How single family offices are balancing tradition and transformation

Policy changes always have far-reaching implications to the strategy, structure and operations of SFOs. Recently, external forces related to the pandemic, geopolitical uncertainties, economic trends and social considerations have all further intensified a keen focus on family wealth profiles. Now more than ever, many jurisdictions around the world are reviewing how their tax policies and enforcement will evolve to secure higher revenues while remaining competitive and fair. SFOs that engage and adapt proactively are better positioned to meet the obligations while satisfying the growing expectations of family, business and regulatory stakeholders.

SFOs are also concerned about how new virtual ways of working will raise new tax considerations for family members, family office employees and for their broader business ecosystem. Family Office principals and beneficiaries are often leading an international lifestyle, so when that is combined with the new norm of virtual work, it is no surprise that nearly three quarters (72%) of respondents to the SFO survey cited the tax consequences of remote working as a concern.

With so many external forces at work and with tax and regulatory policy changes likely inevitable for prominent families, nearly all SFOs will benefit from a careful review and fresh perspectives on how to best adapt to the shifting landscape.

“These issues all add pressure on SFOs as they strive to remain compliant,” says Steven Shultz, Global EY Private Tax Leader. “And they come at a time when tax authorities are collecting and analyzing data and proactively sharing that information multilaterally via automatic information exchange protocols.”

Taking action for wealth and regulation

Obtaining the necessary technology and skills in-house can be difficult if not impossible given the pace and sophistication of technology change. As such, many SFOs are considering co-sourcing aspects of the family office operations that involve the most unique skillsets and/or the fastest changing technology and operating model. Accounting, tax, technology and risk management are all emerging areas of focus in this regard.

“It’s very clear what the direction of travel is as far as the regulatory environment is concerned – faster, reliable, more sophisticated,” says Helena Robertsson, EY Global Family Enterprise and Family Office Leader. “And, of course, any digital transformation includes not only opportunity but also clearly intersects with risk and reputation considerations.”

The technological landscape creates significant challenges and opportunities for SFOs, and responses to the survey clearly show that there is an urgency for digital transformation across a broad spectrum. This is reflected in 81% of respondents indicating they have plans to make significant investments in three or more digital technologies and tools in the coming two years.

“While digital transformation provides great opportunities, it also comes with risk,” says Desmond Teo, EY Asia-Pacific Family Enterprise Leader. “And it was clear from the SFOs we spoke to that cyber security is a top of mind focus area – not just for the family office but for the entire ecosystem that includes the families themselves and of course the connected businesses.”

In this context, almost three quarters (74%) of the SFOs surveyed indicated that they have experienced some form of cyber security or data breach. Of course, SFOs are concerned about a wide range of associated risks, including theft, stolen identities, loss of privacy, threat to reputation and in some cases even physical risks related to family security. Therefore, it is to be expected that SFOs would highlight this as an area of focus.

As one SFO taking part in the survey noted: “We take cybersecurity very seriously. We’ve engaged a third-party to do 24/7 monitoring and we also do regular penetration tests. We delayed going onto the cloud due to security concerns. We will be migrating, but to a provider that will host our data completely separately.”

However, this type of diligent approach does not appear to be the norm. Despite acute concerns, most SFOs don’t have robust practices in place to respond. The survey found that 72% of SFOs don’t have a cyber incident response plan and less than a third have cyber training for employees or family members.

“Evolving technology requirements and the increase in remote working and collaboration all give rise to a greater risk from a data security perspective,” says Bobby Stover, EY Americas Family Enterprise and Family Office Leader. “There are profound benefits to be had from harnessing new technologies and to a large extent the changes are inescapable. Leading families are capturing the opportunities with one hand while simultaneously becoming more rigorous and sophisticated in managing the related risks with the other.”

Taking action for digital transformation

“We are seeing many clients require a root-and-branch review and digital transformation if legacy systems are outdated or simply not providing the required insights and benefits,” says Paul McKibbin, Americas EY Private Family Office Advisory Services Managing Director.

Before choosing or creating technology solutions, it’s invaluable for SFOs to carefully define evolving family stakeholder needs, multi and next generational expectations, strategic priorities and the SFO’s core business functions. The technology to meet these needs can range from a single off-the-shelf product to a sophisticated ecosystem of integrated solutions. Due to the ever-changing landscape, success is not necessarily measured in the result, instead it can be as much about the process. In terms of operating models, SFOs are also considering new ways of leveraging external providers to support or operate certain functions given the need for specialized platforms and resources.

Cleverly, some SFOs are taking the opportunity to proactively and formally engage the next generation of family leaders to play a prominent role in defining and designing the technology solutions for the future. Often this next generation brings a comfort with digital trends and their involvement can spur innovation and alignment with expectations and objectives for the future. 

