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  1. Wealth
May 9, 2024

Preparing the next generation is a ‘primary concern’ for family offices

Many family offices globally lack formal succession planning procedures, and there are concerns for the rising generation poised to inherit wealth

By Rory Sachs

Family governance and successful succession planning are seen as top priorities for family offices globally, yet many lack a ‘structured approach’ to preparing the next generation for the future, a report into the international family office sector has found. 

J.P. Morgan Private Bank’s inaugural Global Family Office Report, which surveyed nearly 190 family offices, found that they were embracing alternative investments including private equity and increasingly drawing on external advisers, to help them manage their wealth. The average net worth of the families represented in the report was $1.4 billion.

While the report found that more than 80 per cent of family offices globally offer governance and succession planning services to UHNW family members, only 37 per cent report they hold regular meetings with all members of the family. In addition, only 18 per cent had a family council where family members could make decisions, and only 17 per cent had set up family constitutions. 

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‘A key takeaway from these findings is that while it appears that many families are gathering, a smaller number are actively engaging in strategic governance measures,’ the report read. 

‘This may reflect the fact that many family offices are relatively younger and smaller in terms of the number of households or individuals served,’ it continued.

[See also: The best family office services providers for UHNWs in 2024]

The anxieties family offices have when it comes to the next generation

According to Natacha Minniti, J.P. Morgan Private Bank’s International Head of Institutional Wealth Management, adequately preparing the next generation to inherit their family wealth is a ‘primary concern’ for family offices. 

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‘Interestingly, nearly 30 per cent of respondents lack a structured approach to prepare the younger generation for this responsibility,’ Minniti told Spear’s

‘That is despite the fact that a majority of the surveyed family offices note succession planning and preparing for the next generation as primary objectives while also identifying them as areas where they need help.’

The concern among family offices when preparing the next generation is also borne out in the survey data. More than a third of international family offices reported being 'very concerned' with ensuring that individuals are prepared for the responsibility of inheriting wealth, while a similar number were eager to ensure that inheriting wealth did not lead to complacency.

J.P. Morgan’s report found that decision-making within families tended to be less centralised and more diffused among multi-generational families than what it termed ‘early-stage families’, which 'tend to have more decision-making authority concentrated with the founder or [through reaching] decisions informally, often by consensus.'

[See also: Spear’s Awards 2023: J.P. Morgan Private Bank is crowned Private Bank of the Year – International]

Family offices embracing alternative investments 

Family offices globally are embracing alternatives to drive returns, with an exposure of 45 per cent on average, J.P. Morgan Private Bank found.

The private bank found the average allocation to public equities was 26 per cent, while average fixed income and cash allocations were 20 per cent.

Private equity investments were the most common asset class, held by 86 per cent of family offices, compared to 85 per cent reporting investments in public equities. 

‘This represents a shift we are seeing among many family offices, where greater portions of their allocations are able to take illiquidity risk, in order to achieve greater potential long-term returns,’ the report said. 

Real estate (77 per cent), cash allocations (75 per cent) and investment-grade fixed income are also all popular (62 per cent), while only 9 per cent of family offices reported exposure to infrastructure investments. 

‘Family offices are diversifying their investment portfolios,’ Minniti told Spear’s. ‘This represents a multi-year shift that we are seeing among many family offices. They are more willing to take illiquidity risk.'

A reliance on external advice 

The 188 family offices surveyed by J.P. Morgan Private Bank, which were connected to extended families with an average net worth of $1.4 billion, varied in size and the number of support functions they offered. 

Nearly a quarter (24 per cent) of those surveyed were supporting just one family household, while 26 per cent of family offices were supporting between two and three households, and another 26 per cent were supporting four to five households. 

Four-fifths of all family offices were found to be working with external advisers, although among smaller family offices this figure was 93 per cent.

External advisers were most commonly used for investment management (71%), access to managers (67 per cent), trade execution (62 per cent), asset allocation and portfolio construction advice (61 per cent), capital markets research (61 per cent), portfolio performance analysis (57 per cent) and portfolio risk analysis (45 per cent), the report said.

Researchers added that the availability of high-quality talent also influenced the decision by family offices to outsource. ‘Family offices seeking to hire top investment talent often find themselves competing against large investment management firms, private equity firms and hedge funds,’ the report said. 

Minniti explained: ‘External providers play an important role in the delivery of many services by family offices, particularly those that are more modest in size of assets under supervision and overall staff.’

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