolds, questions arise about its impact on financial markets and the economy. The decisions these heirs make about managing and investing their inherited wealth could influence market dynamics for years to come. Will they follow the conventional investment patterns of stocks, bonds, cash, and real estate favored by previous generations? Or will they venture into new, potentially disruptive avenues in search of higher returns and meaningful impact? The choices made in this era of wealth transition will shape the financial world in profound ways.

As a financial professional with extensive experience working with family offices, I’m asking: “How will this historic wealth transfer impact family offices, and in what ways should they prepare for the changes it may bring?”

Family Offices: Background

Family offices have experienced explosive growth in recent years. The family office market has been one of the financial sector’s most significant growth trends in recent years. The number of family offices increased threefold between 2019 and 2023, to almost 5,000, according to Preqin (see Fig. 1.1). (2)

Of these, 59% are single family offices and the remainder, multi-family office groups running money for more than one family. Though estimates vary, all agree on the large scale and recent nature of the family office market’s rapid expansion.

What has driven this growth? In short, an unprecedented increase in personal wealth. The number of ultra-high net worth individuals (UHNWI) with $30m or more in personal wealth rose 4.2% between 2022 and last year, to more than 626,000 globally, according to Knight Frank data. And that number is due to increase 28% in the next five years, driven most by growing wealth in Asia (see Fig. 1.2). (3)

The “Quiet” Wealth Transfer Challenges Facing Family Offices

Against the inevitableness of the “great wealth transfer”, there are two elephants in the room that don’t receive a lot of attention but should be garnering a lot of attention at this time:

1.???? How will Family Offices pass on their wealth and family legacy to the next generation

2.???? Preparing for the Next Gen: Where to invest and how to invest

Passing on Wealth and Family Legacy

?Around 54 percent of family offices are concerned about ceding control to an unqualified younger generation, according to a recent survey from the Royal Bank of Canada, ( RBC ), and Campden Wealth .

• Although 80% view their family office as effective at the intergenerational transfer of wealth, only 53% have a succession plan in place – and of those, only 30% have a formal, written plan
• There are also mixed feelings about whether the next generation is ready to take the reins. About 54% of respondents said the next generation is inadequately qualified to takeover, and:
• ?42% feel they are too young to assume immediate leadership roles (4)

Of the “10 biggest challenges facing family offices”,(5) according to August 2024 study by Ocorian , a leading global provider of fund administration, capital markets, corporate and compliance solutions, in their summary of findings there is no mention of:

• #6 Preparing the next generation for their wealth transfer (36%)
• #9 Managing leadership transitions (27%

Preparing for the Next Gen: Where to Invest and How to Invest

According to a Bank of America Private Bank survey titled, “2022 Study of Wealthy Americans”, 75% of millennial and Gen Z investors believe “it’s not possible to achieve above-average returns solely on traditional stocks and bonds.”3

Investment Evolution for a New Era

Younger generations are more inclined toward sustainable and socially responsible investing, making Environmental, Social, and Governance (ESG) factors a core priority in their portfolios. In contrast to traditional asset classes, alternatives have gained traction among family offices, especially since the COVID-19 pandemic, as a way to diversify and mitigate risks in volatile markets. Among these, private credit stands out as a favored asset class, offering attractive risk-adjusted returns, diversification benefits, and a hedge against market swings. Hedge funds also remain popular for their operational sophistication and their potential to deliver strong, risk-adjusted returns. (6)

For family offices, preparing for this generational shift is about more than asset allocation. It involves bridging potential gaps in communication and values, aligning the family’s financial strategies with the personal aspirations and ethical commitments of the next generation.

Preparing for the next generation isn’t just about maintaining wealth—it’s about evolving with the changing world and ensuring the family office continues to thrive across generations. (7)

Wealthy families must begin planning soon. Notably, about 60% of family offices anticipate that this generational wealth transition will occur within the next decade—a sharp increase compared to the 20% of family offices that experienced control changes over the past ten years, as highlighted in the RBC report.

