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.