Here, Robert Casey, senior managing director of Alliance Research, and Thomas Livergood, founder and chief executive of The Family Wealth Alliance, explore what they see as the biggest trends in family wealth, touching on areas including integrated financial planning, client complexity, and security and risk management.

Introduction

Akin to estate planning in the ‘70s, investment planning in the ‘80s, financial planning in the ‘90s, and wealth management in the last decade, family wealth has emerged.  Serving approximately 35,000 households with over $5 trillion of assets, it is a force.  Known by different monikers such as family office services, multi-family offices and the like, the family wealth industry continues to evolve.  In this review, we highlight some of the most significant trends shaping that evolution, starting with the first four.

A renewed emphasis on integrated financial planning

Wealth management started out as a branch of financial planning. The idea was to apply the disciplines and techniques of comprehensive, integrated planning to the particular needs of wealthy households. It went far beyond investments, addressing such issues as wealth transfer, asset protection, tax planning, risk management, and charitable legacy. This integrated approach was the essence of financial planning, as Harold Evensky made clear in his groundbreaking 1997 book Wealth Management. To be sure, Evensky didn’t coin the term wealth management. Nonetheless, he placed it firmly where it belonged. “I have little doubt,” he wrote, “that wealth management is a specialty of financial planning.”

In the ensuing years, things changed. Investments came to the fore, powered by rampaging bull markets. Integrated planning - unglamorous and costly to provide even though wealthy clients benefit greatly from it - receded in importance. It became common and remains so today for many firms to offer investments and nothing else, yet to call themselves wealth managers. Who needs comprehensive, integrated planning?

Well, not so fast. In a welcome turn, financial planning is making a comeback and shows signs of reasserting its rightful place as the foundation of wealth management. This trend is evidenced by a renewed emphasis on identifying and achieving the family’s financial and personal goals. It has been heralded by use of such terms as holistic planning and goals-based wealth management. Goals are identified and prioritized, then resources are directed to each of them as needed to make sure they are accomplished within the intended time horizon. Progress toward each goal is tracked and investments supporting individual goals are put on their own “glide paths” to reduce their risk profiles as the time for spending the assets approaches.

This development is a win-win for both firms and families. Firms are focusing on the service where they can add the most value - integrated planning - though they are often challenged to demonstrate that value to clients. As investments become further commoditized and compression of asset management fees persists, they will be in a better position to maintain their profit margins. As for the families, they will be more likely to achieve their financial and personal goals, a welcome outcome.

The challenge of increased complexity

Family wealth firms are grappling with the issue of increased client complexity. This issue plays out in two ways. The first is that firms must use resources to build sufficient staff expertise to be able to give clients the professional advice they need to handle their increasingly complex financial lives. That’s expensive. A second and equally important challenge: firms must be able to gauge and put a price on a given level of complexity in order to deliver their services profitably. That’s risky. Unprofitable relationships where the price has been set too low can bleed a firm dry.

Why are client lives becoming more complex? Many factors combine to move the complexity needle upwards. Longevity is a big one, for example. Increased longevity has added an extra living generation to many families, complicating wealth transfer planning and family governance, and prompting families to require more services. Example: many client families now ask their wealth management providers for help with eldercare arrangements and administration, adding to the service menu and prompting the need for additional staff expertise.

Investments are more complex, and esoteric strategies require greater expertise to evaluate than plain old stocks and bonds. Taxes on investment income are dramatically more complex than two decades ago. And tax compliance is more onerous. One example: clients with overseas income, assets, bank accounts or just about any foreign financial nexus now need assistance in avoiding the dangerous shoals of Foreign Bank Account Reports (FBARs) and the Foreign Account Tax Compliance Act (FATCA). Another complicating factor: the trend toward multiple ownership entities to hold family assets. Use of multiple entities may be motivated by wealth transfer, tax, or asset protection strategies, or a family’s penchant for direct ownership of multiple businesses.  In any case, these factors and more play off each other and compound complexity.

