Three overlooked hurdles for family offices in 2024

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While 2023 is in the rear-view mirror, there are some leftover impacts to markets and innovation that will continue to develop over the next 12 months, according to experts.

Cautious optimism might be a way to describe alternative investment, such as private equity deals, as many are still interested in pursuing these opportunities, but the frenzy of the last few years of abundant deals and cheap, accessible credit has come to an end.

Now, many family offices are taking more time with their due diligence and preparation before wading into the next deal.

Propped up evaluations of stocks are also something that will impact the market in 2024, which is likely not a surprise to many, but will have an impact on where investors put their money.

And while all of these are significant, here are some other impacts that many may overlook, but the experts say are going to be something to watch.

Tough to recruit and retain talent

For a while, succession has been a hot topic for family offices, as many are working on the challenges of passing on the family business. But there is a significant talent crisis within the family office space itself, as it is a specialized field and requires a unique set of hard and soft skills.

Brad Jesson, principal at Toronto-based Northwood Family Office, says talent scarcity has caused some family enterprises to make decisions that have negatively impacted both the family and their business.

“We have two families this year that in the last couple of years, they sold their businesses, then said to their trusted CFO or CEO, ‘Hey, run the family office,’” explains Jesson.

“So, all of a sudden, that person who was running, let’s say, a great tech company, is being told, ‘Go do due diligence on private equity or real estate or alternative managers,’ but those skill sets are not transferable and it blows up. All of a sudden, you’re firing your 20-year buddy from the family business.”

Cybersecurity and digital footprint

Experts have been warning for a while about cyber breaches being a case of if, not when, but many families are still not taking the right steps to protect themselves. And it is only becoming more necessary, as there is more data accumulating that can be compromised.

Gregory Moore, a partner and portfolio manager at Montreal-based Richter business and family office, adds that reporting requirements are becoming more onerous and government and advisors are asking for more information as part of this process – from voluntary trust disclosures to know-your-client paperwork – and this is leading to more opportunities for data to be compromised.

“For families, the likelihood that some sort of data breach may take place is more and more of a concern,” he says. “You have to ask yourself: Are your financial advisors and counterparties appropriately housing any sensitive information? Are we as a family appropriately locked [up] in terms of any of our sensitive information? When was the last time we went through a cyber audit to make sure that we’re not at risk?”

The other aspect of cyber hygiene comes from a discussion about the digital footprint made by members of the family or family office, “which is important to a lot of families where there is significant wealth and emerging generations that are very active on social media,” adds Moore.

Should you park money in cash?

“The one thing I’ve been hearing from family offices we interact with is they are looking at GICs as a good place to be because a 5-per-cent return doesn’t look bad compared to the returns of the last few years,” says Keith McLean, executive vice-president and portfolio manager at Calgary-based Viewpoint Investment Partners.

“But if you project forward, that stance is actually quite incorrect and I can say that because it almost doesn’t matter which economic outcome we have, cash is likely not going to be a great place to be.”

McLean outlines the cash performance in what he calls the three likely economic outcomes of this year: soft landing; hard landing; stagflation.

In the case of a soft landing, or no landing, scenario, “cash is going to underperform drastically, much like we saw in the last couple of months of last year, when we began to price in that disinflationary environment, in that stocks are going to do quite well and likely [there will be] some cyclical outperformance also.”

If 2024 sees a recession, cash is still likely to underperform, “as those long rates will likely have further to come down and you’ll actually benefit from having a bit of a longer duration core bond portfolio, as opposed to just cash.”

In the case of stagflation, which McLean says Canada hasn’t really experienced since the 1970s, the outcome for cash is a bit more complicated.

“In that environment, cash does okay, but what you really want to be in is commodities because, and we saw that during the 1970s where commodities do exceptionally well, if you stay in that 3-per-cent-plus inflationary environment, parking yourself in cash on a retrospective basis might look great with whatever people can get now.

But really, on a prospective basis, it’s not going to be the case because you have to look at what you believe, or where the risks of the family that you’re managing money for, for what you should be doing.”

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