Family offices expect heirs to take a new path in investing

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for the high-net-worth investor and consumer. subscription To receive future issues, directly to your inbox.

It is easier to keep wealth in the family than to control how it is invested for your heirs.

For investment companies belonging to ultra-rich families, the risks are particularly high. A recent Bank of America survey of 335 family offices, where 60% of respondents had assets of at least $500 million, found that 87% had not yet transferred their assets to the next generation.

More than one-third of family offices whose directors are fully involved in the company’s operations expect heirs to change the mission or purpose of the family office. For companies whose managers are less involved in decision-making, the share jumps to 73%, according to the survey.

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

Heirs tend to make big changes such as prioritizing philanthropy over investing or even closing the family office altogether, said Thiessen, who leads family office solutions for the private banking division.

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

This radical change is fast approaching, with 59% of respondents saying they expect assets to be passed on to the next generation within 10 years.

Heirs are more likely to make dramatic transitions when principals don’t take steps to integrate them into the family office, Thiessen said.

This can also lead to conflicts, with nearly half of family offices with less involved directors anticipating an increase in family conflicts compared to 29% of companies with fully engaged directors.

Regardless of lead involvement, most family offices said they expect successors to grow their wealth and increase their use of technology and artificial intelligence in the company’s operations.

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

A majority of respondents – 56% of family offices with fully involved managers and 73% of firms with less involved managers – also expected heirs to increase their allocations to alternative investments. These expectations are consistent with family offices’ bullish sentiment toward private equity, direct corporate investments, and real estate, which were the three most favored opportunities for future wealth creation.

Respondents already boast a high allocation to alternatives, excluding cryptocurrencies, at an average of 34.5%, which is close to marketable securities’ 36.4%. A narrow majority expected heirs to increase their allocation to cryptocurrencies, which currently average 6.4%, according to Bank of America.

Millennials and Gen Xers are also widely expected to maintain or increase their sustainable or impact investing, despite broader backlash to ESG investing. Last quarter, global sustainable funds saw net outflows of $55 billion, with the lion’s share derived from redemptions in BlackRock funds, according to Morningstar.

While 64% of respondents said their biggest challenge was growing and preserving their wealth, family offices were broadly optimistic about the economy. Six out of 10 respondents said they were optimistic about the US stock market. private equity; And merger and acquisition activity over the next year. More than half of companies with assets of at least $500 million expected that the gross domestic product (GDP) in the United States would rise over the next year.