Family offices expect heirs will take new path on investing

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.

Keeping wealth in the family is easier than controlling how your heirs invest it.

For investment firms of ultra-wealthy families, the stakes are especially high. A recent Bank of America survey of 335 family offices, with 60% of respondents holding at least $500 million in assets, found that 87% had yet to pass down assets to the next generation.

More than a third of family offices with principals fully involved in firm operations expected heirs to change the family office’s mission or purpose. For firms with principals who are less involved with decision-making, the share jumps to 73%, according to the survey.

“It’s more than just passing down the wealth. We know that next generation will usher in a new era of investing, of how they think about philanthropy, how they use technology,” Bank of America’s Elizabeth Thiessen told Inside Wealth.

Thiessen, who leads family office solutions for the private bank division, said heirs tend to make significant changes such as prioritizing philanthropy over investing or even shutting down the family office altogether.

“The next generation may decide, ‘We don’t want this infrastructure. We don’t want this complicated set of responsibilities around governance and being on the board, and we want to simplify this,’” she said.

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This sea change is approaching quickly, with 59% of respondents reporting that they expected to transfer assets to the next generation within 10 years.

Thiessen said heirs are more likely to make dramatic shifts when principals have not taken the steps to integrate them in the family office.

This can also lead to strife, with nearly half of family offices with less-involved principals expecting an increase in family disputes compared to 29% of firms with fully involved principals.

Regardless of principal involvement, most family offices said they expected successors to grow their fortune and increase their use of technology and artificial intelligence in firm operations.

More than half of respondents said they had already tried AI for market research and other tasks with most reporting positive experiences. Larger family offices were most likely to use it, with nearly three-quarters of firms with at least $1 billion in assets reporting doing so, compared with 40% of family offices holding less than $500 million.

A majority of respondents — 56% of family offices with fully involved principals and 73% of firms with less involved ones — also expected heirs to increase their allocations to alternative investments. These predictions are in line with family offices’ bullish attitudes toward private equity, direct investments in companies and real estate, which were the three most favored opportunities to create future wealth.

Respondents already boast an high allocation to alternatives, excluding cryptocurrencies, with an average of 34.5%, nearly on par with marketable securities at 36.4%. A slim majority anticipated heirs would raise their allocations to cryptocurrencies, which have a current average allocation of 6.4%, according to Bank of America.

These millennial and Gen X heirs are also widely expected to sustain or increase their sustainable or impact investments, despite broader backlash to ESG investments. Last quarter, global sustainable funds saw $55 billion in net outflows, with the lion’s share derived from redemptions in BlackRock funds, per Morningstar.

While 64% of respondents said their top challenge was growing and preserving their wealth, family offices were widely bullish about the economy. Six in 10 respondents said they were optimistic about the U.S stock market; private equity; and merger and acquisition activity over the next year. More than half of firms holding at least $500 million in assets expected U.S. gross domestic product to increase during the next year.