The New Generation Of Family Office

The investment market has always been a continually evolving landscape and the idea that all investment strategies will be adopted by incoming generations is not one to hold on to.  In the last decade alone, we have already seen a change from a relatively straightforward mix of equities, bonds and property to a landscape that encompasses new asset classes and products. Private assets, blockchain technologies and, in particular, digital assets have been particularly volatile in recent years with an ongoing pattern of booming and busting.

There is no doubting the incoming tidal wave of investment and adviser demand with the latest generations set to inherit private wealth. To underestimate their investing experience and economic power would be an error of judgement. According to the CFA Institute, 31 per cent of millennials were under the age of 21 years when they started investing. This is compared with only 9 per cent of baby boomers and 14 per cent of Generation X when they were the same age.

As accounting giant EY has noted, there is more than US$30 trillion of inheritable wealth set to move to the younger generation in the near future. This is not an insignificant sum heading into the hands of a generation that has different values, goals and desires to their predecessors.

This shift will be further realised through the increasing representation of women in Family Offices, with more women set to inherit wealth than ever before. According to research carried out by We Are Guernsey and Family Capital[ii], women are increasingly significant generators of wealth with the Centre of Economics and Business Research[iii] suggesting that some 60 per cent of the UK’s wealth will belong to women by 2025. As EY also noted back in 2016[iv], when assets change generations, firms typically lose as much as 80 per cent of those assets.

According to Morgan Stanley[v], in the US alone Gen Z — those born somewhere between the latter part of the 90s through to the early 2010s — will be the country’s largest generation by 2034, with a population of 78 million. The average Gen Z got their first smartphone just before their 12th birthday and are therefore the first digital natives. Communication is most commonly done via social media and text messaging, spending as much time on their phones as older generations do watching television.

It is imperative that, as new generations take charge of family wealth, with fresh ideas and values to previous generations, Family Offices ensure they adapt to meet the needs and expectations of tomorrow’s tech-savvy and ESG-minded investors.

Digitally-Minded New Clients

Next-generation clients are already looking for offers and services that better reflect their own lifestyles and values. Net zero, digital assets, personalisation, and digitisation are just some of the areas that will align with their needs. The most important question facing wealth managers today is not which initiatives to prioritise, but how best to implement them.

According to GlobalData’s report – titled “Intergenerational Wealth Transfer: Seizing the HNW Opportunity” - US$8.6trn of global HNW wealth will pass down generations over the next decade. Unlike their parents, the younger family members receiving this money are likely to have grown up in – or at least have lived much of their lives in – an era of global digitalisation. Having matured alongside the internet, most, if not all, of these individuals now live many aspects of their lives digitally – be it entertainment, shopping, communication, or even hailing a cab.

This upbringing has also influenced the values held by tomorrow’s investors, with younger generations placing much more emphasis on social media and digital channels. Likewise, the report found that HNWs under the age of 40 are more likely to work in ‘new’ industries, given their renewed prominence by the rise in technologies such as media and telecommunications.

Just like their career choices, the next generation’s expectations have been heavily influenced by their digital experiences when it comes their finances. Specifically, the rise of mobile and internet banking means younger wealth management clients now expect a fully digitised offering. For example, older clients may love the chance to visit their adviser or banker to chat about markets and investment portfolios. However, younger generations may not like this old-fashioned approach to investment updates. While they may want the ability to speak with an adviser when required, they will also demand 24/7 digital access to real-time reporting, assessments and portfolio overviews wherever they may be.

In years past, the wealth management sector has lagged behind the rest of the world when it has come to embracing technology. However, with GlobalData finding that a sizeable 28.3 per cent of HNW clients’ children discontinue the relationship with their parents’ wealth management upon inheriting, this attitude has to change if offices want to hold on to successor clients.

Those offices that cannot meet the digital needs of the next generation of investors risk becoming less relevant, less competitive and, ultimately, facing a client exodus. This risk is compounded by increasing scrutiny and reporting complexities of ESG or impact-related investments. As noted at this year’s annual Sustainable Finance Week, hosted by We Are Guernsey, impact in these areas is hard to measure. But next-gen HNWs will expect data-led reporting on the difference their investments are making to climate and social issues.

Sustainable Is A Must Have

Sustainable investing – which includes net zero –is growing three to five times as fast as traditional investments. It’s been estimated that by 2026 the asset class could account for 8 per cent to 17 per cent of privately invested wealth, up from 4 per cent to 11 per cent today. While net zero is a 2050 goal for many countries, acting now to ensure sustainable investing is embedded across the entire client life cycle is crucial.

