Why the family office of the future needs refreshed operating models

Within the focus area of people, family offices rely on an array of advisors, as shown in the chart above — whether for common needs such as banking, accounting and legal services or even for less common items like education of family members and philanthropy. On average, family offices spend almost 40% of their budgets on outsourced services (about 30% in investment management as well as 10% in other areas such as back-office support services). With the exception of real estate assets and principal (direct) investments, which are generally managed in-house, the management of other asset classes is outsourced to specialist managers.

By leveraging multiple providers for non-investment services, family offices are gaining specialized help in a difficult market for talent — an excellent strategy in a very dynamic environment. Doing so does not come without risk, as they are also opening themselves up to greater complexity that must be managed. Further, more and more vendors in the market are looking to capitalize on the trend of buy rather than build and may not yet be fully qualified to offer complex and high-touch service needs in a cost-effective manner.

In terms of operating models, single family offices are also considering new ways of leveraging external providers to support or operate certain functions that require the need for specialized platforms and resources, the separate EY Single Family Office study found. Many single family offices are collaborating with external partners to support their agenda around risk and operational scalability. Our survey found that more than 90% of single family offices are either currently leveraging or are considering co-sourcing functions related to risk management across the operating model.

Part of this acceleration toward third-party support stems from a broader set of external service providers — not just law and tax/accounting firms but also banks and others — with enhanced capabilities to support an outsourced model through greater scale and broad expertise to leverage. Such vendors are increasingly adopting institutional-grade industry accreditation to validate their process and control environments, with System and Organization Controls (SOC) and International Organization for Standardization (ISO) badges.

In the Wharton survey, family offices realize that data underpins their future and must be protected, crossing the domains of technology and processes. As such, family offices want to do more with their data. Yet those intentions must be matched with concrete plans and risk management.

About a quarter of respondents to the Wharton survey (24%) say that their family office or its personnel data has been compromised/breached by hackers or other unauthorized users — a jump from 16.7% in 2022. And of that group, 34% say the breach was slightly or moderately costly, while 8% say the fallout was extremely costly.

On average, family offices employ less than one FTE IT professional and few of these are cybersecurity experts. Even though family offices have identified cybersecurity risk as a top concern, responses indicate that they are not taking sufficient steps to address these risks. Family offices must ensure that cyber and IT risks are evaluated and that response plans are vetted, drawing from a risk framework developed at a board level.

In general, the information technology department in a family office supports a broad range of services, delivered by both in-house IT staff and external vendors. Less than 30% of family offices carry cybersecurity insurance (down from 45% in 2022) despite the potential costs associated with a data breach. However, 75% of respondents reported that they have experienced phishing attacks, compared with 60% in 2022 — a 15-percentage-point increase.

The technology stack of a family office is truly mission-critical as it enables many of the tasks associated with financial management, information consolidation and aggregation, along with client reporting. Wharton survey respondents tell us that they choose such a platform primarily based on how well it can adapt to the specific context of the family office, along with ease of use and accessibility. Cost and complete confidentiality, the other criteria offered in the survey, tie for the lowest ranking — another warning sign that security isn’t always treated as a priority.

One way that family offices are strengthening their risk profiles is by leveraging external service providers that have prebuilt institutional-grade capabilities. A side effect of looking to these vendors for services comes along with the vendor’s track record of meeting the needs of other large allocators (such as fund managers and public pensions) with tighter operational risk requirements.

Since becoming more simplified and consumer-facing, GenAI has rocketed up boardroom agendas — but at family offices, which are rightfully cautious, its impact is largely still not yet being felt in their operating models. Among respondents, 10% reported that they use AI tools to generate new investment ideas and themes, but 56% answered that AI tools have no impact on the investment management process and 25% responded they do not know the impact yet.

GenAI has multifaceted use cases. For instance, GenAI can be used to query existing financial data to create future scenarios or return just-in-time analysis that might take an analyst several hours. More broadly, overall decision-making capabilities about many data-driven topics can be enhanced with GenAI, and everyday worker productivity can be boosted as well.

As familiarity with AI tools and their capabilities increases, family offices are more likely to embrace adoption. But today, that feels like a farther-out future: on average, family offices tell us that they have just 0.5 IT professionals on staff, who are typically more oriented around the “boxes and wires” of keeping technology operating instead of AI-specific domains. Another challenge is that many family offices invest in private markets, where unstructured data sets are not as accessible for identifying patterns, trends and correlations.

So what should family offices do now with GenAI? It’s better to leverage partners first as you build up your internal capabilities and adopt more specialized use cases within your organization. The first step is education to level up skills in the office and provide growth opportunities for employees, raising retention. The earliest use case could be using GenAI tools to work more efficiently: drafting communications, summarizing data, preparing family presentations and other tasks, guided by a thoughtful human worker.

Forty percent of family offices in our sample were established after 2000. The original wealth creators account for 27%; 31% of the principals or beneficial owners of the family offices are in the second generation, while 25% of the principals or beneficial owners of family offices are in the fourth generation or later. Therefore, the good news is that most of family offices polled have some experience with a handoff from one generation to the next.

But while the operating entity may be prepared for succession, the family itself may not be. Families that have experienced disruption often experience issues on the family side, which damages the symbiotic relationship with the family office. About 40% of respondents reported that they have a formal succession plan for the leadership of the family office (moderately higher than 2022). And that figure is even lower — around 20% — for the family and for professional management of the family office, both of which represent double-digit declines from 2022. Additionally, a third of respondents reported that they have an informal succession plan (perhaps a verbal agreement).

The foundation for success relies on parallel governance, in which the family office provides operational confidence to the family member owners, who in turn return a patient capital base to the family office for investing and growth. Among the challenges they face, family offices primarily cite the young age of the next generation for planning their future roles (39%, compared to 26.2% in 2022) and the potential discomfort in discussing this sensitive subject matter (30%, a jump from 13.1% in 2022). And 22% say that no next-generation member is qualified to lead the family or family office, about the same as in the prior survey.

When it comes to trustees (who ultimately can control investments and businesses if deposited in trust), 58% of respondents reported that they are individual family members, while 50% reported that the trustees are non-family individual advisors. Based on our experience, an individual trustee tends to be an older generation, again raising the issue of succession.

Summary 

To rapidly adapt to technological advancements and gain specialized services amid talent shortages, family offices must explore new operating models with a focus on effective governance and strategic planning. The Wharton Global Family Alliance’s 2024 Family Office Survey reveals the nuances between managing risk and capitalizing on it, showing areas that are being overlooked in a disruptive business environment.