The investment issues confronting family offices, such as a switch to private markets, through to current volatility, collectibles, and impact, were put under the microscope in the annual investment forum in New York, hosted by this news service.

Wealth managers and vendors received both practical advice and updates on major industry trends at Family Wealth Report’s annual Family Office Investment Forum in Manhattan last week.

Wealthy families are increasingly mobile across international borders, said Simran Sandhu, executive vice president for Citco Group of Companies, a trend also noted in this publication’s recent report on the Latin American market based in Miami, Florida.

Despite recent headlines, family offices continue to be interested in impact investing and ESG investments, Sandhu said. A more concerning trend, according to Ernesto Mairhofer, head of private wealth and family offices for Citco, is the fact that only one-third of family offices have put a succession plan in place.

One potential way to reverse the trend, suggested Fredda Herz Brown, founding principal of Relative Solutions, is to position the process as more of an organic transition that allows children in the family to make decisions, rather than a more formal “succession.”

Shift to private markets
The accelerating shift of family office investments and portfolios into private markets has been a major industry trend, noted Mike Raso, co-founder and managing partner of Conduit Private Partners. Indeed, family offices are stepping up their due diligence to unlock and access private capital markets, according to panelists Claire Champy, vice president at Atlas Innovate, Gareth Lewis, founder and co-chief executive of Delio and Mrinalini Lhila, founder and managing principal of 360 Capital Advisors.

Nonetheless, family offices overall remain “underinvested” in private markets, with private equity and venture capital accounting for only about one-fifth of family office investments, said Maxime Seguineau, founder and managing partner of Raido Capital Partners, who moderated the session on private markets. 

When doing due diligence on private companies, seek out experts who have differing viewpoints, Champy cautioned. And beware of two “red flags”: companies going after too many verticals and companies who claim they’re about to sign a “very large” client.

Investing challenges
When it comes to investments, veteran family office executive Neil Nisker, co-founder, executive chairman and CIO of Our Family Office, warned that today’s volatile environment poses “greater challenges than any time in the 53 years I’ve been doing this.”

Nisker pointed out flaws in the vaunted Sharpe Ratio, noting that the ratio didn’t consider unpredictable ‘black swan’ events: “what used to be a one on 100 years event now happens every year.” He went on to tout his own SIR Ratio, which he defined as performance divided by volatility. 

The best investment strategies aren’t flashy but more like “watching paint dry,” Nisker maintained. And when looking at venture capital funds, he advised family offices to only invest with “top decimal managers.”

Buying assets isn’t the only way to think about investing, Peter Culver, co-founder of Freedom Family Office, reminded the audience in a presentation arguing that paying less in taxes is a “powerful investment most investors overlook.”

“The biggest risk to wealth is paying taxes,” Culver told the audience. He urged family offices to focus on reducing taxes on ordinary income, capital gains and estates by using a variety of structures and strategies such as buying private placement life insurance and using solar tax credits.

“Phenomenal growth” of collectibles
The “phenomenal growth” of collectibles as an asset class has been another major investing trend, according to Thomas Ruggie, founder and CEO of Destiny Family Office.

Brian Hughes, the longtime consultant who is now president of Eton Advisors, moderated the provocative panel “You’re dead! Now, what happens to your prized collectibles?”

Collectors need to tell their family what’s in their collection so there are no surprises, said Matthew Erskine, owner of Erskine & Erskine law firm, reminding the audience that families have nine months to have the collectibles appraised  for the Internal Revenue Service. “There are two aspects to a collection,” Erskine said: “the actual object and the market value of the object.”

Mindful that capital gains tax on collectibles is 28 per cent, many surviving family members would rather give an object away than sell it. But Erskine said it’s a mistake to assume that a charity would want to receive a collectible as a gift. 

Erskine also stressed that collectibles are an unregulated market, and Ruggie compared the asset class with the illiquid real estate market. “You can make money if you hold on for a while,” he said, “but you can’t sell right away.”

Prodigal sons and daughters
The Forum’s final session, moderated by Joseph Reilly, CEO and founder of Circulus Group, touched on a sensitive topic: “What to do when your children don’t want to run the family office.”

One tactic family offices can take, according to Relative Solutions principal Fredda Herz Brown, is to have a transparent process to evaluate which of the family’s children is best suited to lead the family office, ideally including a third party who is not a family member.

Brown also urged families to maintain relationships with children who don’t want to be part of the family office. While these children may have no interest initially, they may change their minds as they get older, she said. “But if you don’t stay connected,” she warned, “they will never come back.”