WEALTH MANAGEMENT: Most Family Offices Haven’t Prepared for Succession, Study Funds.

As published on barrons.com, Tuesday 20 December, 2022.

A higher risk tolerance than their predecessors. A strong interest in cryptocurrencies, digital assets, and sustainable investments. A desire to use clear communication to overcome challenges as they step into their new roles. According to a new report from BNY Mellon Wealth Management and Campden Wealth, these are some of the notable features of the next generation of wealth holders.

The report, released Tuesday, surveyed 102 Next Gens between March and July from families averaging US$752 million in net worth, offering a glimpse into the views of recent or future stewards of their family’s wealth. Presently, families are on the cusp of a massive generational wealth transfer, which Boston-based market research firm Cerulli Associates estimates will amount to $84 trillion changing hands over the next twenty years.

One notable finding is whether the next generation is prepared to receive this wealth. The survey said that only 37% of Next Gens feel very prepared, while 52% feel somewhat prepared or unprepared. Campden Wealth’s November 2022 North American Family Office Report, which surveyed those in leadership roles, found only 39% of respondents believed Next Gens were adequately prepared to succeed them.

“Clearly, there is a disconnect when you look at the next generation,” says Ben McGloin, head of advice, planning and fiduciary services at BNY Mellon Wealth Management. For instance, only one-third of families surveyed have formal, written succession plans. Others rely on informal agreements, are still developing their plans or have none at all—clear missed opportunities to create a smoother transition.

However, McGloin notes there’s an appetite to learn: 40% of those surveyed wanted a better understanding of their post-succession role.

The transition timeline may approach more quickly than some have prepared for. The survey reports 55% of U.S. Next Gens expect to take control of family wealth in five to 10 years.

“Offsetting the potential concern about preparedness is the willingness to seek advice,” says Leo Grohowski, BNY Mellon Wealth Management’s chief investment officer.

Nearly all surveyed, 99% and 97% respectively, said they need expert advice in trust and estate planning as well as tax planning and mitigation. Though Grohowski also notes a fairly high number of Next Gens don’t have their own wealth manager. For families below US$250 million in net worth the figure was 32%, and declined to 21% for wealthier families.

“I thought that was surprising given the amount of wealth,” McGloin says.

Grohowski and McGloin spoke to Penta about the forthcoming changing of the guard in family wealth.

Of those surveyed, 34% of Next Gens said a top priority would be pivoting to an increasingly growth-oriented investment strategy once in charge.

“The surprise to me wasn’t the direction, but perhaps the magnitude of the desire to diversify away from traditional and into more growth-oriented and, frankly, more risk-oriented strategies,” Grohowski says.

Nearly half (45%) of Next Gens invest in digital assets and new technology, which may play larger roles in family offices in the future.

Though the report found respondents had mixed views on cryptocurrency, among those who invest, 43% expect to increase allocations in the coming 12-24 months. Furthermore, 78% of those investing in digital assets and new tech do so to diversify from traditional investments, with 70% saying they do so to invest in areas before they are adopted by the mainstream. The leading areas of digital assets invested in currently are fintech (86%), bio tech (77%), and healthcare tech (76%).

Grohowski also finds the switch from traditional investments interesting, considering that BNY Mellon Wealth Management’s capital market assumptions for the next decade “are looking more constructive than they have been for a number of years on the outlook for a traditional portfolio.”

It could be possible, he suggests, that when Next Gens were surveyed earlier this year, “some frustration with the performance of traditional asset classes played into this.”

McGloin sees the need to address and ease potential conflict as a key takeaway from the survey. Despite shared goals between generations, succession planning can be a tense topic. But Next Gens believe in the power of communication. Two-thirds of Next Gens surveyed believe in regular communication as an impactful governance tool to avoid family disputes, with 39% feeling the same about regular formal meetings.

But communication is a tool that needs to be wielded more. Among those surveyed, 44% of Next Gens with a net worth of US$250 million-plus (and 21% below that figure) said their families avoid the complex topic of succession planning. “Moreover, 61% of Next Gens from extremely wealthy families believe that excessive wealth leads to family infighting, compared with 42% of less wealthy Next Gens,” the report said.

“Formalizing what we would call a family governance framework is critical to have success around having conversations but ultimately addressing the potential conflict or challenges,” McGloin says. Such a framework should identify and address topics formally, such as role and responsibility definitions and assignments, and formally planning for transition.

The report also notes that families may consider bringing in professional family consultants if necessary to offer neutral guidance.

Sustainable investments, such as those integrating environmental, social, and governance criteria, and exclusion-based and impact investing, are hugely important to Next Gen family members. The survey reports that seven in 10 said “sustainable investing has become a permanent fixture of the investment landscape.”

Actively investing Next Gens plan to increase their average sustainability portfolio allocations from 17% to 43% during the next five years. Slightly more than half (53%) of Next Gens say they are more engaged in sustainable investing, focusing more than their parents on affordable and clean energy (53%), climate action (53%), and quality education (47%).

In contrast, Campden Wealth’s 2022 North American Family Office Report found sustainable categories only represent 20% of portfolio allocations among those who invest in the category. Within five years the growth is more modest—expected to rise to 31%.

Grohowski says “this whole last year or two has been an important wake up call in our industry” regarding sustainability. Namely that assigning a number or rating to categorize a sustainable investment isn’t enough. “That’s what this generation is telling us: Make sure you have advisors that understand our values in sustainable investing, and are prepared to measure it and report back to us properly.”

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