Emerging HNWI Investment Trends in the Family Office Industry

25th July 2016

Progeny Corporate Law’s Client Relationship Manager, David Reed, examines emerging High Net Worth Individual (HNWI) investment trends in the family office industry.

David’s article has been published in the following publications:
Financial Planning Today – November 2016

The factors driving new trends in the investment landscape for High Net Worth individuals (HNW’s) are many faceted, ranging across changes in the demographic make-up of the HNWs themselves, to global economic forces and a shift of emphasis in the services offered by the Family Office industry.

On the one hand, the continuation of historically low interest rates and the sluggish growth seen across the wider financial world, neither of which looks set to change in the short to medium term, have led to disappointing returns on more traditional investments. On the other, a new generation of HNWI’s are seeking to make investments which do more than simply increase their wealth. ‘Impact investing’ is the phrase used by bodies such as the World Economic Forum (WEF) for this type of activity, and its growing popularity creates both an opportunity and a challenge for the Family Office industry.

The idea of HNWI’s becoming involved in philanthropic activity is hardly a new one, of course. The Sunday Times Giving List 2016 details 200 HNWI’s, including the Sainsbury family’s £220.5m to the £300,000 donated to drugs and alcohol rehabilitation charities by Eric Clapton.
What has changed is the degree of involvement which HNW individuals are seeking to enjoy. The days when philanthropic giving involved a HNWI signing a cheque in return for either some good PR or simply a warm feeling of contentment seem to be long gone.

The new generation (and this is a change largely driven by a generational shift in wealth) are seeking to invest rather than to simply give, and to invest with an eye on two different types of return. The first is the traditional financial return, generally with a view to recycling the funds generated via another wave if impact investing, the second being the tangible return seen in the social impact of the investment in the wider world.

Whether that investment is set to work in the fields of renewable energy, healthcare, education, micro financing or any one of a vast number of socially responsible causes, the key is for the investors to be able to see a measurable impact in return for the money which they’ve put in.

In some ways the concept of impact investing is merely a shift along the spectrum from the practice of screening investments in order to filter out those which involved companies working in fields such as tobacco or the arms industry. It is a shift, however, which marks a much more ‘hands on’ approach to investment and, in somewhat simple terms, a determination to use wealth in order to ‘do good’ rather than simply avoiding it being used for less salubrious or simple lifestyle enhancement purposes.

The issue of confidentiality around the investment decisions of HNWI’s could place a barrier in the way of gaining a wider understanding of this changing approach. Fortunately, however, many investors realise that gaining publicity for a given cause is almost as important as priming it with finance and this. Allied to research undertaken by organisations such as the WEF and the Charities Aid Foundation (CAF), has helped to build up a profile of the kind of HNWI involved in impact investing.

It is also possible to examine what drives the decisions they are taking and what the Family Office industry can do to ensure that impact investment becomes a long term trend, rather than a passing phenomenon.

It should be pointed out that impact investing, and the way in which it is handled by Family Offices, has a vital role to play in ensuring the good stewardship and preservation of the family wealth of HNWI’s. Figures collated by the WEF show that an estimated 60% of the wealth generated by one generation of a family has been lost by the end of the second generation, rising to a shocking 90% by the end of the third.

The focus which impacts investing places upon shared values, and a positive long term legacy in the name of a family, is capable of playing a vital role in binding the different generations together in pursuit of a shared investment strategy, especially the younger generations (under 40) wanting to become involved with these investments. Impact investing is a means of oiling the wheels of wealth transfer between the generations, as well as enabling succession planning, by placing the long term emphasis on something other than simply the wealth itself.

Further research carried out by CAF – in the form of a survey of 1005 individuals with an average wealth level of GBP7.5m – revealed the generational fault line with regard to impact investing and also the differing levels of what might be termed ‘social conscience’ demonstrated by the different age groups. According to these figures there was a 22% gap between the over and under 40’s when it came to socially conscious investments and the under 40’s, with an average investment of £170,800, had already matched the levels for lifetime giving reached by those over the age of 60.

For the Family Office industry, figures such as these paint a picture of a significant future market. As one generation gives way to another, the field of impact investment is likely to have moved on from being an exciting but recently new opportunity to being simply another investment option, and the Family Offices able to take advantage of this new landscape will be those which began to develop their expertise at the earliest opportunity.

To date, the barriers cited by those HNWI’s interested in impact investment but wary of getting involved or simply minimising their exposure, include the complexity of the products on offer, a lack of understanding and a lack of specialist advice. Above all else, Family Offices need to learn to treat impact investment with the same rigour as any other kind of investment, with particular reference to gathering data on the social impact of the investment.

Clearly, the impact of an investment in an educational trust in a developing country is always going to be harder to measure than the simple cash return on a standard investment.

The Family Offices which don’t take the time to develop the expertise and tools needed to make such measurements are likely to be the ones which find themselves being left behind. Steps such as carrying out due diligence on any socially conscious bodies seeking investment, and drawing up a set of agreed and measurable metrics via which to define whether the investment is reaping dividends, will need to become a standard part of the process, as will playing much more of a role than simply funding the investment.

Any Family Office professionals still doubting the wisdom of honing their expertise in the field of impact investment would do well to take heed of a few more of the fascinating statistics included in the WEF ‘Impact Investing: A Primer for Family Offices’ report.

According to the report, compiled in partnership with Deloitte Touche Tohmatsu, the amount of wealth due to be inherited by the Millennial generation from their baby boomer predecessors over the next 40 years looks set to be something in the region of $41 trillion. When wealth of this kind is inherited, an estimated 98% of those inheriting that wealth will opt to switch to a new set of advisers, whilst the 2014 Deloitte Millennial survey found that almost 30% of Millennials believe the top priority of any business should be to improve society, particularly around a lack of resources, climate change and income inequality.

All of which, when combined with the rest of the evidence, would tend to indicate that impact investing is not only here to stay, but has only really just begun to take root.