David W. Fox, President of the Global Family & Private Investment Offices Group at Northern Trust, comments on the upcoming trends in the family office space
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Every year, Northern Trust gathers its Global Family and Private Investment Office clients for a series of closed door forums and advisor roundtables that offer a unique view into trends emerging among the world’s wealthiest families and the family offices that serve them. As we reflect back on what we learned at our 2015 events and look forward to 2016, there are several themes that are top of mind for our family office clients.
Operational Alpha – Family offices are working to create "operational alpha" in their enterprise by conducting business more efficiently while reducing costs, especially through increased automation of processes, consolidation of providers and data aggregation. More frequently, we are seeing family offices conducting formal business process reviews with providers to streamline processes and procedures between parties.
Next Gen Engagement – There is an increased desire for next-gen education and peer-to-peer networking groups for both future generation family members and their family office staff. Providing financial information "on the fly" for family members is key while still being mindful around confidentiality and security.
Diversification Through Hedge Funds – Clients are seeking true sources of diversification, typically through hedge funds, as they prepare for a lower return environment. With the return projections for conventional fixed income too low for many ultra-sufficient investors, hedge funds can provide significant and important diversification benefits to family office portfolios.
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By GlobalDataRisk Management & Security – Cyber threats and fraud are two of the major risks to family and private investment offices. Offices are evaluating their risks, performing gap analysis and implementing new internal and external controls to mitigate risk. There is an increased focus on security in all respects: technology, personal and travel – Family offices are conducting holistic security reviews.
Succession Planning & Governance – Succession planning for family leadership, office staff and trustees with stewardship will continue to be an area of heightened focus. Structured governance programs with multiple committees are being reconsidered, but need consistent evaluation and often reorganization to include future generations.
Environmental, Social & Governance Investing (ESG) – Families are looking for ESG tilted options that do not trade risk or return, especially as the next generation becomes more involved in the investment decision making process. Impact investing through direct investments or co-investing is gaining interest, but there is difficulty in sourcing these types of investment opportunities.
Direct Investing – Investors with expertise or trusted contacts in a particular area are increasingly making investments directly in private companies. Strategy is in part driven by the muted investment returns environment, so family office clients are seeking uncorrelated sources of returns.
Looking forward to 2016, the regulatory environment will continue to pose challenges for family offices and the financial industry as a whole. We also expect "low and slow" monetary policy, with a shallow trajectory of future rate increases and ongoing headwinds from the impact of global demand levels and global income inequality.
As globalisation continues, the ultra-high net worth population and the family offices, advisors and institutions that support them will continue to experience both opportunities and challenges as they navigate through the constantly evolving global marketplace.
David W. Fox, President of the Global Family & Private Investment Offices Group at Northern Trust
