Off the back of the global pandemic and at a time when sustained rises in inflation are threatening to erode the long-term value of investments, wealthy families, more than ever, are having to consider how best to protect and transfer wealth to the next generation.
Such disruption, alongside increasing demands around ESG concerns and rapid developments in the digital space, have prompted families to re-focus, taking a more nuanced approach to their investment strategies.
With the Consumer Prices Index typically underestimating ultra-high net worth (UHNW) living expenses and the cost of luxury items, families are also having to work harder to protect and preserve their wealth for future generations.
Notably, last year, Gibson Strategy published a Jersey Private Wealth Report highlighting the need for families to adapt their investment strategies, noting negative yields once inflation is taken into account.
Further, ongoing geopolitical tensions and continued tightening of monetary policy have the potential to create increased market volatility and additional strain for investors during 2023.
In light of these pressures and the greater complexity of the environment families are now operating in, it is vital that advisors wishing to remain relevant are aware of such risks and ready to challenge the status quo, while also keeping an eye on where the opportunities lie.
Where previously fixed income was deemed to not provide sufficient diversification nor returns, for instance, with some investment advisors pointing to rises in interest rates making income from bond interest more valuable. Drew McNeil, Head of Client Relationships at Wren Investment Office Limited, for example, explains:
“Opportunities are beginning to show up in high-quality, short-dated investment grade fixed income, with much higher yields on offer than just 12 months ago, as well as commodity plays benefiting from increased investment in renewable energy infrastructure and demand from China’s post-COVID recovery.”
With estimates suggesting that up to US$70trn of family wealth will be passed on to the next generation in the coming years, it is clear the stakes are high.
Increasingly, wealthy families with an entrepreneurial spirit are now turning to direct investments to maximise their options and unlock new opportunities.
Although typically higher risk, families with wealth built from successful business endeavours often have the expertise and contacts, particularly when selecting investments that are aligned to their skills and where they can also provide an active, guiding hand.
A report by Fintrx, for example, found that nearly half (44%) of family offices globally who make direct investments do so through co-investment approaches.
Although such families often hold a diverse range of assets - from traditional discretionary investment portfolios to real estate, art and commodities, such as gold – they also often have a higher tolerance for risk combined with an appetite for fresh opportunities.
Having greater liquidity with no need to borrow externally – a blessing when set against rising interest rates – allows UHNW entrepreneurs to be nimble when opportunities arise. And, with a large adjustment in the market lowering valuation prices predicted, there is significant potential on the horizon.
Undoubtedly there are risks too and families who stray into unfamiliar territory may find themselves investing more time and money than desired without reaping satisfactory returns – underlining the need for specialist advisory support.
Against this backdrop, imminent and significant intergenerational wealth transfer is adding another dimension to the evolution in family investment needs.
With the migration of decision-making to the next generation and the acceleration of ESG in general, it seems clear that even greater emphasis will be placed on sustainability, purpose, and impact as Next Gen investors control more capital.
As a result, structures that accommodate multigenerational requirements and that are designed with a long-term outlook, including setting out a clear succession plan, will be essential.
A report published last year by Family Capital focussing on family office investment, meanwhile, highlighted that 80% of families believe communication and education are key to ensuring effective governance in a multigenerational context, pointing to the need not just for structural considerations, but for cultural and behavioural change to be integrated into a family’s holistic approach.
Consequently, it is imperative that teams supporting UHNW families build strong relationships with their clients, while also creating bespoke investment strategies capable of encompassing a variety of needs.
Overall, a forward-thinking approach is critical.
While there has been a rise in more exotic and less mainstream assets such as cannabis and cryptocurrency in recent years, sustainable, impact and ESG investments - which would once have been similarly categorised – have now become a core component of investment strategies.
It’s no surprise then that in 2020 the market size of impact investing stood at US$715 billion, an incredible 42% rise from US$502 billion in 2018 (Global Impact Investing Network). Those families adopting a forward-thinking approach have reaped the rewards.
As a long-term trend, advisors will need to ensure they are at the top of their game in key areas, such as sustainable finance and digital assets, if they are to remain in step with their clients.
Such a future-focussed approach has the potential to be transformational to the wealth management sector at large, with families able to take a longer-term view and put in place measures to safeguard against multigenerational wealth erosion.
In this environment, advisors will be increasingly looked to for expertise and proficiency as global markets continue to evolve, as new trends emerge, and as this next generation of investors steps into the spotlight.