COVID-19 an opportunity for Family Offices to review their purpose

For Family Offices (the office) now is a good time to reassess and prepare for the future through a thorough review into their structure and purpose.

Step one: Organise a meeting of the family and confirm the purpose of the office.

During the pandemic, ensuring communication channels are kept open with family members is a top priority, with video conferencing often the only option for a face to face meeting.  While these meetings are a great way to see each other again, it’s worth using them to ensure that the role of the Family Office and what it is designed to do remains relevant. When first established Family Offices should have a sense of its ‘mission’. Essentially what the family wanted it to achieve. Perhaps it was implicit but now it’s really important to ask the question, does that mission still reflect what the family needs the office to do on its behalf?

This is also imperative if the office is serving the third or fourth generation of the family where the individual needs and wants of family members may diverge widely from its original purpose.

The term ‘family wealth’ incorporates many elements not just the financial but also its social (reputation) and human capital. The younger generations may have a very different view of what it most important is this equation.

Step 2: Consider a thorough risk review of operations and security.

We’ve been aware of an increase in the incidence and impact of risks ranging from targeted cyber security breaches, to domestic fraud and payroll misappropriations over the past few months.

It’s quite possible that risks may exist in the way younger family members use ‘social media’ often garnering unwanted attention. Education on safe use of technology is fundamental to ensure data and reputational breaches are avoided at all costs.

At a global level, there has been an increase in threat activity directed towards high risk individuals and their private residences.

If the office’s principle purpose is to ‘preserve the wealth of the family’ making sure that all financial and non-financial risks have been identified and mitigation measures undertaken is important.

Step 3: Understand how the family’s portfolio is reacting to COVID 19

The majority of Family Offices in Australia are well positioned with sufficient liquidity in their portfolio, well supported by the actions of the government both in reaction to the crisis and before.  However it is worth identifying what holes have appeared since COVID-19? Are there extraordinary opportunities to deploy capital?

Family Office platforms enabling ‘peer to peer’ deal flow have become increasingly useful as a basis for assessing what other families are considering. Recently there’s been a great deal of interest in private equity deals where ‘founders fund founders’, early stage venture into tech orientated businesses, and continued interest in ‘distressed’ situations debt.

Step 4: Review consumption patterns and family expectations.

Whilst, investment opportunities exist that can generate significant capital growth, it is likely that yields on certain more diversified pools of capital will reduce as interest rates continue to remain low and companies in the short to medium term reduce their dividend pay-outs. It is also likely the weakening of the US dollar will negatively impact on the amount of Australian capital generated from global equities portfolios.

One conversation that may be important is to manage the expectations of the family as regards the prospective returns the Family Office is capable of returning to the family in the next two to three years and start planning with the family what this may mean for ‘distributions’.

Step 5: Review technology and reporting

Finally, many Family Offices benefit from reviewing their current reporting frameworks and utilisation of software. The time costs related to the manual input of data and upkeep of excel spreadsheets is a common problem and can be streamlined with a more up to date approach to record keeping.

Thankfully there have been significant advances made in the capability of non-custodial reporting platforms which can lead to the reduction in Family Office investment management costs from anywhere between 10-50bps on assets under management. Now may be a good time to test the operational framework from a cost and durability perspective.

Taking these five steps will help to recast the Family Office’s role, on behalf of the family.

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