Family Offices and Their Challenges In The MENA Region | Investera | Investment Portfolio Management Platform

Family Offices and Their Challenges In The MENA Region

09September, 2022

The dominance of family-owned businesses is pretty much visible in the MENA region, more than in any other part of the world. Some common and famous family businesses that can always ring a bell here in this region include Majid Al FuttaimAl GhurairAl Ajlan, Al Olayan, and many others. Many of these companies operate in the investment and banking sectors, as well as retail and industry services. 

One of the main reasons these businesses are dominant is because of their long history of trade over the past years in the region, especially at times when the use of digital technology wasn’t common, these visionary entities, which were run by entrepreneurs, or known tribal characters, led the market. Another reason is the strong culture of unity of old family organizations, where businesses were highly based on family ties, which are lasting until today. According to recent studies, 90% of the companies in the middle east are family-owned companies or businesses, generating almost 80% of the GDP in the region.

The rapid growth of wealth worldwide goes back to the rapid spread of family-owned businesses and the growing number of ultra-high net worth individuals (UHNWIs) worldwide. According to EY estimates, “10,000 family-owned offices exist around the world, half of them were formed in the past 15 years”.

Despite the rapid growth of family-owned businesses here in MENA, it is not always as easy as it could seem from the outside. This tremendous success and dominance in the many market sectors can be on a higher elevation than what it is now. Why is that? It is immensely due to the technical difficulties faced in the administration and handling of the investment portfolios & funds across multiple sectors for a single-family office. Managing a generation of wealth and keeping it growing in the constant advancement of the world’s business sectors is quite a demanding job requiring plenty of resources and the development of current assets. Some of the challenges generally faced by the family offices in the MENA region include the following: 

According to a survey by PwC, “69% of family offices in the MEA have no standard succession or growth plan set, which leads to a loss of wealth for families by the third or fourth generation because of unregulated business matters”. Succession planning challenges are one of the biggest threats to family offices in this region more than in any other part of the world. Reasons can include the increased number of heirs or family members, with numerous visionary and optional plans that every individual has devised or set. Hence, family offices are highly urged to set an official plan of regulation or clear missionary systems ensuring the inclusion of all board members, and investment professionals, to bridge the communication gap between all decision makers and different facilities, resulting in a comprehensive and more effective vision for the future.  

When an effective succession plan is set, bridging the generation gap between the heirs of inherited wealth can be an easier job. The generation gap is also one of the prominent challenges that face members of these offices. Because this wealth or business is “inherited”, many members would always want to keep running the business “as it is”, or “preserving the legacy” instead of adhering to the new trends, or improving the core values or goals of their company. 

Another challenge that is strongly present in managing wealth in family offices is making peace with technology. Technology is a big game player here in the fundamental basis of running family offices and managing their wealth. With the long list of benefits to systematic and computerized work that smart technologies can do, the generation gap issue can also be raised here. Because family business members vary from different age groups and generations, the uneven interest or need of using technology can be an impediment in the way to set a proper succession plan, and an adhesive vision. Some family office heirs from older generations, are not tech savvy or might lack the full knowledge about its prominent need, especially in the world of numbers and investments. 

Facing the increased accounting complexity with more investments, and asset classes over time can be a very challenging day-to-day job. With the overflow of tasks, managing multiple portfolios, big data, and very complex accounting requirements, increases the chance of error, resulting in big losses of money and time. According to UBS reports, the overall internal costs for operating family offices in 2022, account for over half of the total expenses, which also vary, according to the size of the assets. In family offices with a USD 100 M to USD 250 M for example, the operation costs may reach up to 58.6 bps.

Automation of tasks, Robo-advisory, and deal pipeline that smart platforms provide, can highly result in more accurate information, saving time and cost. Research has shown that many family offices are increasingly facing uncertainty in the financial markets, which also goes back to the complexity they can come to face, due to a lack of visibility or a solid ground to stand on.

Another issue that could be a result of lacking a relationship with technology is facing security challenges. Managing years of accumulated wealth, monitoring investments, and financial pockets is always at risk of fraud, and data penetration. Such data, should always be held confidentially as this issue is always a concern to many investment offices. Without the use of high end cybersecurity methods, such information would always be at risk, resulting in loss of, not only money, but also loss of opportunities. In conclusion, family offices and family office representatives, must take into account and believe the “untraditional” fast-paced digital world we are living in, and change the idea of “risking the legacies”. Adaptation to disruptive technologies such as Blockchain and Artificial Intelligence is crucial to resolving almost all the challenges faced. The implementation of smart end-to-end ERP systems, or Business Intelligence (BI) Software, which are AI-based technologies, can take investment and wealth management to a different level. 

According to a research survey on Investment Management, only 20% of industry professionals have access to smart business solutions that can ease their workflow and allow them to manage their funds and portfolios, without having to deal with daily complex tasks that can increase the risk of error, or the risk of fraud or loss of data. There are many smart investment management platforms or software in the market, which can be easily accessed by the public, such as Personal Capital, Investera Pro, and many others. This software can guarantee family offices the fulfillment of their needs, handling multi-asset classes, ranging from private equity to public securities. With a click of a button, these smart technologies can also aid in managing fund workflow transactions automatically, generate reports, build structures for growth, and can even help the investors discover where they stand, and how far they can grow within a certain period with dynamic dashboards, and access to Robo advisory benefits.