From AI to ESG: Family offices expect heirs will take new path on investing

A recent Bank of America survey of 335 family offices indicates a significant generational wealth transfer is imminent, with 59% expecting to pass assets within a decade and 87% yet to do so. The survey reveals that next-generation heirs are anticipated to substantially alter family office missions, potentially prioritizing philanthropy, simplifying governance, or even dissolving the office, especially when current principals are less involved. Investment strategies are also poised for change, with heirs expected to increase allocations to alternative investments (currently 34.5% of portfolios) and cryptocurrencies, alongside greater adoption of AI for operations and a sustained focus on sustainable/impact investing. Despite these internal shifts, family offices generally maintain a bullish outlook on the economy, U.S. equities, private equity, and M&A activity.

Analysis

A Bank of America survey of 335 family offices reveals a significant generational wealth transfer is imminent, with 59% expecting to pass assets within the next decade and 87% yet to do so. This transition is projected to induce substantial changes, as over a third of family offices with involved principals, and 73% with less involved ones, anticipate heirs altering the family office's mission or purpose, potentially leading to simplification or dissolution.

Next-generation heirs are poised to significantly reallocate portfolios, with a majority expected to increase exposure to alternative investments, currently averaging 34.5% of holdings, and cryptocurrencies, currently at 6.4%. Private equity, direct investments, and real estate are particularly favored. Concurrently, heirs are anticipated to sustain or increase sustainable and impact investments, despite recent broader market outflows of $55 billion from global sustainable funds, notably impacting BlackRock.

Technology adoption is also a key trend, with heirs expected to increase the use of AI and technology in operations; over half of respondents reported positive experiences with AI for market research. Despite these internal shifts, family offices maintain a broadly optimistic economic outlook, with 60% expressing bullishness on the U.S. stock market, private equity, and M&A activity over the next year, and over half of larger firms expecting U.S. GDP growth.

Key Decisions for Investors

• Monitor the significant impending generational wealth transfer within family offices, which will likely drive increased allocations to alternative investments, including private equity and real estate, and cryptocurrencies.
• Consider the sustained interest in sustainable and impact investing among next-generation heirs, despite recent market outflows, as a potential long-term investment theme.
• Evaluate opportunities arising from the increased adoption of AI and technology within wealth management firms, particularly larger family offices, for operational efficiency and market research.
• Factor in the broadly optimistic economic outlook from family offices regarding U.S. equities, private equity, and M&A activity when assessing market sentiment.