Succession planning also remains a focus, and attitudes towards artificial intelligence begin to materialize
TORONTO/NEW YORK, November 28, 2023 –North American family offices shifted to more conservative wealth preservation strategies due to economic turbulence in 2022 and 2023 to date. Their focus was also on succession planning, increased private market investing, and interest in artificial intelligence along with other emerging technologies, according to The North America Family Office Report 2023 by RBC and Campden Wealth.
Despite challenging markets, almost half of respondents reported an increase in assets under management (AUM). That growth could be explained by proactive tactics adopted by three-quarters of family offices, such as shortening the duration of bond portfolios, reducing borrowing and mitigating the impact of rising interest rates. The collective AUM across North American family offices increased to an estimated US$189 billion with an average portfolio return of 1%, down from 15% in the past year. Family office averaged 2% in returns globally – much smaller than the 13% seen in the previous year.
Investment strategies also changed with 38% of North American family offices being focused on growth as their primary strategy, down from 48% in 2021. Wealth preservation was the primary investment strategy for 18% compared to 13% in 2021. Private market investments are now the largest held asset class held by family offices, continuing its growth trend from previous years.
“We are encouraged to see that North American family offices are approaching a challenging global economy with thoughtful and proactive measures,” said Manju Jessa, Head of Family Office & Strategic Clients, RBC Enterprise Strategic Client Group . “Thanks to the insights provided by survey participants, our clients and their families will be even more prepared to build, preserve and steward their wealth for the future.”
Potential risks surrounding inflation, the U.S. economy and geopolitical tensions significantly influenced investor psychology.
When surveyed about which of these threats is most likely to materialize in 2023, a striking 59%of respondents pointed to a U.S. recession (though to date, it has not). Following recession risk, respondents highlighted tensions between the U.S. and China (47%), as well as two closely intertwined scenarios – the continued absence of inflation deceleration (39%) and the risk of excessive tightening by the Federal Reserve (42%) – as concerns.
These worries fueled firmer cost control for North American family offices– with 22% spending less than the year before, primarily by reducing discretionary expenditures and staff compensation.
The focus on investing in private markets also increased, now making it the largest-held asset class for family offices. Private market investment made up 29% in average portfolio share, up from 27%. This shift can likely be attributed to the appeal of alternatives such as real estate, commodities, and hedge funds can be widely recommended as effective hedges against inflationary pressures.
Cash and equivalents held by family offices worldwide grew from 5% to 9%, reflecting their prudent approach amidst volatile and risk-averse markets.
“Private markets are indeed perceived as a safe harbour,” said Adam Ratner, Director of Research, Campden Wealth. “Despite the challenging investment landscape of 2022, private markets allocations surged to 29 percent of the average North American family office portfolio according to our data set. This growth suggests that family offices view private markets as resilient and attractive in uncertain times. These asset classes ranked at the top for growth potential amongst respondents.”
While many North American family offices feel well prepared for the future, only 41% have a written or informal succession plan.
One of the challenges is many perceive next-generation family members as either inadequately qualified (54%) or too young (46%) to assume leadership roles.Another obstacle is family matriarchs or patriarchs unwilling to cede control, a concern raised by 29% of respondents. When it comes to why some of these concerns haven’t been discussed, 33% feel addressing these sensitive issues will be uncomfortable for senior family members.
Family offices agree earlier succession planning is needed. Introducing the next generation to family values was highly prioritized by 92% surveyed and encouraging interaction with the family office was a close second at 84%.
“It’s imperative to start having conversations about family values and priorities early and often with the next generation to help preserve the family’s wealth,” said Angie O’Leary, Head of Wealth Planning RBC Wealth Management – U.S. “Those discussions will change over time, but early and open conversations, along with a well positioned succession plan, are essential to prepare the next generation to inherit the responsibility for the wealth and carry out the family’s legacy.”
Wealth aggregation platforms and related software, designed to offer a comprehensive view of an organization’s financial landscape by consolidating data from multiple banks and investment managers, are emerging as valuable tools for family offices. While adoption levels are currently modest – as just 38% use wealth aggregation platforms – there is growing interest among family offices in harnessing the capabilities of these tools.
Through their private equity portfolios, family offices also find themselves involved with exciting emerging businesses that harness cutting-edge technologies. Private equity funds, in particular, offer family offices a comprehensive exposure to a range of these innovations.
Artificial intelligence has garnered substantial interest, with 31% of North American family offices seeking to increase their investment involvement, and 14%intending to initiate exposure. Healthcare and digital transformation are already popular technology sectors, with 81% and 76% already invested in those sectors.
Responsible investing is gaining momentum among North American family offices as well, with 41% actively engaged in this strategy, up from 34% in 2021. The proportion of portfolios dedicated to responsible investing has also increased over the years. In 2020, the family offices in North America who engaged in responsible investing dedicated an average of 16% of their portfolios to responsible investments. This has grown to 17% and is expected to rise to 28% in five years’ time.
Motivation behind responsible investing varies, but the top two reasons cited by North American family offices were the increasing recognition of the importance of sustainability and that demonstrating family wealth can be invested for positive impact.
“More ultra-high-net-worth families want to align their investment strategies with their values,” O’Leary said. “They also understand that responsible investing strategies expand their choices on how they construct their portfolio and may help them achieve their desired financial outcomes.”
All results noted above can be found within The North America Family Office Report 2023.
The data for this series was collected between April and September 2023. This data includes a survey that was completed by 330 family offices worldwide, with 144 (44%) being from North America. In-depth interviews were also conducted with 31 family office executives, with 13 of these being from North America. Single and private, not commercial, multi-family offices were included in the analysis this year. The report defines multi-family offices as entities that serve no more than eight families and whose core family holds at least 50% of the family office’s total AUM.
RBC Wealth Management directly serves affluent, high net worth and ultra-high net worth clients globally with a full suite of banking, investment, trust and other wealth management solutions, from our key operational hubs in Canada, the United States, the British Isles, and Asia. The business also provides asset management products and services directly and through RBC and third-party distributors to institutional and individual clients, through its RBC Global Asset Management business (which includes BlueBay Asset Management). It also includes our Investor Services business. RBC Wealth Management has over C$5.5 trillion of assets under administration, over C$1 trillion of assets under management and more than 6,000 financial consultants, advisors, private bankers, and trust officers. For more information, please visit www.rbcwealthmanagement.com.
In the United States, RBC Wealth Management operates as a division of RBC Capital Markets, LLC. Founded in 1909, RBC Wealth Management is a member of the New York Stock Exchange, the Financial Industry Regulatory Authority, the Securities Investor Protection Corporation, and other major securities exchanges. RBC Wealth Management has $544 billion in total client assets with more than 2,100 financial advisors operating in 190 locations in 42 states.
Campden Wealth is a family-owned, global membership organization providing education, connectivity, research and networking opportunities to families of significant wealth, supporting their critical decisions, helping to achieve enduring success for their enterprises and family offices, and preserving their family legacy.
Campden Research supplies market insight on key sector issues for its client community and their advisers and suppliers. Through in-depth studies and comprehensive methodologies, Campden Research provides unique proprietary data and analysis based on primary sources.
Campden Wealth owns the Campden Club, a private, qualified and invitation-only members club representing multi-generational business owning families, family offices and private investors across 39 countries, and the Institute for Private Investors (IPI), the pre-eminent membership network for private investors in North America. Campden further enhanced its international reach with the establishment of Campden Family Connect PVT. Ltd., a joint venture with the Patni family in Mumbai in 2015.
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