Family offices are overlooking governance in 2023: Citi report

Ultrarich families are warming to bonds in the marketplace but looking away from bonds with their heirs, according to a new study on the latest family office trends. 

Citi's annual "Global Family Office Report," published on Thursday, found that amid the market uncertainties of 2023, some of the richest families in the world have dramatically increased their investment allocations to fixed income, an asset class that most commonly includes bonds — "the biggest asset allocation change in the history of the survey," Hannes Hofmann, the global head of the global family office group at Citi Private Bank, said in an interview. Over half of the respondents, 51%, grew their exposure to fixed income over the past year as rising interest rates fattened yields — whereas in the past two years, only around 20% had done so, the report said. Across the board, "38% upped private equity allocations, while 38% cut public equity allocations," the report authors wrote. 

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Yet somewhat ironically, as the move to embrace the perceived stability of bonds accelerates, the study found that respondents were notably cooler than last year on a key factor in ensuring the stability of a family's overall wealth — their attention to long-term relationship building with heirs, to ensure a smooth transition of wealth to future generations. 

In 2022, "fostering family unity and continuity" was respondents' top priority overall, the study said, but this year it ranked far below other items for family office leaders. That finding could be an important reminder for financial advisors working with family office clients to emphasize discussions of governance, succession and next-generation wealth stewardship. 

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Some 74% of respondents in the study said their top priority was "typical wealth management services," and 55% said it was "mainly investment management," while only 21% chose "fostering family unity and continuity." The results were consistent across regions of the world, the report said. At the same time, most respondents said their top concerns were "preserving the value of their assets" (68%), which can dissipate if heirs are unprepared to handle them, and "preparing the next generation to be responsible wealth owners" (60%) — a key outcome of effective family governance planning. 

"This insufficient alignment is worrying as families' main apprehensions reflect the dual need to prepare wealth for their family and their family for wealth," the report authors wrote. 

"Stock markets being up this year, a lot more (family offices) focus on private assets," which includes private equity, said Rodrigo Faro, Miami CEO at multifamily office Brainvest Wealth Management. 

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The shift in priorities for clients made sense for Hofmann considering the macroeconomic uncertainties of the past year, he said. "In times of uncertainty, people need to focus more on how to preserve value for the family, and that time has to come from somewhere… . The families themselves still want to think about how to educate the next generation, but it's taken a bit of a backseat this year." 

Citi

Hofmann added that families who built their fortunes in the first or second generation tend to focus less on governance than older-money clients in his unit — but are eager to learn from them. 

Citi serves around 1,600 family offices worldwide, Hofmann said, adding that the average family office client has a size of around $3 billion. The survey, which was conducted over the summer with family office clients at Citi, garnered replies from 268 of those clients this year, whose total net worth was $565 billion — with a majority hailing from outside of North America.

"This is more participation than any year before, which probably shows that family offices feel the need to get a better insight into what other family offices around the world are thinking," Hofmann said.