Six challenges that single-family offices need to address
Single-family offices need to overcome multiple challenges in order to meet the complex requirements involved in managing the assets of wealthy families. We look at six major obstacles, and highlight the solutions used by single-family offices to deliver the best possible service to family members.
1. Finding the right partners
Single-family offices enable affluent families to access a wide range of in-house wealth management services. In many cases, however, they are unable to provide sufficient resources for each service. Choosing external partners and financial service providers who will implement their own strategy is therefore a fundamental decision for single-family offices.
The list of potential partners is easily narrowed down based on the requirements and existing expertise within the single-family office. The service providers then need to be evaluated based on predefined key criteria in order to find the partners that can best meet the family's needs. These criteria will include the partners' experience, costs, a risk assessment of collaboration, and even the personal chemistry between members of the family and service providers.
Single-family offices: Selection process for external partners
Source: Credit Suisse
2. Structuring human resources policy and recruitment
The increased professionalism of many single-family offices is leading to the recruitment of more and more specialist managers. In the Credit Suisse 2021 Single-Family Office Study, 51% of respondents cited recruitment and long-term retention of staff as one of the biggest problems facing them over the next five years. The absence of formal structures such as an HR department can make it difficult for family offices to recruit.
It is therefore advisable to ensure human resources is clearly structured within the institution. For instance, key staffing decisions should be made by a committee and not by individuals. Additionally, a consistent compensation model that matches the circumstances of the family office, regular and structured performance feedback, as well as an open and transparent corporate culture, are key elements of successful talent management. This allows family offices to position themselves as flexible, open employers and an attractive alternative to large companies.
3. Optimizing the cost of the family office
A study produced by consultancy firm FOX shows that internal costs account for 55% of the total cost of family offices – and are on a rising trend. The development is even more acute in the case of family offices that are developing more services in-house and therefore hiring more staff. By contrast, family offices specialized in only a handful of selected services usually have the lowest running costs.
Achieving an improvement in cost efficiency is therefore a major challenge for many family offices, with measures to reduce internal costs, such as recruitment expenses and the cost of in-house infrastructure and IT solutions offering the greatest potential.
4. Defining investment processes within the family office
Social and economic changes such as the COVID-19 pandemic and climate change constitute obstacles to the implementation of investment strategies. However, the personal expectations and objectives of family members also have a bearing on investment decisions.
Clear guidelines in the investment process, from the definition of an investment road map to its implementation and the portfolio review, can be helpful for family offices in terms of reconciling these different aspirations. This approach is the best way to manage the opportunities and risks of all investments, and at the same time optimize returns over the long term.
Step-by-step definition of investment process in a family office
Source: Credit Suisse
5. Ensuring data security for the office and family
The integration of state-of-the-art technologies will pose a challenge for lots of family offices in the near future. While the rapid pace of technological progress enables further efficiency gains to be made, it also necessitates a constant renewal process within IT in order to retain competitiveness.
Family offices need to consider platforms for portfolio management, reporting, as well as the risk management of investments, and then adapt them to their individual needs either internally or through third-party service providers.
The extensive assets held by family offices make them vulnerable to cyber-attacks, both on their own IT infrastructure and on the personal devices of family members. In this area too, it is therefore vital for family offices to come up with solutions that will protect against the risks to the assets managed, as well as the privacy of family members.
6. Preparing succession planning with a family office
The handover of family assets to the next generation is often a complex task that can cause conflict. A family office can help ensure that the technical and emotional aspects of succession planning are better managed, as well as facilitate a seamless handover of the assets. It can provide a platform to facilitate intra-generation communication and make it easier for the different needs and values within the family to be reflected in the investment philosophy. A family office also gives the next generation access to knowledge and networks as well as an opportunity to take responsibility for the family assets at an early stage.
