This news service talks to the head of the US financial group's global family office practice.

As part of our regular coverage of trends in the family offices space, we interview David Fox, president of Northern Trust’s global family office practice, about his view of the industry and its trends. 

What do you see as the dominant trends in how single and multi-family offices operate (more SFOs merging into multi-family offices, more recruitment of outsiders, taking a higher profile in the media, etc.) and why?
Families are becoming increasingly global in nature, with representation in multiple regions and jurisdictions, often with highly differentiated requirements and protections. Families require the ability to have a global servicing team, as well as expert knowledge of various jurisdictional laws which can benefit them. Additionally, they may face challenges of reporting on a multitude of investments to constituents across the globe and time zones - an external advisor such as Northern Trust can be agnostic and provide them with aggregated reporting capabilities that present a true portfolio view.

Alpha
As markets continue to be challenged and global uncertainty creates volatility, family offices are even more focused on maximizing profitability and returns in all aspects of their business. This means that operational efficiencies are crucial in order to create Operational Alpha. Family offices need decision-ready tools and services on demand that enable them to make thoughtful business and portfolio decisions.  

Families look to maximize profitability and returns in a multitude of ways. Through evaluations called Business Process Reviews, we work with families to directly identify tactical opportunities for improvement, designed to ultimately save cost and maximize value. This consultancy approach is very popular for offices, and often highlights significant opportunities for us to add value.

Additionally, many of our investors look to either alternative or direct investments to provide elevated returns; or portfolio opportunities uncorrelated to direct market volatility (i.e. life insurance) for differentiated returns.  

Recruitment
One trend seen in family offices which are particularly involved in direct investment is that they are recruiting talent with more formal private equity or venture capital experience. Family offices understand that the cost of acquisition for this type of professional is high, but the return can be easily measured, and they may be more inclined to provide that type of incentive.

What do you see as the biggest challenges for family offices today (costs of doing business, recruiting the best staff, getting families to agree on goals, other)?
Family governance
It is critical that a family establish a framework by which they can make decisions regarding their shared assets. This provides a lasting structure that can help remove some of the emotional components related to family assets, and create a governance overview from which decisions can be made for the benefit of the whole family. It can prevent conflicts within the family (across generations or branches), and provide a clear and mutually agreed upon philosophy to guide decision making in the future. 

This framework often takes the form of a family’s governance structure. While each structure is unique, depending on the ownership, taxation, asset type and other factors, the underlying premise is always the same. In order to successfully transition leadership to future generations, families must develop their framework to provide transparency, build communication, trust and generate family unity.

Northern Trust helps clients begin to develop their governance structure by starting with a process of building a “cornerstone statement.” This unique approach consists of three components: values, vision and mission. Developing this statement is a process that begins with a family identifying values they share and actions that express those values. Next, Northern works with families to define what success looks like for them – their shared vision. Finally, Northern helps them develop the steps, or tactics, to get from the values to the vision, which is embodied in the mission statement.

Technology
Technology is also essential in enabling consolidated aggregation/reporting and accurate accounting for family offices. As client portfolios grow, and reporting becomes more complex - resources and budgets remain steady but the need for automation, efficiency and consistency increases. If families don’t have a true portfolio view of their assets, then gaining a true depiction of wealth is very challenging.  

If it’s not aggregated and/or audited, then significant time and resources at the office level are leveraged to do so – further diminishing profits. Not using some of the newer evolving tools most likely means that profit and/or return opportunities that might otherwise be identified could be missed.  Lastly - using the most current reporting reduces overall operational risk in the office - better accounting and reporting tools protect against threats such as fraud.  Also, client communication (reporting to various family members) can be more easily accomplished with streamlined reporting, again raising the efficiency and productivity of the office as a whole.

To address this, Northern Trust introduced an advanced business analytics solution, which provides data visualization and modeling capabilities and intuitive report authoring tools in order to meet these client goals. And, the business continues to invest and expand upon these cutting-edge family office technology capabilities.

Transitions
Family or business transitions can be particularly challenging, even with a strong pre-established governance structure. In polling clients, this type of succession or evolution is consistently ranked a key concern. Without succession plans, either at the office or family level, stewardship of the family assets could be at risk. Particularly for families of significant scope and size, it should be a priority for families to ensure that oversight is secured. Where family members are significantly involved, it’s also important for the office to know who the leading influencers are within the family going forward, to ensure alignment and/or evolve their philosophies.

In response, Northern is strengthening its family office consulting practice, which can help serve a range of needs that clients face during such certain crucial periods, whether it be at the initial stages of starting a family office, to undergoing succession of a long-term leader, and everything in between.