As we approach the “great wealth transfer,” family offices face critical, yet often overlooked, challenges in passing on both wealth and legacy to the next generation. To assist me with insights on how a Family Office can ensure a smooth and intentional transition I’ve asked Jeremy Stevenson , Managing Partner, of iBridge Global Partners, for his thoughts.

For those of you not familiar with iBridge Global Partners , they are a premier boutique family business and family office strategy firm, that uniquely specializes in designing bespoke strategies that not only help owners define and align their goals, but also unify their families, maximize profits and value, and ensure both the family and business are positioned for multi-generational success or top dollar exits. While Jeremy and iBridge are completely aware and conversant with the issues facing Family Offices today I asked him to specifically address the areas of: “Effective Wealth and Legacy Transfer”, and “Preparing the Next Generation for Investment Responsibility”.

Jeremy’s initial reaction to the issue of Effective Wealth and Legacy Transfer was:

“Transitioning wealth is more than just a financial transaction—it’s about preserving a family’s values, mission, and vision across generations. Without careful planning, the legacy built over decades could be diluted or lost entirely.”

Regarding Preparing the Next Generation for Investment Responsibility he had this to say:

“Today’s younger generations have distinct perspectives on investing, often emphasizing sustainability, innovation, and social impact. Deciding where and how to invest is crucial, not only for financial growth but also to keep the next generation engaged and aligned with family values. At iBridge Global Partners we are equipped to address these generational shifts by crafting an investment strategy that resonates with young family members while preserving financial stability and growth for the Family Office.”

Jeremy went on to point out that the Next Gen will demand different working methods, increased transparency, and new forms of support. I asked him to provide me with some examples of what he meant and here’s what he provided:

1. Values-Driven Investment

• Impact and ESG Investing: Millennials and Gen Z are notably more concerned with social and environmental impact than previous generations. They prioritize investments that align with values like sustainability, social responsibility, and equity. Family offices now need to incorporate Environmental, Social, and Governance (ESG) criteria and offer impact investment opportunities to meet this demand.
• Philanthropy as a Priority: This new generation views philanthropy as integral to their wealth management. They prefer strategic, hands-on approaches to charitable giving, often aiming to address systemic issues rather than just giving to causes.

2. Demand for Transparency

• Real-Time Information Access: Growing up with instant access to information, younger generations expect the same level of transparency from their family office. They want real-time visibility into their investments and decision-making processes, which calls for digital platforms and dashboards that allow seamless, 24/7 access.
• Open Governance: Millennials and Gen Z seek a clear understanding of their family office's financial strategies and decision-making. They often want to be directly involved or informed about critical moves, including investment and philanthropic decisions, necessitating more inclusive and open governance structures.

3. Digital-First Approach

• Tech-Enabled Wealth Management: Digital convenience is essential for younger generations, who expect their family offices to leverage the latest technology. They look for digital tools that offer insights into portfolio performance, tax strategies, and even AI-driven investment recommendations.
• Cybersecurity: With greater digital exposure, the risk of data breaches is a significant concern. Younger generations prioritize cybersecurity and expect their family offices to have robust protection measures in place, including frequent audits and updates to secure their information.

4. New Modes of Communication and Collaboration

• Frequent, Informal Updates: Millennials and Gen Z generally prefer more frequent and informal communications compared to traditional quarterly reports. This generation values agile, open communication channels that support quick updates and feedback.
• Collaborative Decision-Making: Unlike previous generations, younger wealth holders often seek a collaborative role in decision-making, valuing a relationship with advisors based on partnership rather than formality. Family offices now focus on inclusive decision processes that honor this desire for collaboration.

5. Focus on Personal Development and Education

• Financial Literacy and Education: The next generation wants to understand the financial intricacies that affect their wealth. Family offices increasingly offer educational resources and mentorship programs to help heirs become financially literate and equipped to manage their legacy.
• Life Planning Support: Beyond traditional financial advisory services, younger generations want holistic support that includes guidance on career development, personal growth, and entrepreneurial aspirations. Family offices now provide coaching, life planning, and resources for building their personal and professional lives.

