Ultra-high net worth families expect more than ever from their family offices. Amid intensifying demands and external challenges, many family offices are adding further structure to their approach.

The authors are Hannes Hofmann & Alexandre Monnier from Citi Private Bank’s Global Family Office Group. The editors are pleased to share these insights; the usual editorial disclaimers apply. Email burroughes@wealthbriefing.com

Alongside the surge in global wealth, the number of family offices in existence has grown rapidly in recent years. At the same time, their responsibilities continue to accumulate. Traditionally, family offices were often focused on wealth management - such as investment and wealth planning - and lifestyle support - including travel logistics and household management. Now, though, these dedicated teams of specialists are increasingly relied upon in vital matters of family governance, unity and continuity. 

Citi Private Bank recently explored these and many other issues in its 2023 Global Family Office Report.  which probed the views of senior figures from 268 leading family offices worldwide. It asked respondents for detailed insights into their investment positioning as well as their main focuses and the top concerns of the families they serve.

A shift in priorities
Family offices cited wealth and investment management as their top focus in 2023, at 74 per cent and 55 per cent respectively. But only 21 per cent mentioned fostering family unity and continuity, making it their fifth priority. This marks a shift from what the firm heard in last year’s report, when it was respondents’ second priority. Other focuses included operating businesses and accounting.

The families whom they serve also prioritize wealth preservation, with 68 per cent having this as their top concern. However, they were conspicuously more concerned with preparing the next generation (60 per cent) and ensuring shared goals and vision (52 per cent) than their family offices.

So, why the divergence between family office focus and the concerns of families in 2023? Despite the lack of alignment on this issue, the firm did not believe it to be a result of disagreement. Instead, family offices have faced acute challenges of late when it comes to wealth management. Amid stubborn inflation and rising interest rates, equities and fixed income declined together on an annual basis for the first time in many years in 2022. A widely expected recession then failed to appear in early 2023, while financial markets rallied, also taking many investors by surprise.

Given these testing conditions, it seems likely that family offices have had little choice but to pivot their attention to the most pressing issues confronting them. This is supported by the insights they offered into their portfolio moves, which were the most significant in recent years. Among the standouts were shifts into fixed income (for 51 per cent of respondents) and private equity (38 per cent) but somewhat away from public equity (38 per cent). They also stressed their ongoing commitment to direct investments in private companies (80 per cent). But while about two thirds of family offices are seeking new opportunities in this area, about one third are pausing their direct investing activity due to economic uncertainty.

Despite the preoccupation with such wealth management challenges, this is not to say that they consider fostering family unity and continuity to be inessential. A similar phenomenon was evident during the Coviid pandemic and Global Financial Crisis of 2008 to 2009. Subsequently, though, family offices were able to devote more time and resources to family matters.

Adding further structure to family offices’ approach
Faced with the great expectations of the families whom they serve, family offices are seeking to bring further formalization and structure to how they function. We describe this process as “professionalization.” Typical features include separating the family office from the family business, hiring more wealth management and other specialist talent, and pursuing ever more formalized operating procedures.

Most progress appears to have been made in professionalizing family offices’ investment function. Some 64 per cent of respondents reported having an investment committee for making key decisions on asset allocation, portfolio management, performance monitoring and the like. And half said they had an investment policy statement, the roadmap setting out such elements as goals, risk tolerance and process.

Nevertheless, there was still room for improvement. For example, most family offices still rely on Excel spreadsheets for consolidated reporting, with only 43 per cent deploying specialist software. 

Other family office activities beyond investing are taking longer to professionalize. While separation of the family office and the business and having clear processes and internal controls are the norm at 70 per cent and 66 per cent respectively, just one in three family offices have created a leadership succession plan. This is somewhat concerning, since we learned in last year’s survey that half of respondents expected leadership succession within the next five years. Establishing governing boards and other such requirements are also behind the curve.

The slowest area to professionalize is the activities of families themselves. This is perhaps unsurprising: family relationships tend by nature to be more informal, even when it comes to making important decisions. As with their family offices, families’ adoption of leadership succession planning remains at just 28 per cent, with another 31 per cent “working on it.” And just one in five families have an educational program to prepare the next generation, despite 60 per cent reporting that readying the next generation for responsible ownership was a key concern.

Other elements of professionalization are also advancing gradually. Around 32 per cent of families have created a family constitution or charter, a formal document that sets out such things as the family’s values, vision and governance structure. Some 30 per cent of families now organize an annual retreat, a formal gathering at which generations and family branches can come together and engage in structured discussions, perhaps facilitated by family office executives and external consultants. Such developments emphasize an increasing desire among ultra-high net worth families to embrace a more strategic approach to protecting and growing their wealth and ensuring a shared vision. 

Further aligning families with their family offices
Family offices face a broad array of challenges in the years ahead. Disruptive forces such as technological change, deglobalization and geopolitical tension present a complex external environment, which could impact family businesses and financial assets in many ways. At the same time, families’ expectations of their family offices have never been greater, both in terms of wealth management and other vital family issues.  

To align family offices with the families they serve more effectively - and to identify potential opportunities along the way - we believe that further professionalization is vital. Serving over 1,800 single family offices, private investment companies and private holding companies, including family-owned enterprises and foundations across 77 countries worldwide, Citi Private Bank’s Global Family Office Group looks forward to guiding on this journey. 

About the authors
Hannes Hofmann is a Managing Director at Citi Private Bank and Global Head of the Global Family Office Group. Alexandre Monnier is the Global Head of Family Office Advisory, part of the Global Family Office Group at Citi Private Bank.

Methodology
This information is a summary of Family Office Survey responses collected from Citi Private Bank Family Office clients from June 7 to  August 9, 2023. This article is for informational purposes only based on those responses from the survey and are not intended to represent investment advice.

Disclaimer
Views, opinions and estimates expressed herein may differ from the opinions expressed by other Citi businesses or affiliates. The information contained herein is not intended to be an exhaustive discussion of the concepts mentioned herein or tax or legal advice. Readers interested in the concepts should consult their tax, legal, or other advisors. You can read our full disclaimer here.