by RBC in partnership with Campden Wealth
RBC Wealth Management has partnered with Campden Wealth to create The North America Family Office Report 2023. Gathering insights from 179 family offices across Canada and the United States with a cumulative wealth of over US$363 billion, the report explores how family offices are juggling a range of risks such as succession planning, cyber threats, investment dynamics and political instability.
Investment performance
Despite the dismal performance of financial markets throughout 2022, North American family offices fared surprisingly well. Almost half reported an increase in AUM, with 12 percent reporting a significant increase. Likewise, when asked how their investment portfolio performed relative to benchmark, 48 percent of respondents reported that it had outperformed compared to just 12 percent who indicated underperformance. Part of the explanation may lie with a proactive investment stance adopted by 73 percent of family offices, which saw them taking measures, such as shortening the duration of bond portfolios and reducing borrowings, to mitigate the impact of rising interest rates.
Financial strategy
Difficult conditions in financial markets have prompted a more conservative attitude towards investment strategies. Two years ago, the primary investment strategy of 48 percent of family offices was growth. Subsequently, it’s declined to 38 percent, with family offices adopting a strategy of wealth preservation rising from 13 percent to 18 percent.
Market risk
The risk most family offices (57 percent) believed would crystallize in 2023 was a U.S. recession. Year to-date this hasn’t materialized, but family offices have been concerned the rate of inflation would not decelerate (39 percent) leading to excessive tightening by the Federal Reserve (Fed) (42 percent).
Private markets
A key feature of family office investment in recent years has been an ever-increasing allocation to private markets. This now constitutes the largest asset class. Last year, 2022, saw a continuation of this trend with private markets rising to 29 percent of the average portfolio, up from 27 percent a year earlier. Family offices still expect private equity and venture capital to supply the best long-term returns despite last year’s disappointing outcomes.
Bonds in demand
More family offices intended to increase their allocation to developed market bonds than developed market equities. This suggests that they are buying into the idea that U.S. inflation is at, or close to, its peak and that as it falls the Fed will cut interest rates. Bonds are preferred over equities because the U.S. economy is expected to be close to recession for the foreseeable future.
Cost control
Last year, faced with a challenging investment market, family offices showed firm cost control. We estimate North American family offices’ operational costs averaged US $5.7 million last year, representing a 22 percent reduction on the previous year. Family offices were able to keep tight control on their costs by reducing discretionary expenditure and staff remuneration. The average basic remuneration for CEOs was US $304,000 – down by around one-third.
Technology
Wealth aggregation platforms, which can provide an overview of an organization’s financial position by consolidating data from multiple banks and investment managers, are relatively new additions to the family office armory. The level of adoption is still relatively low (38 percent) but can be expected to rise rapidly, given the percentage of family offices keen to take advantage of these platforms.
Effectiveness
Family offices are viewed as effective when it comes to ensuring capable individuals are in leadership positions (79 percent) and making informed decisions (78 percent). Where they are seen as less effective is in facilitating a collaborative approach and avoiding conflict between family members.
Succession planning
According to respondents, the most critical factor for successful succession planning is to start early, introducing next gens to family values (92 percent) and encouraging their interaction with the family office and family leadership (84 percent). These count more than educational attainment and external work experience, but ultimately the willingness of the existing family leadership to embrace the succession issue is critical (76 percent).
Philanthropy
Three quarters of North American family offices make philanthropic donations, with an average value of US $12 million. Donations focus on providing solutions to long-term challenges in education (68 percent), community development (56 percent) and healthcare (46 percent). Since these causes entail an extended period of commitment, they are best described as philanthropic rather than just charitable. Increasingly, families see philanthropy as part of their broader social impact strategy, which also covers their approach to investing and business development by integrating ESG and sustainability.