There are a few issues keeping family offices awake at night and advisors need to understand what is top of mind for these billionaire families and how best to serve them, a Northern Trust executive said.
“The more well-versed we are, the better we understand this ecosystem, the more value we will be able to bring to the table,” said Lincoln Ellis, senior investment strategist of global family office and private investment office services. “It’s absolutely mission-critical in the billion-dollar-plus family office cohort to understand where we sit,” he said.
Ellis, who spoke at Charles Schwab’s Impact conference Tuesday, noted that Northern Trust manages more than $2.6 trillion and its family office manages families with more than $135 billion. Ellis referenced data from a benchmarking survey the company did in 2020 that shows the median net worth of million-dollar-plus families is $2.6 billion.
Ellis said it is not surprising that most of the assets are in trusts. But many might be surprised that two in five family offices (41%), according to the survey, do not have a chief investment officer on staff. This becomes an opportunity for advisors, he said, “to become partners and thought leaders with these billionaire-plus families and help them think about ways in which they should be building their portfolios, constructing asset allocations and thinking about risks.”
The 2020 benchmark survey he cited also showed family offices are most concerned about issues such as growth forecasts, geopolitical uncertainties, international relations, inflation, interest rates and Covid. Atop the list was domestic political uncertainty (cited by 78%). Though that was due to the election, he noted, politics will continue to be an important question mark because of the debt ceiling and infrastructure bills.
And while domestic and geopolitical uncertainty dominate the headlines, they are often both noise and signals, Ellis said. “But an important context in which investors make decisions, and we all know there are very significant behavioral elements to this, we want to make sure that they were consistently separating the signals from the noise.”
When building portfolios for billionaires, Northern Trust is driven by three core issues—growth, monetary policy and inflation, Ellis said. He further noted that there are five consistent investment themes important to family offices and billionaire families—healthcare technology, digital disruption, automation and robotics, smart mobility, and the green economy—and given the demographics of the globe and the shifting stance of geopolitical concerns, these themes will continue to be significant for investors moving forward, he said.
As for what is driving portfolio repositioning, Ellis said younger cohorts think differently about investing, and it is important for advisors to be aware of this, especially when they engage billionaire families or a family office. One of the notable shifts in the younger generation is the significant reduction of cash in the balance sheet and the significant reduction of the role of fixed income.
Ellis also noted that this is a broader trend that is not just happening in younger cohorts. “Cash and fixed income are places where people are actually taking chips off the table,” he said.
He explained that fixed income has had a diversifying effect on portfolios, particularly in times of stress. “But if you look at how flat these rate structures are and how close they are to zero, you risk a symmetry between the yield, which will be predominantly part of the total return, and the actual diversifying effect it has for the portfolio,” he said. “That trade-off is skewed in a very unfavorable way for fixed-income investments.”