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Getting fit for the future: Prioritising cybersecurity, investment and succession

As operating environments become increasingly competitive and complex, the family office of the future will need to become savvier about their investment strategies while tackling challenges such as cybersecurity and succession, experts say. The ones that do not risk sleepwalking into disaster.

Early in 2019, a 20-year-old German man admitted to police that he was behind one of the country’s biggest data breaches where hundreds of documents containing private information of a thousand public figures were leaked online.

What shocked authorities, however, was the man had no formal IT training—he had just collected information from publicly available sources and taken advantage of unsophisticated passwords. The revelation drew the ire of the interior minister Horst Seehofer, who urged the public to increase their sensitivity towards cybersecurity.

For family offices, cybersecurity ranked highly among key risks for the year, with a quarter (29%) highlighting the importance of protecting against cyber-attacks. Last year, 31% of family offices reported to have suffered from one or more cyber-attacks, but only 52% have cyber plans in place.

Lily Kennett, director of intelligence at Schillings, says families should be looking at cybersecurity as a human issue rather than a technological one.

“Because cyber-attacks involve computers and networks, most people regard it as a technical concern and leave it in the hands of an IT expert,” Kennett says. “Best practice involves a multifaceted approach and needs behavioural and organisational training and education, as well as technical resilience. “More cyber-attacks rely on manipulating human behaviours to gain access to a system so principals should audit their own public information because when people understand what information is public, they are much less naive and less susceptible to manipulations based on the use of personal data.”

Investment trends

This year (2018) saw family offices increase their appetite for alternative investments, increasing their allocations in private equity, hedge funds and real estate to 46% of their portfolios and half plan to invest more.

However, Fred Fruitman, managing director of Loeb Holding Corporation—the Loeb family office’s investment arm—warns family offices not to succumb to “herd instincts” by piling into the alternative investment space just because everyone else is doing it.

“I find this trend concerning—I don’t think that it’s driven by hard analysis. They are doing it because everyone else is doing it and family offices will continue to do it until they get burned and realise that 46% is too big an allocation for it—maintaining a balanced portfolio is much wiser.”

Co-investing, which one family office in North America described as “one of the big fashions of the family office world at the moment”, is also trending among family offices, with 92% of direct co-investment deals meeting or exceeding their performance expectations.

Despite the positive outcomes, Rebecca Gooch, director of research at Campden Wealth, says families need to proceed with caution when looking to invest more into co-investment deals.

“It is important to find a partner that you trust—trust is paramount and one with interests that are well aligned with your own and with a strong track record of successful deals in the sectors you are interested in,” Gooch says.

Open dialogue

While family offices look to create even greater returns from their portfolios, the number one ranked priority for families is creating and maintaining a good system of communication, which Gooch says is key for the future success of any family office.

“Given the complex nature of a family office and the scale of wealth being managed, a good system of communication is imperative—it can help facilitate idea generation and consensus building over forthcoming strategies, the early identification of emerging problems, and approaches to mitigate them,” she says.

Catherine Grum, head of family office services at KPMG, agrees and suggests families should consider looking into the process concluding that a formal written constitution is not for them.

“Much has been written about the value of family constitutions, but a lot of the benefits are actually derived from the process the family goes through in establishing their common values and shared purpose,” Grum says.

While communication between the generations topped the priority list for family offices, the ever-looming issue of succession planning moved at a glacial pace, with only 43% having a method in place.

This is despite 70% of global families expecting a wealth transfer to the next generation within the next 10-15 years, says Gooch.

“Succession can be tricky to navigate, so we strongly advise families and those who support them to proactively begin planning for the future,” she says.

“In fact, many multi-generational legacy families say that they prepare for generational transitions decades in advance and the most forward-thinking families have plans for both long-term succession and contingent succession.”

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