As published by IFC Review, Wednesday 31st July, 2024.
One of the most wide-reaching developments in the family offices landscape at present is the ‘great wealth transfer’. The transition of wealth from older generations to millennial and Gen Z inheritors is estimated to total $90 trillion over the next 20 years in the US alone, according to Knight Frank’s 2024 Wealth Report. As wealth changes hands, we should anticipate fundamental changes in the investment philosophies and methodologies of family offices. Broadly speaking, the next generation of wealth holders have a strong familiarity with technology and a profound interest in social responsibility, having grown up in the digital age under the looming threats of climate change and global pandemics. As next gens assume more prominent roles within family offices, their technological-fluency and focus on impactful investments are already becoming key themes for the operation and investment strategy of family offices.
The role of technology within family offices
As next gens gradually exert greater influence in the family office market, their digital literacy is giving rise to the integration of new technologies to optimise efficiency and decision-making processes. An early example of this digitalisation in the market is the emergence of virtual family offices (VFOs), which operate without a fixed physical location, using cloud-based technology and digital platforms to manage assets, provide services, and connect with expert advisors on an ad hoc basis. This model provides a greater degree of flexibility and cost-efficiency to suit next gen-wealth holders and can be particularly attractive for digital nomads who lack a fixed base.
The family office model is evolving into a ‘one-stop shop’ for a wider range of matters including investment strategy, succession, property management, concierge services, record keeping, accounting and tax reporting. Innovation is a key driving force for this transition, as the tools available to family offices evolve to facilitate day-to-day operations. For instance, cybersecurity and data privacy have become top priorities for family offices, given the sensitive nature of financial and personal data they possess. Sophisticated cybersecurity measures, including multi-factor authentication, encryption, firewalls, and continuous monitoring software, are being employed to protect against cyber threats and data breaches.
RegTech (regulatory technology) helps family offices navigate the complex landscape of compliance and regulatory requirements, especially for international structures since regulations can vary dramatically between jurisdictions. Automated compliance tools, real-time monitoring systems, and AI-driven analytics can be called on to assist family offices in meeting the legal standards of each jurisdiction in which they operate and reduce the risk of regulatory breaches.
In portfolio management, family offices take advantage of new investment platforms and risk management tools to provide real-time analytics, track the performance of their investments and make informed decisions. AI and machine learning algorithms are further enhancing these capabilities by identifying trends and opportunities in the market. Meanwhile, technology is diversifying the operations of family offices beyond investment management. High-net-worth families often require bespoke concierge services ranging from travel arrangements to lifestyle management. Digital platforms and AI-powered personal assistants (like Google’s Gemini AI and Microsoft Co-Pilot) are streamlining these services in managing schedules, facilitating bookings, and catering more effectively to the specific needs and preferences of their clients. The integration of new technologies is not just a trend, but a strategic necessity for the modern family office to remain relevant and competitive in the digital age.
As well as harnessing new technologies internally, family offices have also become a key source of investment funding in the tech market. UBS carried out a study of 320 family offices across the globe for their Global Family Office Report 2024 in which more than 75 per cent responded that they saw generative AI as an area for investment in the next two to three years (the highest of any investment category). Investment in health-tech and climate-tech closely followed, indicating the focus on impactful investment in innovation that is feeding into family office investment strategy. Traditionally, most high-growth tech companies look to venture capital for investment, however in recent years, family offices are emerging as a pool of investment for innovators.
Impactful investment and philanthropy
Alongside the growing interest in technology, family offices – and particularly next gen family members – are increasingly focussing on the impact of their investment strategy. The Global Impact Investing Network (GIIN) defines impact investments as those “made with an explicit intention to generate positive, measurable social and environmental impact alongside a financial return.” Where previous generations of investors often distinguished between investment strategy and philanthropy, next gens consider both to be interlinked. UBS’ 2024 Report found that almost half (49 per cent) of family offices reviewed list climate change as a major investment risk over the next five years, and that concerns for the planet and humanity are manifesting in increased investment in climate-tech and life sciences. This trend underscores a growing commitment to ensuring that capital is utilised not only for economic gain, but also for the broader benefit of society.
Although impact investing is not a proper form of philanthropy, the two share a common goal to positively contribute to society. Unlike philanthropy however, impact investing retains a financial focus, as the investments themselves must be successful businesses in order to grow and achieve their long-term positive impact. In many cases, philanthropy has a role to play alongside impact and returns-based investments, therefore good communication within family offices is key to ensuring that financial, impactful and philanthropic objectives are met. It is essential that wealth-holders clearly establish their priorities so that their assets can be correctly allocated across a spectrum of investments according to their specific goals.
