Family offices approaching crunch point

The rise of family offices has been remarkable in the 21^st century. They are more numerous, have notched up handsome investment returns and hold more capital than ever. But they are now pushed towards an inflection point where the old ways of doing things are no longer relevant, exposing them to new vulnerabilities.

The next generation of beneficiaries has intensified scrutiny. Costs continue to compound, even as the efficient frontier flattens. Most of all, they struggle with transformative AI, having only experienced modest exposure to technology thus far.

The majority of them operate with fewer than 10 staff, yet they are responsible for integrating financial, personal and strategic dimensions of the family enterprise. These include investment management, legacy planning, governance and administration of increasingly complex pools of capital. The mismatch between responsibilities and resources is widening.

These are some of the findings from a recent pilot survey carried out jointly by Lightbox Wealth and CREATE-Research. It highlights the pain points family offices face as they seek to grow out of the pioneering phase and professionalise their business with institutional quality governance and investment tools in response to various structural drivers that are reshaping their operating models.

The most cited driver is generational handover. Preparation of the next generation remains a service gap, as are family unity and continuity. Governance and planning seemingly lag behind the pace at which Gen1 is passing the baton to their successors with different expectations about business transparency, investment returns and digital fluency in a world where age-old personal relationships are being superseded by arm’s-length transactions.

Cascading game-changers

This shift, in turn, is reinforced by the end of the ‘Great Moderation’ of the past 25 years, which was marked by stable economic growth, low interest rates and low inflation. They favoured ‘set-and-forget’ asset allocation. That was shattered by three recent cascading game-changers: severe monetary tightening by key central banks to tackle the inflation spike caused by the Covid-19 pandemic; negative tail-risks from the agenda of the new US administration; and US–China geopolitical rivalry fragmenting the intricate web of global supply chains.

Hence, traditional strategic asset allocation, for long the ‘North Star’ of investment decisions, has come under scrutiny among family offices, that have been overweight in single asset classes such as hedge funds and private debt or in single sectors such as life sciences or real estate. Such a buy-and-hold approach now means leaving juicy returns on the table as choppy markets are whipsawing portfolios in the absence of dynamic investing. Family offices have been slow to profit from price anomalies as markets are driven more by politics than economics.

This change in market dynamics has turned the spotlight on governance and talent. So far, typically key asset allocation decisions have mainly come from Gen1 or other family members in their capacity as principals.

The decisions are then approved by an investment committee, whose main competency rests in being former business associates of the principals, or by originating deals via their own personal networks. This approach worked when private markets had benign tailwinds during extended period of quantitative easing, but it has come under scrutiny now that interest rates are no longer zero-bound and ‘dry powder’ in private markets is at a record high.

The result is heightened key person risk at the strategic-decision level as well as at implementation level, where the chief investment officers are forced to contend with threadbare resources.

Stranded in the foothills

Yet, while the wealth management industry at large has been embracing AI to accelerate product innovation, process efficiency and organisational agility, family offices are still in the foothills, in comparison.

So far, AI is trialled via a single licence or delegated to interns, creating more liability than leverage. Such baby steps do not, however, detract from the keen interest in applying this technology more broadly. But it has to be done in the right way — with robust governance and full alignment with human judgment. This is in the belief that AI, as a governed productivity layer, can unlock institutional-quality outcomes without the usual institutional bloat.

Our survey shows that to minimise growing pains as they come of age, family offices need to tackle four imperatives.

Governance must be upgraded, as AI without guardrails becomes a liability. Effective investment policy statements, risk committees and robust control frameworks must all be in place.

Secondly, it is imperative to prioritise efficiency, focusing scarce human capital on high-leverage activities such as strategy, sourcing and succession. Tasks such as formatting reports should not a be priority for highly paid investment staff.

Technology needs to be embedded as a layer, not a bolt-on. Agentic assistants should structure information, surface insights and prompt decisions. Their role will involve supporting, not replacing, chief investment officers.

And finally, the strengthening of networks is key to most major clans. Connecting with other family offices allows sharing of due diligence and best practice, and performing cost syndication to prevent cost escalation.

Our survey concludes that differentiation will come not only from capital and people but from the adaptability and depth of the digital estate passed down to the next generation.

Family offices don’t have a technology problem: they have a governance problem. Fix that and AI could become a multiplier.

Philip Watson is CEO of Lightbox Wealth and Amin Rajan is CEO of CREATE-Research