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Family offices move up the wealth spectrum, push for sophisticated investment
A growing number of family offices are managing more of their asset base internally and “professionalising” their investment functions, according to Citi Private annual survey of hundreds of family office professionals from around the world.
But the trend is more pronounced in family offices managing more than US$500 million, which – as a consequence of their growing complexity – are beginning to “mirror the behaviour of leading institutional investors”.
“While family offices are innately unique, (the) survey demonstrates that there are many commonalities around their concerns and behaviours,” said Alexandre Monnier, family office advisory head in Citi’s global family office group. “Findings like these unveil the new ways family offices are managing their wealth – through portfolio diversification and sophisticated investment approaches – and preparing families to achieve both financial and family wellbeing.”
Twenty per cent of family offices in the Citi survey used an entirely outsourced investment model, while 32 per cent had an in-house team working in partnership with external managers. Of the 48 per cent using an in-house investment team, 52 per cent were managing more than $US500 million – something that makes “intuitive sense” given that building and maintaining internal teams is more cost effective with a larger asset base. Beyond investments, larger family offices were also less likely to look outside the organisation for “specialised expertise” in areas like tax management and wealth planning, while this year’s survey saw a sharper focus on the internal provision of family education – though services like lifestyle management are still largely the purview of external advisers.
And while family offices historically haven’t embraced institutional techniques, that’s changing too; a third of the 70 per cent of family offices that reported owning concentrated positions – usually a legacy of the wealth creation process itself – were considering active strategies to manage the related risks, while three quarters were leaning towards derivative solutions and the rest “toward outright sale”.
With greater complexity comes the need to manage it. Three quarters of respondents were performing periodic reviews of performance and rebalancing and establishing a “transparent and regular” reporting process, while 60 per cent had established investment committees (60 per cent) and investment policy statements (52 per cent) – all shifts that were more pronounced at larger family offices. Robust due diligence processes and risk management frameworks remain at “surprisingly low levels” despite their importance, though size was again a factor in how much consideration a family office gave them.
Families that had reached the third generation or beyond since their wealth was created were also much more likely to have an in-house CIO compared to first- and second-generation families.
“This is consistent with our experience of many first-generation families, who are often keen to take a hands-on approach to investment management and are thus reluctant to cede control to professionals. As wealth and the family become larger and more complex over time, however, this typically changes.”
