Traditionally, most prominent families are underpinned by a family office. Often offering everything from estate planning to investment advice, the people serving the family are often as important as the management of companies they own.
An institution in its own right, the lightly regulated family office has nevertheless remained surprisingly unchanged through the years. While cases such as Archegos make the headlines, most as surprisingly low-key affairs given the sums managed.
To an extent, that model is beginning to show its limitations. That doesn’t apply uniformly nor can a one-size fits all model supplant it. If anything, effective family offices would be expected to diverge in their functions as the needs of particular families. The time for innovations has come. And there is no one better to implement than ambitious emerging markets superclans.
In any case, a few trends can be identified in the current circumstances:
The past 40 to 50 years have, as a rule of thumb, been almost ideal in terms of tax planning. The next generation will not enjoy the same luck.
Keynesian in a crisis, neo-classical in a boom, a significant number of families have enjoyed the best of both worlds. However, when debt burdens threaten the state itself, its reaction has a life of its own and that is a lot more difficult to assuage than at times tempestuous yet poorly organised publics.
That will likely move tax planning from an almost routine cherry picking of favourable legal ports to a more complex art involving both financial vehicles as well as exotic financial products. The risk there wouldn’t be money lost in tax but that complexity, as so many investors have found, sometimes hides astonishing tail risks. Expect (and bet on) accountants with advanced maths degrees.
With fiscal constraints also comes political risk. While most governments were able to purchase ‘democratic peace’ through government spending, the next generation will face a politics defined by the reality of trade-offs, diverging interests and zero-sum thinking. The political polarization will increase, negotiation will become a dirty word, and finding the middle ground will pose multiple challenges.
In some cases, this may mean little more than having to increase charitable or political donations and engage in better public relations. In other cases, this might mean that geographic diversification becomes a prime factor in decisions. A family office adapted to these realities will have to become better at traversing such realities above the writing of checks. They will have to invest in truly understanding politics, beyond engaging with leaders – the public opinion will increasingly matter and those who will pay attention to these trends will have the upper hand.
With bond yields depressed while cash and money market instruments often hovered tentatively above negative returns, over the past decade alternative assets have gone to being important stores of wealth for many of the upper crust. This trend is expected to continue even if secular stagnation moves to the rear-view mirror and expands. What was often a way to translate art purchases into portfolio allocation will be more normalised to a wide range of otherwise heterogeneous business opportunities from agricultural land, water, climate change mitigation and start-ups. These will require both a higher degree of due diligence as well as active participation from the family itself.
The stock markets have been distorted by unprecedented government intervention and the gap between the real economy and the stock markets is widening further. This in turn will shift the focus on taxes again, once we overcome the worst waves of the pandemic, since somebody will have to pay for all the government spending.
Your average family office has little of the trappings of a technology company, and often studiously so. But with technology having an ever-greater impact on every industry, having access to reliable expertise is becoming less a superfluous option and more a critical need. The family office which is able to assist leaders of tomorrow may find itself cultivating links with the right people in academia and science as much as it does with NGO folks.
Some of the biggest challenges will be met with the adaption to the new world with a lot of uncertainty, be it political, fiscal, environmental, social, financial or regulatory that is developing in the next few months. Governments barely addressed the issue of taxation on internet sales, and they haven’t even touched bit data and blockchain yet, it is clear that they can’t keep up with the pace of innovation. It is not unlikely that the markets will decide before the governments act, as we have seen with the case of cryptocurrencies.
This is not an exhaustive list and, as with families, not all family offices should be the same. But those looking at ensuring the next generation has the right support for the right environment might wish to check these few off.
All these changes and challenges will most probably bring along opportunities, and probably the best thing about how most Family Offices work is their agility. Many new technologies and innovative charity projects receive rounds of funding from Family Offices, and we can see the private sector stepping in where governments fail or retreat.
Written by Radu Magdin. Have you read?
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