Family offices expect heirs will take new path on investing

A version of this article originally appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to high-net-worth investors and consumers. become a member to receive future editions straight to your inbox.

It’s easier to keep wealth in the family than to control how your heirs invest in it.

The risks are particularly high for investment firms of ultra-wealthy families. A recent Bank of America survey of 335 family offices found that 60% of respondents had at least $500 million in assets, while 87% had not yet passed their assets on to the next generation.

More than a third of family offices whose executives were fully involved in company operations expected heirs to change the mission or purpose of the family office. According to the survey, this rate rises to 73% in companies where managers are less involved in decision-making processes.

“This is more than just transferring wealth. We know the next generation will usher in a new era of investing in how they think about philanthropy, how they use technology,” Bank of America’s Elizabeth Thiessen told Inside Wealth.

Thiessen, who leads family office solutions for the private banking division, said heirs tend to make significant changes, such as prioritizing philanthropy over investment or even closing the family office entirely.

“The next generation may decide: ‘We don’t want this infrastructure. We don’t want these complicated responsibilities around governance and being on the board, and we want to simplify it,'” he said.

This big change is fast approaching; 59% of survey respondents reported that they expect to pass their assets on to future generations within 10 years.

Heirs are more likely to make dramatic changes if principals don’t take steps to integrate them into the family office, Thiessen said.

This can also lead to strife; Almost half of family offices with less involved managers expect an increase in family disputes, compared to 29% of firms where managers are fully involved.

Regardless of executive involvement, most family offices said they expect successors to grow their wealth and increase the use of technology and artificial intelligence in company operations.

More than half of survey respondents said they had already tried AI for market research and other tasks, and most reported positive experiences. Nearly three-quarters of firms with at least $1 billion in assets use it, while 40% of family offices with less than $500 million in assets use it.

The majority of respondents (56% of family offices have fully involved directors, while 73% of firms have less involved ones) expected heirs to increase their allocation to alternative investments. These forecasts are consistent with family offices’ positive attitudes towards private equity, direct investments in companies and real estate, the three most preferred opportunities for future wealth creation.

Respondents currently allocate a high share to alternatives excluding cryptocurrencies, with an average of 34.5%; This is almost on par with marketable securities at 36.4%. According to Bank of America, a slim majority predicted that heirs would increase their allocation to cryptocurrencies, where the current average allocation is 6.4%.

These millennial and Gen X heirs are also widely expected to maintain or increase sustainable or impact investing despite broader backlash against ESG investing. Last quarter saw a net outflow of $55 billion from global sustainable funds; The lion’s share came from redemptions in BlackRock funds. Morning Star.

Family offices were broadly optimistic about the economy, with 64% of respondents saying their biggest challenge was growing and protecting their wealth. Six in 10 respondents said they were optimistic about the U.S. stock market; private equity; and merger and acquisition activity in the coming year. More than half of firms with assets of at least $500 million expect U.S. gross domestic product to increase next year.