Changing Family Values

Shadi AlNasr Principle, Senior Client Strategist, Global Family Office, BNY Mellon Wealth Management explains how regional Family Office activity has developed during recent times, highlighting the prevailing trends and challenges for this sector and how technology will be deployed in its service bring a higher level of efficiency, an increased focus on achieving a family’s goals and objectives and a mechanism to create more formal management of the family’s wealth-related activities.

There is often a misconception around defining family offices, equating it to the definition of a family business. A family office is a structure that holds the family business(es) and wealth under one umbrella, catering to the distinct needs of the family: be it servicing and managing the investments, incorporating philanthropic strategies, increasing access to liquidity, creating wealth structures or defining spending (dividend to family office members), etc. All these services combined can immensely benefit the family in creating a successful and sustainable legacy. According to the 2017 Global State of Family Offices report by Capgemini, family offices have been around for well over a century. However, in the Middle East, it has only come to the fore in the past two to three decades. Though the region has been a late bloomer, it is certainly catching up with the rest of the world. In the region, there has been a shift in the evolution of family offices. Evident through an increase in the creation of formalized family office structures and governance activities where informal structures, like “embedded family offices” and “virtual family offices” are evolving into more formal, staffed family office entities. These formal family office structures

Over the past few years, the world has experienced the worst public health crisis, social tensions, technological disruptions and economic turbulence in decades. This has exacerbated the need for transition of wealth, next gen planning, adoption of digital assets and leveraging technology to reduce risk and increase the visibility of underlying asset performance and most importantly, giving back to the society. Besides the pandemic which acted as a catalyst for growth, there are three distinct trends we see emerging in the Middle East family office landscape affecting family offices operations:

Transition of wealth: There has been a growing trend of wealth transitioning from businesses to individuals. We are seeing this globally as well where there has been a recognized effort to distinguish the private wealth of individuals with that of business assets. Families are now increasingly seeking specialized units that focus solely on private wealth instead of the family investments being managed by the team who focused on the day-today operations of the business.

Succession planning: Most of the wealth in the region has been created over the past 50-60 years and most are firstgeneration wealth creators. According to the 2022 DHF Capital Report, it is estimated that approximately $1 trillion

ME assets will be passed on to the next generation by 2030. Evolution in operating model: The massive amount of transition and transfers in flight has created a sense of urgency for families to re-structure the way they manage their wealth. Their operating models are evolving into a more corporate-like structure embedding standardized policies and procedures within their governance framework. They are also seeking out nonfamily members to join the offices and often these individuals are highly experienced employees from global firms, bringing with them an institutional mindset and a change in behaviour.

Approximately only a quarter of the regions’ HNWIs have adequate succession planning. Are Family offices addressing this concern?

The true test of a family office is the degree to which the transition from one generation of a family to another is managed successfully. There are three types of challenges that can emerge when family offices attempt succession planning: accuracy with which an office executes on everything from the very tactical, such as funding a capital call, to the strategic, of complex estate plans. The services most mentioned as ripe for improvement by digitalisation include but are not limited to file and document sharing, interfamily communications, investment reporting, accounting, transactional processing, HR functions as well as concierge and domestic staff management. Technology in the categories of collaboration, data aggregation, bespoke financial and performance reporting, as well as innovation in technology around less

Concerns that have to do with the inherent nature of conversations and planning around the inevitable wealth transfer. Addressing the topics of what comes next and inheritance and wealth discussions, to name some, are often topics avoided by the families. A perceived dichotomy of values be tween current and future generations which can complicate succession planning efforts. For example, successor generations may choose to use their wealth to drive social, economic and environmental impact in addition to just preserving and growing their wealth.

A lack of expertise needed to effectively carr y out succession planning. A significant number of family offices actively partner with trusted advisors in the industry who can help guide the family in their conversations.

The evolution of family offices to more formal structures with staffed family office entities, brings more efficiency and an increased focus on fulfilling the family’s goals and objectives. It also enables family governance, wealth transition and succession planning. As substantial wealth goes through intergenerational transfer, the investment approach families seek is also changing. Younger generations are looking for ways to make a positive environmental impact and implement responsible investing strategies and advice to contribute to the family legacy.

The next generation of family office leadership is perceived to be more interested to invest in opportunities related to decentralized finance (crowd funding, peer-to-peer lending. etc) and focused on ESG. They are more willing to forgo some profit to make responsible investments, compared to the older generation. There is also decreasing demand for product or transaction driven investing and an increasing demand for discretionary investment management and outsourced chief investment officer (OCIO) services.

Family Offices tend to operate lean. Most are cost centres and non-commercial. Digitalisation can provide operational and administrative efficiencies which will either lower costs of hiring additional staff or repurpose professionals within the office to higher and better uses. It can improve the timeliness and liquid asset classes are changing how family offices operate. We are seeing an increased sophistication in how families operate in the Middle East, including master global custodian services and the effective use of leverage. Consolidated reporting, investment performance analytics and efficient management of execution are just a few of the advantages families seek when moving to a master global custodian. The ability to consolidate the leverage of assets that are being managed across multiple investment managers through one loan structure at the master global custodian account level is an appealing efficiency The true game changer will be the integration of many disparate systems through APIs and other integrations. Family Offices have often been torn between competing approaches of “best in breed” versus “fully integrated.” Advances in ease of integration with multiple platforms through more sophisticated API’s will allow offices to be able to enjoy both to some degree.