In the context of the great wealth transfer, it is possible that investment priorities may diverge across generations of wealth-holders. Next gens, who are naturally more detached from the wealth creation process, might see their family’s wealth as a tool for impactful investment or philanthropy rather than capital appreciation. Given these complex family dynamics, it is essential that robust governance mechanisms are put in place to protect the family’s assets. Although the appropriate structure will depend on the specific circumstances of the family, useful examples include family limited partnerships (FLPs), family investment companies (FICs) and trusts. On the latter, it should be noted, where legal ownership is transferred to a third-party trustee, the family’s investment strategy may be restricted by the relevant trust law and jurisdiction; for instance, the trustee might not have the power to allocate capital for philanthropic or impactful ventures at the risk of capital depreciation.
Measuring impact
Another key challenge for family offices seeking to make impactful investments is rooted in the difficulty of accurately measuring the ‘impact’. UBS found that 55 per cent of the family offices they surveyed in their 2024 Report were hesitant to allocate capital to impact investments due to the difficulty of accurately measuring the outcomes. One measure for quantifying impact is ‘social return on investment’ (SROI), however, as this covers such a broad range of social and environmental endeavours, it is difficult to compare the SROI of one impact investment against another. Accurately gauging SROI is further plagued by companies seeking to cash in on impactful investments through a combination of:
- ‘Impact washing’ – overstating or misrepresenting their positive effects to mislead investors and customers.
- ‘Impact hushing’ – intentionally downplaying or obscuring information to avoid scrutiny.
Family offices are sensitive to these challenges, and they are actively taking steps to address them. To combat impact washing, investors are increasingly demanding greater transparency and accountability from the companies in which they invest. This ranges from detailed impact reports to independent auditing and supply chain tracing (by which investors track the impact of their prospective investment at each level of the supply chain to assess the overall SROI of the entire production cycle). International regulations are also beginning to introduce standards of investment transparency. For example, the European Union’s Sustainable Finance Disclosure Regulation (SFDR) 2021 seeks to improve the clarity and comparability of sustainability disclosures in financial markets by imposing strict disclosure requirements on companies and standardising how results are measured. The United Nations’ Sustainable Development Goals (SDGs) further help investors analyse whether a company’s policies align with their own goals.
In addition, non-profit organisations are helping to assess the credibility of impact investments. For example, B Lab, a global non-profit network, evaluates the practices and outputs of companies across five impact areas (governance, workers, customers, environment, and community) to produce a holistic analysis. Where B Lab is satisfied that the company meets their high standards, it can grant ‘B Corp certification’ to verify the company’s SROI as a positive signal to investors. Out of the hundreds of thousands of companies that have been assessed by B Lab, just over 8,000 companies are B Corp certified (including very substantial brands like Patagonia and Ben & Jerry’s).
The Impact Investing Institute has prepared a ‘roadmap to impact’ in collaboration with Schroders Wealth Management, seeking to pull together a pool of publicly available resources for family offices to measure SROI. The paper highlights the importance of a clear Investment Policy Statement, setting out the family’s key values and ambitions for the impactful investment of capital. The roadmap also highlights the emergence of global networks of families and family offices, such as the GIIN and The ImPact, which connect like-minded investors seeking to engage in impactful investment worldwide and share experience.
Given the sheer amount of data available, the key issue comes down to how impact metrics can be analysed by investors. Innovation is playing a crucial role as family offices are able to utilise the latest technology to enhance their data collection and measurement processes. A prime example is IRIS+, a system developed by the GIIN for tracking, managing, and optimising impactful investment. IRIS+ has emerged as the generally accepted system for measuring impact by incorporating standard frameworks (including the SDGs) and aligning these with the investor’s specific impact goals.
The ‘great wealth transfer’ is reshaping the family office landscape, as next gen wealth holders are transforming investment strategies by integrating cutting-edge technologies and focussing on the social and environmental impact of their investments. Being naturally more detached from the original wealth creation process, next gens are finding that their wealth is not their identity, but a tool to shape their own legacy. The rise of virtual family offices, enhanced cybersecurity, RegTech, and AI-powered portfolio management, are testament to this shift. Moreover, the focus on impactful investments, particularly in climate-tech and life sciences, underscores a commitment to addressing global challenges, blurring the line between traditional philanthropy and profitable investments. There are hurdles to overcome, particularly in gathering and processing credible data on SROI and designing family wealth structures that facilitate impactful investment. However, the family offices that implement the right technologies and strategies are best placed to thrive in the digital age.
For further information, please contact:
James Shaw, Partner, Withersworldwide
james.shaw@withersworldwide.com
