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A version of this article first appeared in CNBC’s Inside Wealth newsletter by Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up to receive future editions directly to your inbox.
Preserving family wealth is easier than controlling how heirs invest it.
The stakes are particularly high for investment firms for the ultra-high net worth. A recent Bank of America survey of 335 family offices found that 60% of respondents had assets of at least $500 million, and 87% had not yet passed on assets to the next generation.
More than one-third of family offices where the CEO is fully involved in company operations expected their heirs to change the family office’s mission or purpose. According to the survey, the percentage of companies with presidents who are not heavily involved in decision-making jumps to 73%.
“It’s not just about passing on wealth; we know it’s ushering in a new era of investing, including how the next generation thinks about philanthropy and how they use technology,” Bank of America’s Elizabeth Thiessen told Inside Wealth.
Thiessen, head of family office solutions for the private banking division, said heirs tend to make significant changes, such as prioritizing philanthropy over investments or closing the family office altogether.
“The next generation may decide, ‘We don’t want this infrastructure. We don’t want the complex responsibilities of governance and board membership. We want to simplify this,'” she said.
This big shift is fast approaching, with 59% of respondents saying they expect to transfer their assets to the next generation within 10 years.
Thiessen said if principals do not take steps to integrate an heir into the family office, the heir is likely to make dramatic changes.
This can also lead to conflict, with nearly half of family offices with less involved principals expecting an increase in family conflict, compared to 29% of firms with fully involved principals.
Regardless of key involvement, most family offices said they expect their successors to increase their wealth and increase the use of technology and artificial intelligence in company operations.
More than half of respondents said they had already tried AI for market research or other tasks, and most reported positive experiences. Larger family offices were most likely to use it, with nearly three-quarters of firms with at least $1 billion in assets reporting doing so, compared to 40% of family offices with less than $500 million in assets.
A majority of respondents (56% of family offices with full principal involvement and 73% of firms with less involvement) also expect their heirs to increase allocations to alternative investments. These predictions are consistent with family offices’ bullish stance on the three most favorable opportunities for future wealth creation: private equity, direct corporate investing, and real estate.
Respondents already boast high allocations to non-cryptocurrency alternatives, with an average of 34.5%, roughly on par with marketable securities at 36.4%. According to Bank of America, just over half of heirs expect to increase their allocation to cryptocurrencies, with the current average allocation at 6.4%.
These Millennial and Gen X heirs are also widely expected to maintain or increase sustainable and impact investing, despite widespread backlash against ESG investing. According to Morningstar, there were $55 billion in net outflows from global sustainable funds last quarter, with the bulk of that coming from BlackRock fund redemptions.
Family offices were broadly bullish about the economy, although 64% of respondents said their biggest challenge was growing and preserving wealth. Six out of 10 respondents said they were optimistic about the U.S. stock market. private equity. and merger and acquisition activity over the coming year. More than half of companies with assets of at least $500 million predicted that U.S. gross domestic product (GDP) would increase within the next year.
