Responding Now and Planning for the Future

As the private client community continues to work through the repercussions of one of the most catastrophic pandemics of this century, never before has the need for this sort of specialist experience and support been so apparent.

With the full economic impact of the pandemic yet to be realised, we can anticipate significant global uncertainty over the coming months and dynamic, resilient and stable international finance centres (IFCs), will undoubtedly have a role to play in responding to that – for example, supporting global financial flows through these unprecedented circumstances, helping to channel capital to where it is needed most in the world, and ensuring assets are secure and protected.

In fact, current circumstances are already shaping how private individuals, families and family offices are approaching their investment and succession planning strategies in the long-term.

Looking to the next generation of wealth owners - set to inherit an estimated US$15 trillion by 2030 (Wealth-X) - they are already focussing on how their investment decisions could make a positive impact on the world.

To secure the longevity of their wealth, families are also looking at ways to diversify, both geographically and in terms of strategies. Research suggests, for instance, that the next generation is seeking more innovative and sustainable investment strategies - UBS’ 2019 Global Family Office Report predicts portfolio shares in sustainable investing will rise from 19 per cent now to 32 per cent within the next five years.

Now there is added impetus for that next generation to think carefully and in targeted ways  about how they could make a positive impact by addressing the specific – and potentially highly complex – issues thrown up by the pandemic. If they get it right, aided by the  correct support, they stand to make a considerable difference.

If IFCs are to sufficiently support the needs of the future family office, it is vital that they have a clear and in-depth understanding of the issues faced by the next generation.

Those issues were already being informed by drivers pre-coronavirus, but the challenges – and opportunities – arising from the pandemic  should serve to sharpen that focus as families and the IFCs they work with look to the long-term.

Governance Focus

In an increasingly complex family office space – one that is global, multi-faceted, multi-generational, digitally-driven, and facing ever greater rafts of regulation and reporting requirements – having strong governance structures in place is no longer a nice-to-have, it is absolutely vital.

Knowing ‘how’ wealth is managed can help to avoid rifts between siblings and parents – and Jersey Finance’s recent research on the evolution of family offices in Asia backs this up.

In the context of the Gulf region, findings in the PwC ‘Family Business Continuity in the Middle East & Muslim World ‘ 2019 report showed that less than one-third of large family businesses in the region had effective policies and practices in place to govern the family business. Specifically, they lacked policies to address challenging family dynamics and common conflicts, a significant finding given that family businesses make up 90 per cent of the private sector.

Encouragingly, though, there has been a trend for the next generation to work more closely with external advisers to professionalise family wealth structures. In Asia, for example, historically families have relied on basic succession tools such as simple wills or holding companies to manage wealth transition. Now, it is increasingly common for the founder generation in Asian families to bring in the next generation and integrate them into the business, working with external professional advisers.

In addition, families are increasingly exploring digital opportunities to help professionalise their infrastructures and bolster their governance capabilities.

With the next generation placing a growing emphasis and appreciation of the value of the role digital technologies can play in facilitating business, complying with regulations, and building global relationships, IFCs need to ensure they have the right sort of digital platform to support those needs and expectations.

It’s why Jersey, as a forward-thinking IFC, put in train some years ago a digital strategy that would ensure the delivery of high speed fibre connectivity to every household and office on the Island – a strategy that has enabled more than 400 digital and creative businesses and a community of more than 3,000 digital and technology professionals to flourish in Jersey. This impressive investment contributes to the ability of the financial services industry to maintain its high-quality services to a global client base by staff working from home during the pandemic. The Island’s company registry continued to facilitate new incorporations and transfers, largely unaffected by the crisis.

This kind of expertise and resilience is already proving hugely appealing to future-focused family offices to support their global enterprises, but also crucially their approach to governance; for example, through top tier cyber security and wealth-tech platforms.

With more and more families looking for support to enhance their governance and professionalise their approach, Jersey’s reputation as a sophisticated and experienced wealth management centre is setting it clearly apart from other IFCs.

