As the cost of keeping an in-house investment team keeps
climbing and global markets grow more complex and volatile,
family offices have taken a shine to external chief investment
officers. Unlike multifamily offices, which pool the resources
of several families to add scale and maximize investment
acumen, external CIOs only manage money, leaving tax, legal and
administrative duties to the clients staff. In response
to demand from wealthy families, a diverse contingent of
competitors has stepped forward.
We are seeing service models converging, says
Robert Casey, director of research at the Family Wealth
Alliance, a Wheaton, Illinoisbased research group focused
on family offices. Institutional investment consultants,
multifamily offices, funds of hedge funds, manager research
firms and asset managers are entering the external CIO arena,
Casey notes: They each bring their own bag of
tricks. Last year his organization surveyed 53 U.S.-based
outsourced CIOs advising more than $650 billion in combined
assets; it estimates that taxable assets managed by such
outfits grew 15 percent in 2012.
With $139 billion under advisement, Cambridge Associates is
one of several firms more commonly associated with the
institutional marketplace that have emerged as leaders in the
external CIO space for family offices. Today private
investors comprise roughly 30 percent of our assets
managed, says R. Bruce Myers, co-head of CA Capital
Management, the Boston-based companys discretionary
management unit. Its also one of the
fastest-growing parts of our business. According to
Myers, unprecedented U.S. wealth creation in recent decades has
opened a huge opportunity in the family office market, which
remains fragmented and has varied needs. We have learned
that we need to be flexible, he says. Some families
require more control, so we work with the individual
familys wealth creator to make investment decisions
rather than managing on a purely discretionary basis.
In 2009, Cambridge added a trust company to its business so
it could act as trustee for estate planning. Such adaptation by
firms moving into the external CIO business is typical, the
Family Wealth Alliances Casey explains.
Increasingly, we see them offering new services
for instance, consultants that now offer financial planning or
an asset manager that now performs manager due diligence,
he says. There is a blurring of the lines.
Some outsourced CIOs have been plying their trade for
decades. Hirtle Callaghan launched in 1988 to act as an
external CIO for wealthy families. While working as a broker at
Goldman Sachs Group, co-founder and CEO Jonathan Hirtle noticed
that one of his clients, the CIO of a large family office, was
consistently outperforming the portfolios that Hirtle managed.
He realized that the CIO would always have an advantage for two
reasons: the ability to choose top specialist managers from
around the world and a strong system for dividing capital among
those managers. He was starting with better value-added
from bottom-up securities selection and augmenting it with a
powerful capital allocation discipline, Hirtle says.
That is the power of the CIO model.
Keen to emulate this approach, Hirtle concluded that
hed have to go out on his own. With a mandate to act as
an independent firm offering a one-stop solution for individual
and family investors, West Conshohocken,
Pennsylvaniabased Hirtle Callaghan took on institutional
customers as clients started asking it to advise nonprofits and
endowments they were involved with. Today the firm has 97
investment professionals, who oversee $24 billion on behalf of
250 clients, with families accounting for roughly 55 percent of
the latter. It deploys what Hirtle calls a go-anywhere
investment approach, allocating globally across all asset
classes and strategies.
Demographics are helping fuel the appetite for external
CIOs. As more baby boomers reach retirement age, many
single-family offices must confront the need to replace key
investment personnel, many of whom are family members. We
honestly havent really begun to plan for that yet,
says Jeffrey Davidowitz, president and CIO of Oldfield Co., a
family office based in the Pennsylvania town of Nanticoke.
Although Davidowitz hasnt looked at outsourcing for his
own firm, he sits on the boards of a college
endowment and a nonprofit that have both relinquished their
CIO functions to a third party.
Cambridges Myers sees opportunity. This
generational transition is an enormous shift, he says.
Many wealth creators are aging and realizing that the
next generation doesnt have a particularly strong
interest in finance.
Firms adding external CIO services should expect fee
compression. In the past few years, as families have sought to
reduce expenses, multifamily office providers have switched to
flat-fee or retainer models rather than fees based on assets,
the Family Wealth Alliances Casey notes. While
underlying fund fees wont be impacted, I think its
inevitable that, as competition increases in the space,
ultrawealthy families will be negotiating similar fee
arrangements for top-level investment management, he