Playing it safe is no longer an option for family offices

This article was first published via Professional Wealth Management.

Against a volatile geopolitical landscape and world of constant economic shocks, families are being urged to rethink strategies.

A seemingly never-ending stream of geopolitical shocks, continual changes to legislation and shifting investment priorities from one generation to the next have combined to create a highly uncertain and complex global investment landscape for family offices and private wealth managers.

Ongoing conflicts in the Middle East, the Russia-Ukraine war and escalating tensions between mainland China and the US, are all creating market volatility and uncertainty. Recent (and upcoming) elections in more than two dozen significant countries — including France, Germany, India, the UK and the US — are expected to lead to policy shifts that will have an impact on global wealth management.

In the face of this growing complexity, sitting tight is not an option: family offices and private wealth managers need to adapt to ensure their wealth is not exposed to unnecessary risk.

As the chart below from the latest Global Business Complexity Index sub-report for Private Wealth and Family Offices shows, regulatory, political and operational risks are considered the most challenging among multinational businesses. Family offices must also consider changing tastes in investment goals, especially as wealth is transferred from one generation to another.

Risk factors considered the most challenging for organisations (%)

Source: Global Business Complexity Index sub-report for Private Wealth and Family Offices

For many private wealth and family office managers over recent years ‘playing it safe’ has meant directing funds away from markets that have been viewed as unnecessarily risky to safer, more established markets, in particular the US.

But there are signs that the tide is starting to turn, as new uncertainties enter investors’ minds.

Uncertainties driving creativity

While finally knowing the result of the US elections calmed the markets somewhat, there are fresh doubts about what lies ahead. Will promised US tariffs come into effect and drive inflation? Will other countries retaliate with tariffs of their own? Will US government debt continue to rise? What effects will any changes in US foreign policy have on global markets?

Such doubts are driving family offices and private wealth managers to look again at the balance of their portfolios and seek value in investments outside of traditional ‘safe havens’ as a way to de-risk. Many are looking for new opportunities in high-growth and emerging markets through innovative structures and co-investment approaches.

A good example of this is the case of a prominent family in the Middle East that works with TMF Group, which has extensive businesses in food distribution and real estate across the Gulf region. They were concerned about concentration risk and wanted to diversify investments in two ways, potentially in partnership with other families or investors.

The family wanted to diversify geographically — given the instability in the Middle East — and were keen to find investment opportunities in Europe or the Americas, preferably in food distribution or retail as these were industries they knew well. They also wanted to broaden investments beyond their two main business lines, preferably in technology or AI innovation. We have heard from a number of families in the region with similar concerns.

Having consulted with other families and investors that had greater experience working in these fields, the family recognised the importance of setting up the right structure to support their investment, working alongside specialists.

In another recent project, we were approached by an investment bank with a US client looking to invest into Asia to diversify away from their purely domestic investments. They were concerned about geopolitical uncertainties following the US election. Having considered ‘traditional’ Asian investment targets in China and Japan, they decided these were either too complex — given potential political tensions and trade tariffs — or simply too expensive. Following further research, they selected Vietnam as an investment target, given the value and market access it provides. With no prior experience of investing in the country, they needed help to understand restrictions and local requirements. They also needed guidance and access to appropriate legal and tax advice needed to make decisions on how best to deploy investment capital.

Simple is the best

In the face of geopolitical uncertainties, there is also a trend towards consolidating wealth management structures across multiple jurisdictions. Previously, special purpose vehicles (SPVs) were often used in a large number of countries, and across multiple service providers, to manage assets. However, geopolitical instability and rising operational costs are making such fragmented asset management less viable. There is a growing trend towards creating unified structures, which streamline management and mitigate risks associated with global complexities.

Family offices and private wealth managers are increasingly looking to simplify their wealth management structures and reduce complexities of operating across multiple jurisdictions with multiple service providers. This trend is driven by the post-pandemic preference for quality over quantity, which prioritises stability and consistency in financial arrangements.

In an uncertain world, family offices and private wealth managers are having to adapt their strategies more regularly, with a shift towards wealth protection and succession planning, to ensure they are resilient enough to withstand unforeseen changes and disruptions.