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How single family offices are balancing tradition and transformation

EY
EY Canada

Multidisciplinary professional services organization

15 minute read 11 May 2022
Related topics
Tax
Family enterprise

As the role of single family offices evolves, so too will managing competing pressures and securing their futures.

Three questions to ask

  • How is the strategic role of the single family office evolving?
  • As they face a range of new and competing pressures, how do single family offices find the right balance?
  • What steps are single family offices taking to support the family office stakeholders? 

EY teams recently engaged with more than 250 of the world’s leading single family offices (SFOs) – our aim was to gather and share deeper insights into their priorities in today’s high-pressure and fast changing environment.

The EY Single Family Office study was commissioned to get to the heart of how SFOs perceive their own capabilities, where they see growth opportunities or market challenges and how they learn from best practices. This study leverages that information to support families as they:

  • Create and protect long-term value
  • Optimize family office strategy and operations
  • Innovate around purpose, priorities and legacy

In times of accelerating – and often unanticipated – economic, social and geopolitical disruption, the strategic role of the SFO continues to amplify and expand.

In speaking to these leading SFOs, it was striking that regardless of where they are and the functions they undertake, a number of common areas of focus emerged.

The key findings of the survey are set out across these focus areas and reflect the insights shared by our respondents:

  • Wealth and regulation
  • Digital transformation
  • Risk and reputation
  • Strategy and governance

Each of these four focus areas will be addressed in turn together with the actions that leading SFOs are taking to respond to the changing environment and to deliver gold standard support to the family office stakeholders.

First is the sheer pace of change when it comes to wealth and regulation including economic and, perhaps most significantly, tax policy and transparency initiatives. Changes in the wealth and regulatory landscape are impacting all aspects of family office strategy, planning and execution with the pace of developments necessitating the almost unprecedented demand for agility. For example, increasingly jurisdictions around the world are using tax policy and transparency initiatives as a platform for addressing broader economic and social policy issues. Now more than ever fresh perspectives are needed to satisfy critical obligations while sustaining the strategic focus in support of family stakeholders.

Another finding is that technology and digital transformation trends are featured more and more as a key priority of SFOs – not only with respect to the SFO itself but also related to connected businesses and to the family itself. Whether it’s cybersecurity or intelligent automation to improve efficiency and manage risk, there is a clear drive towards a “digital first” mindset in many SFOs. Both within the family and its operating business, digital transformation offers profound opportunities and important considerations for SFOs. Disruptive tech is here to stay.

A third area raised by SFOs was the need for more sophisticated and rigorous models for managing an expanding scope of risk and reputation considerations. Risk management has long been a strategic focus for most SFOs and yet many are seeing the need to revisit scope, methods and leading practices. A failure to do so can leave families and family office leaders exposed to unexpected surprises. One of the dynamics driving new risk and reputation frameworks is the expanding definition of value and risk to include new environmental, social and governance (ESG) considerations. SFOs identified this as an area for increased focus and action particularly as it relates to evolving, multi-generational family priorities and legacy amidst more prominent ESG trends.

Above all else, amidst this backdrop, SFOs and prominent families themselves are being intentional in designing and operating more sophisticated and strategic governance constructs. Dual Governance that both distinguishes and aligns the business and family governance, integrates where appropriate and contemplates the strategic and often essential role of the family office is facilitating clarity, execution and stakeholder alignment.

LOW ANGLE VIEW OF BUILDING
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Chapter 1

Wealth and regulation

The pace of change warrants fresh perspectives.

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.

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.

As one SFO in the survey commented: “Companies now need to be much more transparent about their taxes to both shareholders and tax authorities. Family offices and family businesses aren’t just worried about the next two to three years, but the next 50 to 100 years. If you want to be sustainable for the long term, you can’t get entangled in a cross-border tax issue.”

 

There is a delicate interplay between increasing demands for transparency and obligations for additional reporting and the ongoing desire to maintain personal and family privacy. It is perhaps unsurprising, then, that more than two thirds (67%) of respondents in the survey are significantly concerned about three or more regulatory issues. Tellingly, however, 64% are not very confident that their tax operations are high performing, which would indicate work needs to be done to remain compliant.

Wealth and regulation
of respondents are significantly concerned about three or more regulatory issues.

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.”

Outdoor public jungle gym rope equipment on the Nallikari Beach, Oulu Finland
2

Chapter 2

Digital transformation

An increasing sense of urgency to transform including to address cybersecurity.

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.

Digital transformation
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.

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.

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.

PANORAMIC VIEW OF A SAND
3

Chapter 3

Risk and reputation

The evolution of structures and models.

While many SFOs would call out risk management as a key function to fulfill, our survey suggests some feel their risk management frameworks could be more robust – in fact less than half (49%) of SFOs were confident they have a structured process in place for identifying risks. 31% say decisions about risk management are not taken at the highest levels of the organization.

 

SFOs also reported difficulty in planning and enforcing risk management processes on family members. One respondent commented: “It can be complex as a family office to manage risk. I can tell employees what to do to mitigate risk, but I can’t tell a family member.”

 

“A lack of formal, institutional-grade risk management can mean surprises or expectation gaps for family offices or for the families themselves. It can leave SFOs in a reactive posture or spending valuable time fighting fires,” says Bobby Stover, EY Americas Family Enterprise and Family Office Leader. “Beyond any financial or business risks, there can also be reputational risks given the prominence of the families.”

 

The good news is robust risk management often delivers broader benefits to the organization. It can become a true advantage that reinforces trust and confidence within the organization and with the stakeholders. In the best cases, these processes also identify new areas of opportunity and innovation.

The good news is robust risk management often delivers broader benefits to the organization. It can become a true advantage that reinforces trust and confidence within the organization and with the stakeholders. In the best cases, these processes also identify new areas of opportunity and innovation. 

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.

Risk and reputation
of SFOs are either currently or are considering co-sourcing functions related to risk management.
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4

Chapter 4

Strategy and governance

The broadening view of long-term value.

SFOs support the legacy and priorities of the family typically across generations. In an environment where changing regulations and emerging technologies create disruption, having a strategic plan and governance systems for the family office, validated and refreshed periodically, is more important than ever before. Most SFOs indicated they have some form of strategic planning and governance construct in place. That said, for too many SFOs these systems are relatively informal and too often can leave gaps in expectations, execution or escalation. 
 

Taking action on strategy and governance

A trend for leading SFOs is a growing appetite for and commitment to more rigorous strategic planning and governance systems. This has only been reinforced by the pandemic. The greater the complexity and diversity of the family and its assets, the more critical governance becomes. Formal governance structures support the SFO to set clear boundaries, coordinate and prioritize demands, and differentiate roles and responsibilities across family and business stakeholders, risk domains and areas of strategic focus.

A hot topic among many families and their SFOs is the growing appetite for defining value and purpose well beyond traditional performance indicators, most notably in the ESG arena and other forms of value in their ecosystems such as human capital, societal and community value and customer and stakeholder impact.

A hot topic among many families and their SFOs is the growing appetite for defining value and purpose well beyond traditional performance indicators, most notably in the ESG arena and other forms of value in their ecosystems such as human capital, societal and community value and customer and stakeholder impact.

“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.

Non-financial metrics
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.

Summary 

As single family offices navigate the pace of change in regulation, technology, risk and governance, they will need agility to balance their obligations with the need to maintain the strategic focus in support of family stakeholders.

About this article

EY
EY Canada
Multidisciplinary professional services organization
Related topics
Tax
Family enterprise

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