Among a raft of concerns and opportunities, family offices need to monitor costs at a time of considerable economic upheaval, according to the UBS global study on the industry.
The UBS Global Family Office Report 2022 foresees an increase in family offices’ costs over the next three years, with the cost of staff expected to be central to this increase.
According to the report, family offices typically focus on where they can add most value – strategic asset allocation and risk management – as well as the key control function of financial accounting and reporting. As they compete for qualified staff in these areas, family office costs are expected to rise in the next three years, lifted by salaries and bonuses.
It found that more than half of those surveyed expect staff costs – including hiring, salaries and bonuses – to climb. Regionally, 80 per cent of US family offices are expecting increases. Roughly two thirds of both Swiss and Middle Eastern offices have similar expectations. By contrast, 44 per cent of survey respondents in Asia-Pacific anticipate less upwards pressure and 22 per cent of Latin Americans seem far less concerned, the report found.
Staff costs accounted for 69 per cent of the pure cost of running a family office in 2022, according to respondents. IT costs are also expected to rise, as spending increases on software, platforms and cybersecurity. “We do see an inflation in staff costs,” a Swiss family office manager added. “Cybersecurity will also increase in terms of cost,” he said. “It’s a very high agenda point at the board and family level," he added.
Family offices have become more high-profile in recent years for various reasons, such as their desire to attract hot investment ideas from external providers, as well as a general fascination with the affairs of the ultra-rich. Although they don't exist primarily to make a profit, their goal of protecting and building families' wealth means that costs are a vital, if unglamorous, topic. Family offices often face the choice of what tasks they perform in-house and what they outsource. Banks such as UBS often serve family offices with a range of solutions and, ironically, some of the professionals who are brought into these entities formerly worked at such banks.
Shift from fixed income allocations
With high inflation, central bank liquidity flagging and interest rates rising, family offices are also reviewing their asset allocation. They are reducing fixed income allocations and sacrificing liquidity for returns, as they increase investments in private equity, real estate and private debt, the report found.
Forty-two per cent of respondents said they plan to increase direct private equity allocations, the report reveals, while 38 per cent intend to raise investments in private equity funds and funds of funds. Real estate is favored by 37 per cent, while 27 per cent are turning to private debt.
The same report shows that a third of the average family office portfolio was allocated to equities in 2021, 15 per cent to fixed income, 12 per cent to real estate and 2 per cent to private debt. Private equity has continued its steady rise, from a 16 per cent average allocation in 2019 to 21 per cent in 2021, the report said.
“Family offices are keeping pace with a period of substantial transformation. In response to the Covid-19 pandemic, digital disruption and now a war in Ukraine, they are reviewing their options with greater urgency, as a strategic shift toward additional sources of return and alternative diversifiers gains ground," Josef Stadler, executive vice chairman at UBS Global Wealth Management, said. "Against challenging market conditions, family offices see the bigger picture and are applying prudence and innovation to their strategic asset allocation," he added.
Continued focus on private equity
Private equity’s broad opportunity and potential to produce higher returns is popular among family offices globally, the report highlights. Eighty per cent of family offices report that they are investing in private equity, which stands out as the only asset class where the number of family offices making allocations has risen steadily year after year. This is up from 77 per cent in 2021 and 75 per cent in 2020.
Technology and digital transformation
Eighty-four per cent of family offices globally said that digital transformation is the investment theme that resonates most with them. This spans e-commerce, data, artificial intelligence, the cloud and blockchain. Turning their attention to digital assets and distributed ledger technology (“DLT”), a third of family offices either invested in DLT or considered doing so in 2021. A quarter were also investing in or considering cryptocurrencies, the report found.
However, many family offices are investing in digital assets and distributed ledger technology to learn rather than earn, the report states. Aware of the disruptive potential of blockchain, they are keen to understand the technology and its business applications. More than two-thirds say they are investing because they believe that decentralized payments and technologies would be widely used. Similarly, over half of those investing in cryptocurrencies, or considering doing so, want to learn about the technology. The biggest barrier to investing is the lack of regulation, according to half of family offices globally. But the reasons for not investing vary by region. Almost half of family offices in both the US and Switzerland state that they’re worried about cybersecurity and the danger of being hacked.
Just over half of family offices also have sustainable investments. This varies regionally, with the lowest levels in the US (39 per cent) and the highest in the Middle East (70 per cent) and Western Europe (65 per cent). Levels of allocation appear to be stabilizing, as family offices refine their values and objectives at a time when new regulations and standards are sharpening the definition of sustainability.
Due diligence is intensifying, the report adds, as family offices seek to avoid greenwashing, measure impact and define their approach. Exclusions remain the most common tool, continuing to surpass environmental, social and governance approaches such as integration and stewardship, which are growing more popular with other types of institutional investors.
It is the third edition of the UBS Global Family Office Report, for which UBS Evidence Lab surveyed 221 UBS clients globally between January 19 and February 20, 2022. Participants, who were invited using an online methodology, were distributed across more than 30 markets worldwide, with the family offices surveyed averaging a total net worth of $2.2 billion.