Taking action on risk and reputation

“Many families have asked us to serve as a fresh yet informed set of eyes – to sit down with them and review their governance frameworks to surface opportunities relative to their peers,” says David Bowen, Partner, Ernst & Young LLP. “They are asking us, what can we learn from others and where are our biggest gaps and opportunities?”

It all comes down to a commonly agreed ownership strategy. A properly designed risk program is framed by what the family perceives as its high-level risks and its risk appetite. Top areas of focus include investments, family reputation, cyber, and data security and integrity — but not all families rank these equally or view them in precisely the same way.

Even with a properly designed (or refreshed) risk strategy and program, the benefits materialize only once an enhanced risk management model is implemented and operating as intended.

To ensure benefits are realized and sustained, SFOs should establish an evergreen program for testing and adapting their processes on an ongoing basis. By adopting a comprehensive approach that is tailored to their own risk appetite, resources and strengths, SFOs can ensure delivery more certainty and resilience.

Many SFOs are collaborating with external partners to support their agenda around risk. Our survey found that more than 90% of SFOs are either currently or are considering co-sourcing functions related to risk management.

“There are many reasons for this shift,” explains Lauri Oinaala, EY EMEIA Family Enterprise Leader and EY Global NextGen Leader. “Family offices told us that they see the growing expectations from consumers and society at large and as importantly the powerful influence of next generation family members. These considerations include – and yet extend beyond – traditional financial performance metrics and we see many families innovating how to incorporate this agenda formally in their strategic planning and governance constructs.”

Leading SFOs are already taking action in various ways. According to the survey, 44% plan to exclude investments that do not align to the family’s ethics and values. This may be ESG related or reflect other values of the family. Increasingly these types of protocols can also influence family reputation.

Yet the survey also exposes a potential execution gap. While 83% of SFOs indicate that it is important to measure and optimize non-financial performance, currently only 30% do so to a significant extent. When it comes to measuring performance, across all regions of the world cost rather than value surfaces as the most widely deployed metric for the SFO.  As the goals and aspirations of the family expands, it will be critical for SFOs to be afforded – and take the lead in designing and deploying – next generation performance criteria that contemplates the broader mandate that’s emerging especially as it relates to ESG.

There is a proven tangible benefit to innovating and evolving performance to include new measures. Our survey shows that 58% of SFOs that have included non-financial metrics to a significant extent have performance that exceeds expectations.

“Family offices are in an exciting position in that some families will be introducing ESG and other new metrics for the first time,” says Helena Robertsson, EY Global Family Enterprise and Family Office Leader. “This provides the SFO leadership a unique, once in a generation opportunity to influence and proactively shape new performance criteria with the principals and, as importantly, ensure that the operations, infrastructure, strategy and governance of the SFO are properly resourced to satisfy the growing expectations.”

Conclusion

What an exciting and yet also challenging era for the world’s SFOs across the globe. Tax, regulatory and economic policies and disruptions are accelerating as jurisdictions around the world attempt to address a wide range of societal and geopolitical challenges. In addition, we see incredible innovation through emerging technologies that create profound opportunities and new risks for families and their interests around the world. All the while, the leading SFOs remain steadfast and proud in their purpose – a commitment to growing, improving and protecting the family legacy across generations.

The four key themes that emerged in this survey were very much consistent with the daily interactions that EY teams have with leading family offices around the world. SFOs are navigating new pressures related to their wealth and the regulations and reporting requirements related to it. All the while, they see exciting opportunities to make use of new technologies and use data proactively to deliver insights and wisdom like never before.

Given the amount of capital family offices now have and the macro-economic and technological risks and opportunities today, many family offices struggle to balance this confluence effectively,” says Ryan Burke, Global EY Private Leader. “As a result, we see many SFOs considering new operating models and ecosystem relationships to strengthen the support for key functions such as technology, accounting, tax, and risk in particular.”

SFOs are some of the most dynamic and complex organizations we work with and they face profound, fast-moving changes from many directions. The drivers are the need to access scaled technology and resources that can be lonely to build and maintain internally. In this dynamic environment, it has never been more important for SFO leadership to take a fresh review and incorporate outside perspectives related to their strategic planning, governance and risk management constructs. These topics have been carefully considered for years so to some extent some may ask “what’s new here”? What our survey exposes is a new expectation that SFOs renew, adapt, and professionalize these systems with explicit and formal alignment to family purpose and priorities. Like never before SFOs are looking to establish next generation structures and talent to manage and sustain these critical underpinnings for any family office.