Family offices, managing the wealth and legacies of ultra-high-net-worth families, are undergoing a major transformation in 2024. Facing an increasingly complex global financial landscape, these institutions are shifting toward professionalization. This evolution is characterized by enhanced operational efficiency, improved governance structures and a strategic focus on attracting top-tier talent.
As they navigate new regulatory standards and the nuanced challenges of succession planning, family offices are embracing a more structured and professional approach to secure their future.
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The drive for professionalization
The professionalization of family offices has been driven by several factors, including the need for more sophisticated investment strategies, compliance with new regulatory standards and the desire to better manage family dynamics and succession planning. According to the 2024 J.P.Morgan Global Family Office Report, family offices are grappling with the complexities of modern wealth management, leading many to adopt more structured and professional approaches to their operations. This includes hiring specialized talent and investing in advanced technologies to streamline processes and improve decision-making.
Key insights from J.P.Morgan and UBS
The J.P. Morgan report provides detailed insights into the professionalization trends within family offices:
Investment management: 80% of family offices use external advisers, with portfolios averaging 45% in alternative assets targeting an 11% return. Nearly 90% of families, especially in the U.S., remain deeply involved in decisions.
Operating costs: The average annual operating cost for a large family office is over $6 million, with about 25% exceeding $10 million annually. This investment highlights the need for professionalizing operations for efficient and effective management.
The UBS Global Family Office Report 2024 complements the J.P.Morgan report’s findings, offering further insights on:
Governance: Only 56% of family offices globally have an investment committee, and only 44% have a documented investment process.
Specialist services outsourcing: Family offices typically handle investment management in-house while outsourcing specialized services like tax, legal and cybersecurity. This trend reflects a hybrid approach to managing complex needs efficiently.
Focus on financial risks: While financial risks are a primary concern, reputational and medical risks are often overlooked. Only 40% of family offices have cybersecurity controls, and just 31% have risk management processes beyond investments.
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Building infrastructure and incentives
Someone with a front-row seat to these changes is Ron Diamond, founder and chairman of Diamond Wealth Strategies, which represents more than 100 family offices ranging $250 million to $30 billion. Diamond emphasizes the need for better awareness and infrastructure, explaining: “Currently, the top students out of business schools are looking to get jobs in private equity, real estate, hedge funds, consulting or investment banking. Almost nobody is looking to work for a family office.
“Most students in business schools do not even know what a family office is, let alone how to connect with one.”
Infrastructure is a significant barrier, Diamond said. “The vast majority of family offices do not have the infrastructure in place to compete with the top PE firms,” he said. “They are fragmented, siloed and inefficient.”
However, Diamond said, the few family offices with proper infrastructure must also get the compensation model right. "To compete with the Carlyles, KKRs and Blackstones of the world, family offices need to incentivize their employees similarly, including part of the carry, lines of credit and other features typically offered by top PE funds. This is just beginning to happen among the most sophisticated family offices."
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What’s on the horizon for family offices?
Despite these challenges, Diamond remains optimistic.
"We are at a tipping point," he said. "I helped establish a family office initiative at Stanford University to educate students and reduce fragmentation. Currently, I'm working with top thought leaders to create an even more extensive initiative at a leading university.
“I believe that in five years, top students from the best business schools will consider family offices as their first choice."
According to a recent edition of Diamond’s Family Office World Newsletter, family offices are undergoing profound changes to navigate modern wealth management complexities, adapt to regulatory changes and preserve wealth across generations. With $10 trillion in capital and an additional $84.4 trillion set to transfer from baby boomers to the next generation over the next 20 years, it’s not a question of if family offices will transform but when.
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The escalating talent war
In an article for CNBC, Robert Frank highlights the competition between family offices and Wall Street for top-tier talent. This “war for talent” has driven family offices to significantly increase salary offers and provide attractive long-term incentives to secure financial experts and investment professionals. This underscores the increasing allure of family offices as desirable workplaces for high-caliber professionals, who are drawn to the unique challenges and opportunities that these environments present.
The future of a family office lies in its ability to adapt and professionalize. In 2024, the option of working for a family office has begun to transcend the mainstream consciousness.