6. Flexible and Adaptive Structures

• Personalized Service Models: As this generational transition unfolds, family offices are adopting flexible structures that cater to individualized needs. Millennials and Gen Z seek advisory relationships that recognize their unique goals, from achieving work-life balance to pursuing specific investment interests.
• Adaptable Wealth Management Practices: Younger generations often prefer more dynamic and adaptable wealth strategies rather than conservative, long-term-only approaches. This requires family offices to offer a range of products and services that accommodate short-term, high-growth opportunities alongside traditional investment vehicles.

Conclusion

Summarizing Jeremy’s timely comments and insights, I would opine that the entire process requires proactive action from Family Offices. It begins with defining the family values and agenda, followed by initiating open communication with their future leaders.

Despite their relative lack of experience, it is very important to make sure they feel heard and to address their concerns and needs. Building trust between generations is essential, as is ensuring clarity regarding accountability and responsibility, and both can be achieved through a deep intentional conversation.

Engaging with the next generation properly ensures a smooth transition from their predecessors when the time comes. By involving them early on, Family Offices can instill a sense of stewardship and commitment to the family's legacy, preserving its sustainability for future generations.

Giving them meaningful responsibilities within the Family Office that allow them to make decisions and take ownership of projects or initiatives is extremely useful. Families can also consider allowing them to explore different aspects of the Family Office's operations and find areas where they can contribute based on their interests and strengths.

The process is not merely a matter of succession planning, but a strategic move for long-term sustainability. By understanding the unique characteristics and aspirations of the next generation, Family Offices can navigate challenges effectively and seize growth opportunities. By being proactive, they can effectively engage the next generation and prepare them for future leadership roles while encouraging a sense of ownership, purpose, and commitment within the family.

As is my custom I would welcome your comments to the thoughts that were shared here today, invite you to connect with me on LinkedIn, and if you prefer, give me a call to discuss.

Sources:

(1)Cerulli Associates, “The Cerulli Report: U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2021”: https://www.cerulli.com/press-releases/cerulli-anticipates-84-trillion-in-wealth-transfers-through-2045

(2) Family Offices: A New Era of Growth, Page 6: ?https://www.ssctech.com/hubfs/website/pdf/2024/Hedgeweek-Family-Offices-New-Era-Growth.pdf

(3) Family Offices: A New Era of Growth, Page 8: https://www.ssctech.com/hubfs/website/pdf/2024/Hedgeweek-Family-Offices-New-Era-Growth.pdf

Knight Frank, The Wealth Report, 18th Edition, 2024

https://content.knightfrank.com/resources/knightfrank.com/wealthreport/the-wealth-report-2024.pdf

(4) Source: 2024 RBC and Campden Wealth Report: Wealth transfer acceleration ramps up for North American family offices | https://www.rbcwealthmanagement.com/en-us/newsroom/2024-09-25/2024-rbc-and-campden-wealth-report-wealth-transfer-acceleration-ramps-up-for-north-american-family-offices

(5) Source: https://www.ocorian.com/news-press-releases/family-offices-becoming-more-professional-face-more-complex-challenges

(6) 2022 Bank of America Private Bank Study of Wealthy Americans: https://www.ml.com/articles/great-wealth-transfer-impact.html

(7) Family Offices: A New Era of Growth, Page 13: https://www.ml.com/articles/great-wealth-transfer-impact.html

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Russell Ballew and not necessarily those of Raymond James . Expressions of opinion are of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance does not guarantee future results.

While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

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Alternative investments are speculative and involve a high degree of risk. An investor could lose all or a substantial amount of his or her investment. There is no secondary market nor is one expected to develop and there may be restrictions on transferring fund investments. Alternative investments may be leveraged and performance may be volatile. Alternative investments have high fees and expenses that reduce returns and are generally subject to less regulation than the public markets. The information provided does not constitute an offer to purchase any security or investment or any other advice.

Sustainable and Impact Investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values-based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.?

There is no guarantee that investments applying ESG strategies will be successful. There are many factors to take into consideration when choosing an investment?portfolio and ESG data is one component to potentially consider.