Murray Bender: RBC Investor & Treasury Services is pleased to present insights on the future of asset and payment services across the globe. Featured on today’s podcast is Mark Fell, Head of Family Office and Strategic Clients at RBC, discussing the findings of a recent survey of family offices in North America. Welcome, Mark.
Mark Fell: Great to be here, Murray.
Murray Bender: Mark, the survey indicates that some 86% of North American families experienced an increase in their wealth during 2020-21. And I understand that family offices actually achieved an average portfolio return of 15% in 2020. Now, in your view, how are family offices changing in response to this growing wealth?
Mark Fell: Thanks, Murray. I should begin by saying that RBC partnered with Campden Wealth to produce the report you just mentioned, and we surveyed 179 North American family offices across a huge range of topics to create what I believe is the most comprehensive report in the family office industry.
So, you know, there really is—there’s no question that family offices had a strong run this past year. Their agility, given that they’re a small size, and certainly, their nimble nature, allowed them to adapt portfolios and capitalize on the many opportunities that came before them, with most certainly coming in some way as a result of the pandemic.
I think that the family office industry is well known for its patient capital, but when the stock market bottomed out at the front end of the pandemic, family offices made a pretty rapid shift towards having a growth-oriented investment approach. This included their zeroing in on the private equity space given lower company valuations, and we even saw hedge fund investments grow again, bucking a five-year downward trend.
This all being said, Murray, family offices have certainly been mindful of the growth they have had. And because of this, a key takeaway from our survey is how family offices have increased their focus on risk management. Two-thirds of family offices told us they are gearing up risk management strategies to be around the expectation of inflation or, of course, rising interest rates all the while remaining confident about economic growth for 2022.
Murray Bender: Now the survey also indicates that family offices are fairly bullish about the future, with actually more than 80% expecting growth in 2022. How is this sense of optimism reflected in the investment strategies of family offices?
Mark Fell: Indeed, Murray, the vast majority of family offices signalled strong optimism for this year. With this growth mindset, about half of North American family offices told us they were seeking new investment priorities. I think this is a notable shift.
Traditionally, family offices, as you know, tend to favour a more balanced growth while having a preservation-minded investment strategy. For many, that approach is in their DNA and, you know, the shift towards growth, while a global trend, was interestingly pursued at a far greater rate by US family offices.
From an asset allocation perspective, a meaningful one-third of North American portfolios were in equities. Fixed income ran about 15% of portfolios. But, you know, the broader alternative space made for close to half of overall portfolios. Real estate and private equity direct investments were a good 25% of family office investment portfolios. It’s worth nothing that emerging areas, a focus for family offices, were health care, biotech, AI. You know, the report provides some good analysis on the private equity space, which, of course, family offices naturally gravitate around, either directly or through fund deals.
Finally, I would say, Murray, that the report pulls out some interesting trends in the sustainable investing and broader ESG space. Clearly, growing areas that we are going to follow closely, although I would say that relative to European and APAC family offices, North America ones are still somewhat behind the ball. But clearly, this is kind of a watch-this-space area with much more to come and it could be a podcast theme on its own.
Murray Bender: Now shifting direction just a little bit, more than 90% of family offices expect cyber attacks to increase in the coming year. How are family offices preparing for these attacks?
Mark Fell: Well, Murray, overall I would say that North American family offices remain relatively unprepared for a cyber attack. You know, there is still a mindset of invulnerability. While almost a third of family offices have said they have experienced a cyber attack and about 30% feel they are ill prepared to safeguard themselves should an attack occur, many still believe they fly under the radar, especially if they’re not operating from a target market like New York or San Francisco or somewhere similar.
You know, of Canadian family offices, over a third still have no cybersecurity plan in place or even have a plan to get one, which is quite concerning. Cyber attacks are only going to accelerate, so families need to bring in outside experts to deal with it. And not just for the family office, but directly for the family members themselves.
Murray Bender: Interesting. Succession seems to be a key concern of family offices. What’s driving this concern and how do you expect family offices to deal with the succession issue?
Mark Fell: You know, Murray, in my opinion, succession remains the biggest issue for the broader family office industry. You know, the industry continues to tilt and focus around managing family investments and a family’s broader finances, including, you know, day-to-day bookkeeping and other administrative needs. This is the comfort zone for most family offices.
When we asked family offices what their greatest risks were over the coming three to five years, investment risk stood front and centre with over three-quarters of family offices putting this as the priority risk they face. Now being unprepared for next-gen succession fell well short relative to investment risk. Yet, you know, there continues to be a naivety to the challenges of succession.
Only half of North American family offices have a succession plan in place. And even worse, just a third of Canadian family offices have a plan in place. European and APAC family offices have a higher degree of readiness for succession planning than we have here in North America, so there’s clearly work to be done.
The underlying issue, I think, is that over half of our survey respondents said that the next-gens in the family are either somewhat or very unprepared. Yet, in a related study that RBC undertook, over 70% of next-gens felt they were prepared for succession. Now this is a clear disconnect between family office management mindset from that of next-gen family members, so there is no simple solution here.
In fact, you know, these are soft murky areas for investment-centric family office practitioners, but if a family is going to transition successfully and sustain itself for more than a few generations, family offices need to broaden their capabilities and be equipped to handle succession topics. It really is becoming a major growth area for the industry.
Murray Bender: In conclusion, Mark, what’s the one thing that really stood out for you in the survey results? And why was it particularly notable?
Mark Fell: Well, I think what stood out and even, frankly, surprised us was that an incredible one-third of North American family offices are now investing in cryptocurrency and equally, a third plan to increase their allocations in crypto over the coming year, which is really especially noteworthy.
Now crypto still takes a few—you know, takes a very tiny place in a family office’s overall portfolio, but it’s meaningful in that you can be sure it’s taking up valuable time and family office management dialogues and portfolio review meetings, et cetera.
So thankfully, I was not surprised to learn that less than—that 10% of Canadian family offices invest in crypto and no Canadian respondent said they planned to increase their crypto investments this coming year.
Murray Bender: Some great insights on the family office space, Mark. We really appreciate your time today.
Mark Fell: Great. Thanks. Thanks for inviting me, Murray.
Murray Bender: For additional insights on topics relevant to corporate investors and financial institutions across the globe, including our previous podcasts, visit rbcits.com/insights. I’m Murray Bender. Thanks for listening.
This content is provided for general information and does not constitute financial, tax, legal, or accounting advice, and should not be relied upon in that regard. Neither RBC Investor & Treasury Services nor its affiliates accepts any liability for loss or damage arising from use of the information in this podcast.