There are two key developments happening in the family office space as we move further into the 2020s: firstly, a vast transfer of wealth (estimated at US$5 trillion ) is occurring in Asia as a senior generation of ultra-high net worth individuals (UHNWIs) passes the mantle on to the next wave of Generation Xers, Millennials and beyond - collectively referred to as NextGens; and secondly, across the world a new cohort of UHNWIs - the so-called Xennials (those born on the cusp of Generation X and the Millennials in the late 70s/early 80s) - are looking to place their wealth into new, innovative and dynamic holding structures.
Family offices are evolving to meet the needs of these NextGens and Jersey is a leading jurisdiction in the creation of these new style structures.
A New Mind-Set
NextGens share many of the aims and values of previous generations in relation to wealth management. Both wish to preserve and protect their wealth for future generations and generate new wealth where possible. However, there are some key differences in their values, priorities and expectations as outlined below.
Tax mitigation has been a significant priority for previous generations but seems to be less of a driver for NextGens. Attitudes have shifted and whilst tax remains a factor, it is perhaps not the pre-eminent one when establishing a new structure.
Establishment of a legacy is a key priority for NextGens. They are generally more socially and environmentally aware and issues such as climate change need to be factored into their requirements. They want to create legacies for a better world so that the generations following behind can continue them.
The difficult markets over the last decade or so have meant that NextGens have a higher tolerance for risk and are prepared to be more innovative in the search for yields. They seem particularly keen on enterprises that seek to push boundaries, such as crypto-currencies, tech enterprises and green energy. NextGens are also generally more conscious of ethical considerations and want their investments to have a positive impact on the communities around them. For example, the recent downturn in some commercial real estate markets has led many family offices to consider investing in social housing schemes.
Human issues and diversity
NextGens are generally more aware of the social, emotional and mental health challenges that may affect their families than previous generations were. These issues are no longer taboo and many NextGens consider them to be of paramount importance and a key factor in how they want their wealth to be applied. Many choose to include specific provisions within their family offices to promote the social, emotional and mental wellbeing of their family members.
Families are also becoming more diverse and NextGens expect their private wealth structures to reflect and accommodate this diversity.
Approximately half of Millennials (born 1980 – 1995) and Generation Z (born 1995 – 2010) grew up entirely in the digital age. Generation X (born 1965 – 1980) and the Xennials (the crossover between Generation X and the Millennials, born between 1977 – 1983) are unique in that they had analogue childhoods, but digital adulthoods. As 'digital natives', NextGens are more tech-savvy and information-orientated than previous generations and they live at a faster pace. They are used to having information at their fingertips and, as a consequence, they expect greater responsiveness and transparency from their advisors than their parents and grandparents did.
Privacy and security
The explosion of social media and cybercrime over the last decade has meant that privacy and security have become a much greater concern and a higher priority for NextGens in the context of their family offices, especially those with a public profile.
For the same reasons, NextGens are also far more concerned with protecting their family's reputation. They are committed to ensuring that their family offices are properly and professionally run, that the appropriate taxes are paid, and that their investments are ethically sound.
Over the last few decades the use of reserved power trusts and "settlor directed" private wealth structures has become commonplace. NextGens seem to be more comfortable entrusting their advisors with their wealth and engaging them to carry out key roles. This willingness to relinquish control is perhaps because the world has become more global as a result of the internet. We all know a lot more about each other than we used to and geography is no longer a barrier in business. In addition, because of the global efforts made to counter financial crime, NextGens generally feel much more confident in the world's regulatory systems.
So, are today's family office structures ready for their NextGens?
Jersey Finance recently collaborated in some research on the forthcoming great transfer of wealth in Asia. It published its findings in 'Asia's Great Wealth Transfer – Implications for the Wealth Management Community' (December 2020). The research shows that there are a significant number of family office structures in Asia that are approaching an inter-generational transfer of wealth, but that are unprepared for the transition. This may be representative not just of UHNW families in Asia, but of UHNW families across the globe.
Inadequate succession planning can have serious consequences. It can lead to unexpected death duties, family businesses failing through control issues, and bitter disputes erupting.
Family offices need to ensure a smooth transfer of wealth and power between generations and key to this is for NextGens to be considered and brought into the frame early on so that they can be prepared to manage the wealth they will one day receive.
As well as ensuring a seamless transition, the structures themselves will also likely need to evolve to meet the needs and expectations of the new principals which, as noted, might be quite different from those of their parents and grandparents.
So, what sort of family office structure are NextGens looking for?
Family offices have always been highly bespoke structures. However, in order to meet the needs of the new UHNWIs, structures are becoming more innovative.
In Jersey there is a wide range of private wealth structures available, including trusts, companies, foundations and limited partnerships. Jersey also has a modern and sophisticated legal framework which permits a high degree of adaption to each of these structures. They can therefore be constructed, deconstructed and combined in many different and novel ways to create unique configurations that reflect each families' needs.
Structures need to be smarter and more efficient than they used to be. There has been an upsurge in fintech and, in particular, in virtual and digital platforms which NextGens will expect providers to have in place in order that they can access the information 24/7.
In most cases, NextGens with large family offices will want their own investment platform. In Jersey, this can be achieved simply by using either the Jersey private fund or the eligible investor fund. NextGens often like to have an in-house investment capability as it allows the family a greater degree of influence and flexibility and also facilitates collaboration.
As well as the structure and the infrastructure, provisions instilling the family's values need to be included. This is not new, but the values being instilled are changing.
Provisions promoting family members' emotional and mental wellbeing are more popular, e.g. mentoring schemes to guide young family members through any difficulties and help them reach their personal potential. Reward systems are also used to encourage young family members to gain work experience outside of the family, become self-reliant, and take pride in their personal achievements. Quasi-banking systems are also used to provide funds or loans to family members to use either philanthropically or entrepreneurially to further hone their strengths and passions. All of these sorts of systems reap rewards not just for the individual but for the family as a whole because family members can then bring their new-found skills and confidence back into the fold.
The family codes of conduct and associated penalties that we saw in some older-style family constitutions are giving way to more informed means of encouraging good mental health and reinforcing positive behaviour.
Family governance remains an important element of any family office. Whilst NextGens may be more relaxed about allocating certain roles to professionals outside of the family, they still want to have close involvement with their structure. This is often achieved by the use of a family council, which again in itself is nothing new. However, what we are seeing more of as families become larger and less conventional, is the use of multiple committees of family members with their own constitutions for different purposes, family branches, or assets. These provisions can become complex, but if well drafted they can be kept streamlined.
Another feature of family offices that is becoming more popular is the ability to collaborate with other family offices, friends, and/or colleagues. Whether in commercial ventures or philanthropy, NextGens like to collaborate and want arrangements to be in place so that if opportunity arises they can move quickly.
NextGens recognise how quickly the world is changing and they expect their structures to be agile, adaptable, and to be ahead of the curve where possible.
The increasing prevalence and influence of the voices of NextGens is causing an exciting evolution of the family office. The resulting structures are bold and innovative and not only safeguard the financial capital of the families concerned, but also their social and emotional capital too.
Sarah is a senior associate at Carey Olsen in the Trusts and Private Wealth Group in Jersey. Sarah has a broad trust non-contentious, contentious and semi-contentious practice. Sarah regularly acts for professional trustees, family offices, settlors and beneficiaries and advises on the establishment and ongoing administration of private trust structures, family offices, employee benefit trusts, pension trusts, charitable structures and foundations. She has particular experience in advising family offices and trustees in connection with the restructuring of complex private wealth structures.
Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Jersey, Cape Town, Hong Kong, London and Singapore.