Education and Succession Planning Become Higher PriorityNew research from Northern Trust and Wharton looks to better understand the financial performance and operational strategy at family offices.
January 09, 2019 — CHICAGO–(BUSINESS WIRE)–Private and public equity allocations drove strong returns for family offices over the past three years, according to a new report released by Northern Trust Global Family Office and Private Investment Offices Group (GFO) and the Wharton Global Family Alliance (GFA). Year-over-year, capital allocations to public equity and private equity have increased, while allocations to fixed income and hedge funds declined.
During the period studied, there has been a steady increase in private equity principal investments by family offices. Within these investments, 42 percent of families participated in an exclusive “club deal” in which they co-invest with one or more families, without involving a private equity firm. Increasingly, family offices are also investing alongside a private equity firm in which it is already a partner on a deal-by-deal basis. Looking ahead, respondents predicted that private equity will be a significant contributor to future returns.
This report—the summary of a comprehensive survey conducted by the Wharton GFA—draws on insights from four years of Wharton studies undertaken to better understand the financial performance and operational strategy at family offices. While family offices place high importance on future portfolio results, this year’s respondents emphasized that success also centers on education and succession planning for their family, and talent acquisition for the office.
‘Alpha’ comes in many forms
“We’re excited to announce this new report as part of our wider efforts to deepen our support for family offices,” said David W. Fox Jr., president of Northern Trust Global Family and Private Investment Offices group. “Since the inception of our unique partnership with Wharton GFA, we have facilitated access to quality, industry-leading research for family offices, with this survey highlighting that ‘Alpha’ comes in many forms outside of just the investment portfolio. We look forward to continuing our partnership with Wharton to develop reports for family offices in the year ahead.”
“Our collaboration with Northern Trust comes at a critical time: we are entering the greatest wealth transfer in history,” said Raphael (Raffi) Amit, Founder and Chairman of the Wharton GFA and Wharton’s Marie and Joseph Melone Professor and Professor of Management. “This report further highlights the complexity of running a successful family office, and the symbiotic relationship between financial performance and family harmony to foster sustained prosperity.”
Managing the Family
Family offices are increasingly focused on the importance of a holistic wealth management approach that goes beyond investments. Commitments to educational programs have increased since the previous year, and family offices look to vendors such as private banks to help prepare the next generation for leadership. Reinforcing the importance of education, respondents favored a merit-based approach to succession, with more than 50 percent indicating that expertise in managing family dynamics is the leading factor in succession planning. This year’s sample of family offices are more focused on promoting leaders with emotional intelligence and business expertise than on age and seniority.
Talent and Tech
Family offices are in search of highly qualified and deeply experienced professionals who can navigate the increasingly complex regulatory and capital markets environments. For offices themselves, many are relying more heavily on personal referrals to recruit top talent, noting a nearly 50 percent decline in the utilization of head-hunters and vendors from 2014 to 2017. With experienced family office workers in high demand, the report also illustrates an increase in the incorporation of non-monetary perks, such as attractive work environment and benefits, into family office incentive packages. Notably, the importance of investment with a social/ethical dimension as a talent incentive has nearly doubled over the past three years.
Technology continues to be critical to a family office’s ability to enhance productivity and expand operations, and they are willing to invest to get the best experience. When selecting a financial technology platform, survey respondents indicate that adaptability and ease of use are their top priorities, more so than cost. As technology’s role increases, family offices are leveraging the efficiencies to widen their scope. Relative to past surveys, the median family office grew in the number of professionals employed, number of households serviced and number of custodians.
2018 Family Office Benchmarking Report Methodology
For the purposes of the survey, a family office is defined as a professional organization, owned and controlled by a wealthy family, dedicated to managing the personal and financial affairs of family members. Respondents of the survey span 17 countries; 40 percent have more than $1 billion assets in under management.