The next generation of family office leaders are likely to borrow more, invest in more alternatives and focus on a variety of philanthropic endeavors, according to new research.
Family offices are preparing for a fundamental generational shift, with baby boomers and older generations handing over the reins to Gen X and millennials, whose investments and priorities are also changing. This change could have a significant impact on the more than $5 trillion in assets managed by family offices.
According to a Bank of America study, a quarter of family offices have experienced a generational change in the past 10 years, and more than a quarter of the principals (top asset holders) are baby boomers.
Preparing the next generation is often a family office’s biggest concern and mission. According to a Bank of America survey, the biggest challenge cited by family offices is “family education,” along with “inheritance tax management.”
However, it is unlikely that the transition will be smooth. In many family offices, dominant patriarchs are reluctant to cede control to their children. Among family offices with the potential to become the next generation of principals or family leaders, 84% say existing principals will remain involved with the family office after the transition. When asked about the biggest challenge in governance, the top answer was “the complexity of family relationships.”
The next generation also has their own ideas about investing and giving. Younger principals are much more likely to support alternatives. Among family offices with potential next-generation presidents, 79% say alternative offices will make up a larger portion of their overall portfolio. Private equity and venture capital are the top two categories expected to receive more investment among Gen Z and Millennials, at 41% each.
“I think the next generation has a different risk tolerance,” said Elizabeth Thiessen, head of family office at Bank of America Private Bank.
They are also more likely to invest in sports. Currently, 27% of family offices run by Millennial and Gen Z presidents are invested in sports teams, compared to 16% of family offices run by Boomers.
Younger investors are also more likely to use debt. 84% of family offices with next-generation family members between the ages of 30 and 45 say they are interested in leveraging credit to build wealth.
New family offices established over the past decade have different risk and investment profiles. According to BlackRock’s Family Office Research, new family offices favor a different type of alternative investments than family offices currently serving second, third, and even fourth generations.
According to the study, almost half of family offices established more than 20 years ago have more than 40% alternative allocations, compared to 32% of newer family offices. According to BlackRock, many emerging family offices are still left with large sums of cash from divestitures, initial public offerings (IPOs), and exits that have not been fully utilized.
“New wealth creation tends to come from founders of private companies and holders of concentrated positions,” said Jessica Buren, head of U.S. family capital, endowments, foundations and healthcare at BlackRock. “They’re very concerned about the risks that still exist every day. So they’re really looking for very liquid portfolios, or investments that can create liquidity. Older family offices have been invested in for decades.”
No matter which generation is in charge, liquidity is key in determining a family office’s primary goals, said Armando Senra, head of BlackRock’s institutional clients business across the United States.
“Understanding liquidity needs is probably the most important element in any portfolio conversation,” he said. “Understanding their liquidity needs leads to deeper conversations about what they are trying to accomplish.”
A common comment among wealthy people is that they want to inherit values that are not just about money. But when it comes to philanthropy, family offices are likely to undergo major changes in their values and philanthropy with younger successors. According to a Bank of America survey, more than three-quarters of family offices with the next generation of presidents said they would support “philanthropy that differs from that of their predecessors.”
Some research suggests that Generation Z and Millennial heirs are more likely to focus on systemic causes such as climate, health, human rights, and international development, while Boomers and Generation X are more likely to focus on local institutions. Because women place greater value on philanthropy and more family wealth passes to women, philanthropy is likely to be central to family offices.
According to a Bank of America study, 40% of family offices with female presidents have a philanthropic mission statement, compared to just 29% of family offices overall.
“The next generation is exploring how they can honor their family’s existing legacy while establishing their own philanthropic identity,” Thiessen said.
