About the opportunities of a holistic all-assets-vision
Article by Kai Linde in the German “Unternehmeredition” magazine (November 2017)
The field of private wealth management is currently on the move. An article about the ways in which Germany’s most successful entrepreneurs react to trends and changes in the investment sector and what we can learn from them.
The low interest rate environment has been shaping the markets for the last couple of years. It forces investors to potter at their portfolio more intensively. While earlier on, liquidity has automatically created gains by simply laying at a bank, investors had to take much greater risks and become more courageous in the last couple of years, in order to maintain their wealth. One can observe a trend moving away from classical investments and towards more specific investment opportunities, such as real estate, direct holdings, private equity etc. In this regard, investors can either choose to invest in such assets via alternative investment funds of specialized asset managers or work their own way into these topics. Especially for entrepreneurs, curiosity often wins in this decision, such that portfolios do not only tend to become more diversified, but also to be shaped by a more direct investment style. In general, this leads to more interesting, but thereby also much more complex structures of private wealth.
High diversification, direct investment style
Large fortunes – due to their complexity – are often managed in single or multi family offices by confidants of the asset holders, which are employed specifically for this purpose. Most family offices manage between 100 mio. EUR and 1 bn. EUR, but of course there are exceptions on either end of that range. On average, they employ around eight employees, which primarily handle investment management, investment controlling / reporting and accounting tasks. It is very revealing to inspect the current average asset allocation of family offices: The biggest share is made up by the asset classes stocks (24 percent) and real estate (23 percent). Multi family offices tend to allocate more money to stocks, whereas single family offices increasingly invest in illiquid investments, such as real estate and private equity. This reflects the general trend towards a more direct investment style. If one takes a closer look at the real estate investments of family offices, it is revealed that almost 87 percent of them are direct investments, whereas only 13 percent are invested indirectly. Also, the market development led to a comparably high share of real assets, such as agricultural areas (ca. 5,5%), commodities (ca. 1%) and other material assets / collections (ca. 1%). These numbers were learned in a market research study by the Family Office Consulting GmbH, which was performed in cooperation with the QPLIX GmbH this spring. In the context of the study, 94 family offices in Germany were interviewed in spring 2017.
Digital Family Office
The advancing digitalization also greatly influences the management of private wealth. Around 70 percent of family offices look at digitalization as a central topic that they face. Primary goals of the respective activities are efficiency enhancement, automatization and digitalization of processes. An important role is also taken by data security as well as digital document management.
However, this trend is only still starting out, since only about half of the family offices, which would like to face digitalization, follow a specific strategy in this matter. Many of them still work with rudimentary excel files or inconsistently with specialized tools for individual asset classes. A certain role model function is taken by large, professional family offices, which commonly employ more specialists, follow specific strategies for a multitude of asset classes and manage large volumes. As in other industries, these larger organizations increasingly deploy holistic and asset class overarching software solutions for the management and controlling of all asset classes. Such platforms combine all aspects of private wealth management and reach from performance analysis and reporting up to accounting features and digital document management.
The market conditions and trends in private wealth management currently trigger asset holders with smaller fortunes to follow this example: Small family offices start to digitalize their day-to-day business processes and also entrepreneurs without their own family office increasingly professionalize the management of their investments and portfolios. In the long term, there is no way around this adaptation. When dealing with a large number of asset classes (no matter if self- or externally managed), the biggest challenge is to make them comparable and bundle them in one location. In order to master the emerging complexity and diversity, software solutions often offer the suitable support. While in praxis, many still work purely manual / with isolated applications or combine different software tools (such as Excel and a real estate specialized tool), more and more entrepreneurs and asset holders substantiate an “all-assets-vision”. This means that all asset classes can consistently and collectively be managed on a digital platform by using “state of the art” technologies. Among other advantages, this enhances transparency and efficiency when the fortune is transferred to the next generation. Data and analyses should be available from everywhere, at every point in time, on every device and in the most up-to-date form. For professional family offices, this scenario is already reality. Germany’s most successful entrepreneurs already lead the way. The future of private wealth management is digital.
The latest market developments lead to radical changes in private wealth management. Successful entrepreneurs with large and complex wealth structures react with increasing diversificiation and a more direct investment style in their portfolios. Under the influence of digitalization, they aim for an „all assets vision”, in which all asset classes are holistically managed on a digital platform.