From what parts of the world do you expect to see the fastest growth in family offices and why?
Northern Trust has seen fast growth in many markets – including those that are already developed, such as the United States; as well as those across the globe. Some of the driving forces behind this include the continued trend of wealth creation, business monetization and resulting wealth transfer, which is contributing to the growth of more of these family offices. As markets become more developed and the demand for investment both from within and outside those markets grows, family offices have a unique role to play in helping to facilitate and professionalize that effort. 

There has been a bit of a trend of family offices outsourcing functions, such as the chief investment officer role. Where do you see most outsourcing taking place in coming months and years, and what limits are there to how much can be farmed out? 
A family office gives a family complete control with less regulatory oversight, and provides a hybrid model - one where the family “insources” the office to themselves but third-party experts provide needed services through a combination of insourcing/outsourcing to advisors. As families become more global and generations proliferate, their needs span multiple jurisdictions/tax environments and their requirements become more complex. This complexity is sometimes better serviced through a third party.  

A fully built-out family office looks and feels a lot like a boutique investment management/private bank outfit. When an office comes to GFO, they can choose to either outsource or insource the work that they do. But ultimately, Northern Trust has the capability to service the full spectrum of what a family office does, whether the family office employs two people or 150 people.

While 70 per cent of GFO’s clients have either new or established family offices, 30 per cent do not have a formal family office. For these relationships, Northern Trust serves as the point of continuity between family members and the family’s trusted advisors. This role ensures that a cohesive strategy is being followed across all parties and delivered seamlessly to family members and key stakeholders.

GFO plays a central role in bringing together this ecosystem of advisors, ensuring that the holistic financial picture of the family is considered. While maintaining connectivity across all parties, Northern Trust provides customized services that are important to the success of the family.

A family office has a choice to either hire its own chief investment officer to select investments according to its determined asset allocation model. Or Northern can serve as the office’s chief investment officer, and then will find best in class third-party asset managers to accomplish the office’s goals. As a result of those choices, Northern Trust today has one of the largest outsourced CIO businesses, with more than $100 billion dollars of client money managed third-party but managed by or advised by Northern.

On the investment side, there is a lot of talk and action around private market investing, direct investment that bypasses fund structures, etc. What are the challenges in doing this, given due diligence costs, need for expertise, dangers of over-concentration of some risks, etc.?
Reporting
Family offices that have significant portfolio allocations to alternative investments are challenged to provide effective reporting for these assets. If they are all manually reported/aggregated, (as many alt investments are) there could be errors/inaccuracies in the reporting, which reduces profitability, increases risk and diminishes returns at the family office level. Northern Trust’s recently developed Front Office Solutions (FOS) offering allows clients to model and review their non-transparent and illiquid assets. This forward thinking offering alleviates operational burdens and provides their investment teams with improved decision support information.

Identifying opportunities
Private banks might try to serve as an identifier for family investment opportunity. In our view, there is tremendous potential directly between families, and the business leverages some of its marquee networking events for families to help identify such opportunities. For example, The Global Wealth Alliance was established to bring together Family Office Executives who oversee the largest family asset pools in the world. This select group of individuals meets twice a year to network, exchange information, opinions and experiences with their peers in a confidential environment. 

The Global Wealth Alliance was developed to be an opportunity for family office CEOs to gather together, and in one room, harness the power of that network to share best practices and engage with experts on key issues in the family office space. The meeting provides clients with access and insight that helps them best serve their family principals, as well as help them leverage and optimize practices from their peers across the globe.

Additionally, as many of these original families made their money by owning and operating companies, there is a trend among the larger families to get back to being involved in and investing directly in businesses, versus investing in public market securities.

How significant in your view are family offices as players in fields such as impact investing and sustainability?
Impact investing and sustainability is growing in part due to the wealth transfer to the next generation. Many of the members of this group don’t just want to be involved in philanthropy, but also want to focus their efforts on engaging in and measuring overall global impact, as well as mirroring their overall ethical values. As a result, we have observed more asset management firms focusing on this issue.

Northern Trust has implemented an investment strategy called Quality ESG, which focuses on both quality as a factor, ESG best practices and low carbon. This tactic has been popular and well received by many global family offices.

Family offices have their vulnerabilities around physical and digital security, and require help. How serious is the issue of cybersecurity, for example, given the often large sums that FOs oversee? 
Cyber threats and fraud are two of the most significant risks to family and private investment offices, and threats are constantly evolving. Offices are evaluating their risks, performing gap analyses and implementing added and enhanced controls to mitigate risks. Holistic (physical, travel, cyber) security reviews are becoming more common. This is a critical component of safeguarding client assets and security.

Because security and confidentiality is of paramount importance to both us and our clients, Northern Trust employs a range of technologically-advanced physical and data security measures. While no firm can guarantee total security, Northern Trust takes some of the most extensive precautions to protect our clients' information.