As noted, complex clients pose a challenge to firms when pricing relationships. Multi-family offices participating in a recent Alliance Research study cited the pricing of complex non-investment services as their number two overall challenge related to fees and pricing. The number one challenge was communicating value in the context of price (source: Inaugural Fees and Pricing Study, Aligning Price with Value Delivered: The Challenge of Family Wealth, 2015.) Cost and complexity of client requirements were also listed the most important factor both in setting overall pricing policy and in coming up with a fee for a particular client.

As client needs get ratcheted up by growing complexity, firms that are able to meet those needs and provide essential advice will prosper. The challenge for firms is to marshal sufficient resources and price their services correctly.

Security and risk mitigation for private families

Thieves and foreign mafia groups are making increasing use of the Internet to rob, defraud, and embarrass. Among their favorite targets: US-based single family offices, along with private family businesses and wealthy households. Security breaches at these private family enterprises rarely make it into the news. Many are not reported to law enforcement because the families fear the spotlight of publicity will just bring them more trouble.

Security experts offer myriad reasons why private family enterprises might be more likely to be targeted than commercial businesses of similar size. One is simply that they are less likely to have adequate security in place.  In particular, they may think that keeping a low public profile will prevent them from being targeted. Unfortunately, that too often proves not to be the case. Cyber crooks, fraudsters and other criminals have found that private family enterprises offer “minimal risk for maximal gain,” in the words of one security expert.

Threats to wealthy families take many forms. Some are chronic but nonetheless very serious. For example, a recent Alliance Research study found that sustainability of their organizations was perceived as the number one risk facing single family offices, and a chronic ongoing concern (source: Opportunity for Education, Report on the Inaugural Security Study 2012: An Opportunity For Awareness, The Family Wealth Alliance, 2013.) Other risks are acute, like travel and health risks, or when a natural disaster strikes. Yet others are unforeseen, such as identity theft via cyber breach, or when fraud silently occurs over time, or when a family’s good name erodes due to reputation management neglect.

What can be done? Networks used by wealthy families have become a favorite hunting ground. Private family enterprises may lock the doors at night to keep the premises safe, but most have not done enough to secure information against those eager to steal and profit from it. The first step is to get expert help to set up a security plan. It starts with a thorough diagnosis and assessment of all risks.  Operational risks for the family office must be identified and addressed. Personal risks also need attention. For example, family members may want to establish contingency plans for emergency medical treatment or personal security assistance when they travel. Finally, families should be concerned about managing privacy and the online reputations of family members. One step is to ascertain all personal information available about them on social media or anywhere else on the Internet, and take steps to limit further exposure going forward.

Still seeking better investment outcomes

The year 2008 recedes in time, but the frustration lingers on among family wealth investors. They have had their fill of costly, illiquid investments that neither enhance return nor reduce risk—the kind of investments that bombed during the financial crisis and have proved unreliable in the years hence. Many funds of funds are on the Endangered Species List. Hedge funds are still credible (some strategies at least) but face increased skepticism. Passive index funds, long a favorite of institutional investors, are finding their way into family portfolios because of low cost, predictability, transparency, liquidity, etc. They provide cheap beta and are usually supplemented by full-price alternative strategies expected to find alpha. It’s a sensible approach but hardly exciting.

Two areas of excitement recently have been direct private equity deals and impact investing. Some families are comfortable in buying and operating businesses, on their own or with other families as partners. These direct deals avoid the fees, lack of control, and lack of transparency that go with private equity funds. The liquidity is not great, but probably not any worse than a 10-year lockup in a private equity fund. And there’s an added benefit: they help keep alive a family’s entrepreneurial spirits. “Doing direct deals may positively impact family office sustainability and longevity by making families more proactive participants in and determinants of their continued existence,” says Daniel Goldstein, a family office consultant based in Santa Barbara, CA (source: Interview with Kirby Rosplock - New Trends in the Family Office Landscape).

Impact investing, another hot area, is a venture capital-like strategy that aims to generate both a financial return and measurable social or environmental gain. It’s particularly popular with younger family members because it can be meshed with charitable or social values. Says Goldstein: “The greater attention to deploying capital in coherence with family values will also positively impact family office sustainability and longevity because it will create greater affinity in a family’s ecosystem, even as that family increases in size and geographic dispersion.