Robert Casey Sees Bright Prospects for Family Offices in 2014

Head of research for the Family Wealth Alliance, Casey expects to see competition to manage assets for family offices heating up.


As a longtime financial journalist, Robert Casey knows the importance of speaking to a variety of sources to give readers the most thorough report possible. Today the former managing editor of American Banker and the founding editor of Bloomberg Wealth Manager is senior managing director of research for Wheaton, Illinois–based Family Wealth Alliance (FWA), a provider of advisory services for family and multifamily offices. Founded in 2003, FWA provides reports on multifamily offices and outsourced CIOs. Casey estimates that total assets for multifamily offices grew to more than $500 billion last year — an increase of 16 percent from 2012 — and that single-family offices in the U.S. control some $2 trillion. He spoke with Institutional Investor about industry trends facing the roughly 5,000 firms that manage multigenerational wealth.

Institutional Investor: One of the biggest trends in recent years is family offices’ shift toward outside management and hiring of outsourced CIOs. Will this continue in 2014?

Casey: Yes, very much so. We estimate that about a third of single-family offices use an external CIO. There’s really three functions that CIOs are performing as that business continues to develop. The first is the traditional role of investment consultant. That means helping the client develop an investment policy, developing asset allocations — for various portfolios and overall asset allocation — evaluating the selection of managers, evaluating performance and reporting on performance. That’s really the base of what external CIOs do. They have the big picture.

Additionally, external CIOs may function as an asset manager. This may involve separate-accounts situations. It may be managing with some kind of pooled vehicles — maybe just particular to that family — ranging from traditional investments to more aggressive ones, sometimes with other nonfamily investors in an outside investment pool.

The third function is financial planner. This involves liquidity management and liability management in the sense of pension fund or insurance company performance, but tailored to the complexity of multigenerational family wealth. Tax management is a critical part of this last role. Ideally, the goal of the manager should be to raise the basis of the portfolio every year.


Who are the primary players entering the outsourced CIO business?

There are many different types of firms entering the CIO marketplace — investment consultants, separate-account managers, managers of managers and multifamily offices. The competition is heating up. Intuitively, multifamily offices would seem to be well positioned for this role because they are already used to taking a holistic approach with clients, but I really don’t think there is any particular group that is dominant yet. Large firms that have institutional backgrounds — Cambridge Associates, for example — are also gaining market share. In other words, it’s a convergence of asset managers who are branching into financial planning and other noninvestment services with multifamily offices, which are bringing asset management in-house in pursuit of these family clients.

What about banks? Where do they figure into this?

They have generally been losing ground within the ultrawealthy family space. This is an area where traditionally the banks should have had this business locked up for generations. The clients want objective advice, and they also want stability in relationship management, however. These are two things that we have had in short supply in the banking sector over the past generation. No stability. No objectivity. So a lot of those families walked away from the big banks.

Are you seeing more family offices trying to enter the multifamily market as others are going the outsourcing route?

Historically, there has really only been a small number of large family offices that have converted to take outside clients. There’s Rockefeller Financial, Bessemer [Trust], Pitcairn — I doubt if I could count ten. We’re not seeing a big push by other existing family operations to grow in this way. In fact, in some cases, they may be heading in the other direction. Remember that for the first time, a single-family office has been defined under the law, and unless you meet that definition, you have to register as an investment adviser. So what’s the definition? No nonfamily clients, no nonfamily ownership, no holding yourself out to the public. So if you want to stay a private entity, you’d have to rearrange your affairs to fit that definition to avoid the expense of registration (see also “Hedge Funds Compete with Liquid Alt Managers in the RIA Market”).

So it’s more a matter of consolidation of assets among existing players in the space?

Right. You either have to have a scale, or you have to outsource nonscalable functions.

At what point is the scale sufficient to manage a multifamily practice?

The minimum a multifamily office is going to need to do absolutely everything in-house is at least $10 billion. But you can outsource things like the CIO function, client reporting or trust services or administrative services. You could then operate as a multifamily office without the full infrastructure.

So it all comes down to achieving critical mass in assets?

People forget that single-family offices are really advisory firms. They’re not immune to the economics of the advisory business, which is a business of scale. We find it costs a small single-family office four or five times as much per dollar supervised as it costs a large family office. So the $1 billion–plus family office has an expense ratio of a quarter of that of the single-family offices under $100 million. That’s one of the big drivers of outsourcing. It is costly to run an investment function internally.

What are the big issues facing family and multifamily offices in 2014?

I think client reporting issues continue to be the biggest focus. A lot of firms have that on their plate right now. The vendors are not doing such a great job, and there is a lot of frustration. The family office firms are providing comprehensive, integrated wealth management on a multigenerational basis. To provide that, you need comprehensive, integrated client information. It’s not just investment performance; it’s also trust accounting, partnership accounting, general ledger accounting, the ability to measure progress against plans — all sorts of things. Family and multifamily offices need the ability to generate financial statements for families that may have dozens of members, all with different shares with different investment partnerships and all facing unique tax perspectives. It’s incredibly complex. That’s a challenge facing of some of these external CIO firms. And the expectations are always going up.

So what is the solution?

That’s not clear. A lot of multifamily offices farm out their reporting to five or six outside firms, so it’s probably closest to what I call the “Garment District model.” They have the one guy put the buttons on and wheel the form down the road to another guy, who puts the zipper on. The reporting is just a big mess. The clients are all clamoring for a change. But they are not necessarily interested in paying more for that. The challenge for the outsourced CIO firms is how to accomplish this without increasing expenses.

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