It’s no secret that a massive transfer of wealth is underway in America. Cerulli Associates estimates that over the next 25 years, nearly 45 million U.S. households will pass on a total of $68.4 trillion in wealth to their heirs.
As this shift accelerates, it will become clear that future generations have perspectives that will spur them to have different investment priorities than their parents. A recent BlackRock study, in fact, found that 67% of millennials crave investments that reflect their social and environmental values.
The way different generations view climate change offers additional clues to how younger investors could invest in the future. Among 18-34 year-olds, 51% say that climate change will pose a serious threat in their lifetime, according to recently compiled data. Among those 55 and over, that number fell to 29%.
Single- and multifamily offices should, therefore, take heed: Unless you begin to embrace vehicles that align with the priorities of the next generation of clients, you will risk losing the opportunity to work with them.
The Current State Of Play
A UBS report found that 34% of single- and multifamily offices already dabble in sustainable investment funds or strategies, which are broadly defined as allocating capital based on a companies’ environmental, social and governance (ESG) practices. Sometimes this means excluding ‘dirty’ investments from a set of holdings, while other times it means actively investing in companies that seek to make a positive ESG impact.
Either way, family offices are well suited to leverage these sorts of investments because, as the name suggests, their client base is made up of only a handful of high-net-worth families. That means there is more freedom – and in some cases, urgency – to build customized portfolios.
At the same time, many family offices have been slow to warm up to sustainable investment strategies. This is due to a variety of reasons, including inertia, lack of awareness, performance concerns and fears that they won’t have the intended impact.
Inertia And Lack of Awareness
According to the UBS report cited above, 39% of family offices say they haven’t used sustainable investments because clients have expressed satisfaction with their current investment approach. Further, about one in six say they’ve discussed these options with clients but that none align with the issues they care about most. A similar number of family offices say they have avoided sustainable or impact investments altogether because they don’t know enough to feel comfortable offering them.
In time, however, these dynamics will start to swing as younger family members begin to have more influence over investment decisions (while it’s also possible that we could see a shift in attitudes among many older family heads). So, while families may say they are not ready to add sustainable funds or securities to their portfolios today, the story could soon be different.
Family offices, therefore, that fail to make these investments available or, worse, are not conversant in them, could face challenges going forward.
Performance And Impact Concerns
UBS also found that about a third of family offices have concerns over whether sustainable investments have a long enough track record, while 24% worry about returns. Another 22% say they are uncertain whether sustainable investing really has the impact its proponents claim it does.
All these issues are, of course, related. Over time, these investments will build up a history, which will then shed light on not only whether they perform well, but if they do what they say they are supposed to do.
Keep in mind, though, that in 2018, 85% of sustainable investments either matched or exceeded the performance of traditional investments of the same type. Also, if clients have concerns about the efficacy of general sustainable investment funds, which are typically loaded with multiple holdings, there are ways to overcome them. One option is funds focused on a particular sustainable asset (like solar). Another is to make a more targeted investment (a wind farm).
Millennials Soon Won’t Be The ‘Next’ Generation
The day is coming when the millennial members of high-net-worth families will no longer be the “next” generation. Instead, they will be in charge, and there is a strong indication that these clients are already focusing more on sustainable investments than their parents’ generation.
Family offices should take this into account when tailoring investments and planning for their clients’ futures – and their own.
Robert Sher is co-founder of Greenbacker Capital, an investment firm focused on the sustainable infrastructure sector.
