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A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for wealthy investors and consumers. Register to receive future editions, straight to your inbox.
It’s easier to keep wealth in the family than to control how your heirs invest it.
For the investment companies of ultra-rich families, the stakes are particularly high. A recent Bank of America survey of 335 family offices, with 60% of respondents holding at least $500 million in assets, found that 87% had not yet passed on their assets to the next generation.
More than a third of family offices whose leaders are fully involved in the company’s operations expected heirs to change the family office’s mission or focus. For companies whose managers are less involved in decision-making, the share rises to 73%, according to the survey.
“It’s not just about passing on wealth. We know the next generation will usher in a new era of investing, thinking about philanthropy and using technology,” Bank of America’s Elizabeth Thiessen told Inside Wealth.
Thiessen, who leads family office solutions for the private banking division, said heirs tend to make significant changes, such as prioritizing philanthropy over investing or even closing the family office altogether.
“The next generation might decide, ‘We don’t want this infrastructure. We don’t want this complex set of responsibilities for governance and board participation, and we want to simplify that,'” she said.
This sea change is fast approaching, with 59% of respondents saying they plan to transfer their assets to the next generation within 10 years.
Thiessen said heirs are more likely to make sweeping changes when leaders have not taken the necessary steps to integrate them into the family office.
This can also lead to conflict, as nearly half of family offices with less involved managers expect an increase in family conflict, compared to 29% of firms with fully involved managers.
Regardless of their primary involvement, most family offices said they expect successors to grow their fortunes and increase their use of technology and artificial intelligence in company operations.
More than half of those surveyed said they had already tried AI for market research and other tasks, with most reporting positive experiences. Large family offices were most likely to use it, with nearly three-quarters of firms with at least $1 billion in assets reporting doing so, compared to 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 expect heirs to increase their allocations to alternative investments. These predictions are consistent with the optimistic attitude of family offices towards private equity, direct investment in businesses and real estate, which constitute the three most favored opportunities for creating future wealth.
Respondents already boast a high allocation to alternatives, excluding cryptocurrencies, with an average of 34.5%, almost on par with tradable securities at 36.4%. A slim majority expects heirs to increase their allocations to cryptocurrencies, the current average allocation of which is 6.4%, according to Bank of America.
These millennial and Gen X heirs are also widely expected to maintain or increase their sustainable or impact investments, despite the broader backlash toward ESG investing. Last quarter, global sustainable funds saw net outflows of $55 billion, with the lion’s share coming from redemptions from BlackRock funds, according to Morningstar.
While 64% of respondents said their biggest challenge was growing and preserving their wealth, family offices were largely optimistic about the economy. Six in ten respondents say they are optimistic about the US stock market; private equity; and merger and acquisition activity over the next year. More than half of companies with at least $500 million in assets expect U.S. gross domestic product to increase over the next year.