As a leading sustainable finance centre, Guernsey has already made several leaps forward in this area. The Guernsey Green Fund, for example, enhances investor access to the green investment space by providing a trusted and transparent product that contributes to the internationally agreed objectives of mitigating environmental damage and climate change. Any class of Guernsey fund wishing to be designated a Guernsey Green Fund must meet its stringent eligibility criteria.

It is not possible for the world to reach net zero without investing in nature and leaders in biodiversity finance have been calling for greater private investment and regulation to protect and restore the natural world.

That is why Guernsey’s Financial Services Commission has just launched the Natural Capital Fund regime, which is the first of its kind globally. This fund will help drive investment into these nature-based solutions, and provide investors with confidence that their investments are going to projects that will protect the natural environment as well as avoid and capture carbon emissions.

What Next For The Wealth Sector?

As the amount of wealth being passed down to the next generation of investors continues to rise, wealth managers cannot afford to get left behind. They must embrace the key wants and needs of the next generation of investors and reflect their values through products and services. If firms could lose up to 80 per cent of assets in the generational wealth transfer – as reported by EY – there is much to be done.

For those businesses that can embrace this challenge, and respect rather than fear the values of the next generation, there are great opportunities. Gen Z may come with a differing view to their predecessors, but they will also require the same level of support and advice when it comes to managing their wealth and making investment decisions. Together with this new generation, who are willing to put their money where their mouths are and hold businesses accountable, advisers, wealth managers and investment companies can play an important part in helping to shape a better society and a healthier planet.

And Finally — Being A Good Employer

It is clear that Gen Z and millennials are more likely to buy products or services and seek employment with companies that mirror their views. So, it seems logical for the wealth management community to act in such a way too in order to attract quality talent. These employees will then be able and enthused to present the business to their peers in an authentic manner, in turn attracting new business.

The “Deloitte Global 2022 Gen Z and Millennial Survey[vi]” provides food for thought when it comes to understanding what a ‘good business’ is to these generations. The summary below is taken from their report.

• Gen Zs (37 per cent) and millennials (38 per cent) predict that the most notable workplace shift within the next 10 years will be artificial intelligence (AI) and other technologies being used to fully automate many jobs or job functions. So, employers who can help professionals adapt to this changing workplace are likely to be more appealing.
• Purpose is also critical. Gen Zs and millennials are willing to turn down jobs and assignments which don’t align with their values.
  • Nearly two in five (37 per cent of Gen Zs and 36 per cent of millennials) say they have rejected a job and/or assignment based on their personal ethics.
  • Nearly half (46 per cent) of Gen Zs and millennials in senior positions have rejected a job and/or assignment based on their personal ethics.

Based on the above, Family Offices will need to engage with AI and other new technologies in order to give their staff meaningful and fulfilling work, and in supporting the next generation’s sustainability values. Overall, it is clear that those who are satisfied with a company’s values, its societal and environmental impact, and its efforts to create and provide a diverse and inclusive work environment are more likely to accept offers of employment and remain in employment for more than five years. This might seem like a lot to change, but those firms willing to improve their impact on the world and on its employees will surely reap the benefits in the long term.

Guernsey is home to nearly 150 regulated wealth management specialists and its practitioners pride themselves in their ability to cater to the evolving requirements of their clients. Our professionals are gearing up to meet these next generation challenges and the exciting opportunities they present.

Footnotes:

[i] https://www.globaldata.com/store/report/intergenerational-wealth-transfer-seizing-the-hnw-opportunity/

[ii] https://www.weareguernsey.com/resources/family-capital-women-in-family-office-report/

[iii] Centre for Economics and Business Research (CEBR), 2020

[iv] https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/financial-services/ey-sustainable-investing-the-millennial-investor.pdf (page 1)

[v] https://www.morganstanley.com/ideas/millennial-gen-z-economy

[vi] https://www.deloitte.com/global/en/about/people/social-responsibility/genzmillennialsurvey.html

Rupert Pleasant
Rupert Pleasant is Chief Executive of Guernsey Finance, the promotional agency for Guernsey’s finance industry. His role includes business development and the promotion of Guernsey’s finance industry in the island’s target markets, including Europe, US, Asia, South Africa, and the Middle East. Brought up in Guernsey, his financial services career has taken him globally, working for blue chip institutions in London, Hong Kong, South Africa, and Switzerland, before returning to Guernsey in 2014. His background is in private banking, trust and corporate services, where he has held a number of senior management roles. Rupert joined Guernsey Finance in May 2020.