Appreciating Diversity

One key issue that emerged strongly in Jersey Finance’s own piece of fieldwork with family offices last year was that, while there are similarities in the behaviours and needs of Ultra High Net Worth (UHNW) families, there is also huge diversity across the family office space and that there are significant differences that are unique to different markets.

Jersey Finance’s experts, with their global experience spanning not only the UK and Europe, but the Gulf region, Asia, Africa and the US too, are focused on drilling down to understand the specific needs of families in those markets, to ensure a smooth generational wealth transfer and to support their distinct ambitions.

For example, our experience has been that families with a US connection look predominantly for bespoke, tailored solutions and are attracted by jurisdictions that offer certainty, political stability, and legal certainty.

In Asia, meanwhile, the traditional ‘command and control’ style of business is being challenged by the next generation who are looking for innovative ways to change leadership models. IFCs need to understand those subtle inter-generational dynamics and family politics when it comes to transforming succession planning models and putting in place structures that will resonate clearly among Asian families.

Africa is different still. Notwithstanding the impact of Covid-19 on the continent, the indications are that, over the medium term, wealth creation is on the rise and the number of millionaires will increase – by 16 per cent in South Africa, 22 per cent in Kenya and 11 per cent in Nigeria, according to Knight Frank. Indications suggest that some of this wealth may not necessarily stay in Africa, with families who have sent their children to be educated in the west finding that they have now settled in those countries. As a result, family structures need to be tailored to meet those international requirements.

Meanwhile, the Gulf region has become home to a pool of talented women actively contributing to shaping their countries’ financial future. In addition, there is a strong push by governments to become front-runners in adopting new technologies such as the Internet of Things, AI, and blockchain. All of this is demanding that IFCs demonstrate how their expertise can help reflect evolving gender dynamics and support the drive towards digital adoption.

Principles

One area where there is growing commonality, however, is in the desire to be driven by principles and values, and Covid-19 is likely to accelerate this drive further. After every major market downturn, there is always a tendency for political and public discourse to turn towards wealth politics and rhetoric around social inequality, and it is likely we will see this again as part of the coronavirus fallout.

Having weathered the fallout of the last global financial crisis over the past decade, families have become far more alive to their role in public debate and acutely aware of their responsibilities as custodians of wealth. That is increasingly being manifested through family office principles.

In the US for instance - home to more UHNWIs than Asia and Europe combined (Knight Frank) - impact investing is growing at a rapid rate, with more and more US families looking to align their investments with their values. This pursuit for ‘doing good’ matches up with the findings of the Knight Frank Wealth Report 2019 with almost 70 per cent of respondents saying their clients’ philanthropic activities were increasing. Equally, Jersey Finance’s family office field work last year found they all shared a common aspiration towards philanthropy.

It’s clear that IFCs will need to be right at the cutting-edge in an area that is continuing to evolve, particularly in measuring positive impact through, for instance, ESG investment and sustainable finance.

If families are to be able to evidence the positive role they are playing and respond to the anticipated fallout of the pandemic, this will be an increasingly important battleground, particularly for the next generation;  it will be those jurisdictions that can demonstrate specialist expertise in impact investing and engagement with the next generation that will be well placed to support this trend.

Against an unprecedented backdrop, providing families with the platform they need to respond positively now and plan for the future is absolutely vital.

Prior to Covid-19, families were already gearing up to exist in an increasingly complex world. The pandemic has served to make the environment even more complex, and sharpen the focus on the fundamentals required by family offices from their IFC partners - stability, flexibility, service quality, and international connectivity – as they look to enhance their governance credentials and meet their principles-driven investment aspirations in the years ahead.

Joe Moynihan
With a career in financial services spanning four decades, Joe has a strong commitment to the future success of the industry in Jersey. Joe commenced his professional life in the banking sector, rising to the position of CEO of Jersey and the Isle of Man for a major bank, which included responsibilities for trusts and investments. In recent years, he expanded his focus as Director of Financial Services within the government of Jersey, where he worked closely with industry and regulator to ensure the island’s position as a leading international finance centre. Before joining Jersey Finance in February 2019, Joe was working to establish high-reputation regulatory frameworks and business models for IFCs in the Middle East and Africa.