As New Entrants Appear, Family Offices Reassess Their Niche
The wealth management industry is contending with increased regulations and the often differing priorities of younger generations.
During 2013 complexity in family office operations grew in step with swelling assets under management. Although demographic trends and the economies of scale necessary to operate a single-family office are causing heads of offices in the industry to rethink their strategies, a post–Dodd-Frank financial services industry appears intent on entering the multitrillion dollar business to compete with longtime service providers. Many observers are anticipating that 2014 will be another year of rapid development in several segments of the wealth management industry.
One trend to emerge from the economic recovery is a push toward outsourcing key functions by offices serving individual families: primarily, investment management and reporting. Research from the Wheaton, Illinois–based Family Wealth Alliance, which offers advisory services to family offices and wealth managers, indicates 15 percent growth in externally managed assets in 2012, with competition among outsourced chief investment officer firms picking up steam in 2013. Whereas Goldman Sachs and JPMorgan Chase & Co. have long dominated Family Wealth Alliance’s rankings, in recent years more and more multifamily offices have begun to make a mark on the single-function marketplace. Industry experts say the top driver for outsourcing is simple cost. “Even the largest family offices are realizing that they can’t afford to hire a best-in-class investment manager, lawyer and accountant,” notes Thomas Handler, who oversees the family office practice group at Handler Thayer, a boutique Chicago law firm that specializes in wealth management. “Many functions that would have been performed in-house a decade ago now are prohibitively expensive.”
Another notable shift in single-family-office investments in 2013 was an increase in direct private equity investments. For private firms, given their long-term investment horizons and seeking growth, multigenerational investors provide an attractive source of capital. Handler has noticed that this trend has gained steam of late. “We have seen that single-family offices, particularly large ones, do not want to pay the heavy fees associated with hedge funds and private equity funds, so they are doing an end around and directly accessing investments.”
Handler also says that the process of making direct private investments has led to collaborations between individual family offices, often with one single-family office that has expertise in the industry at the core of the deal, joined by other family offices acting as outside investors. Whereas details of how many deals actually occurred in 2013 are not available, industry observers cite a clear trend away from traditional private equity funds. “I don’t think the families have ever been big on institutional private equity funds,” notes Family Wealth Alliance senior managing director for research Bob Casey, “I think you’ll definitely see activity picking up in direct private investments.”
In contrast to the outsourcing trend among single-family offices, multifamily offices are continuing to expand their range of in-house services. Collectively, in 2013 multifamily offices had $500 billion in assets under management, according to Family Wealth Alliance estimates. Although established, independent multifamily offices still dominate the market, bank-owned operations such as Minneapolis–headquartered Abbot Downing, a brand with roots dating to the 19th century that was relaunched by Wells Fargo in 2012, have been aggressively marketing themselves. To compete with the deep pockets of bank-backed firms, independent multifamily offices have thus scrambled to diversify their resources. “It’s like a switch was turned on,” says Anthony Riotto, president of Riotto-Jones & Co., a New York talent recruitment firm catering to wealth management companies. “After years of focusing only on asset gathering, multifamily offices are now hiring for relationship management functions, particularly investment professionals.”
Multifamily offices as a whole have been contending with how to manage the shift of wealth to the next generation — and their often differing approaches on how to manage their portfolios. Says Leslie Voth, president and CEO of Pitcairn, the 90-year-old Jenkintown, Pennsylvania–based multifamily firm: “Their needs are different from their elders’ in many respects.” Industry experts anticipate Generation X and millennial family decision makers wanting greater reporting transparency than their parents did, with millennials in particular wanting electronic real-time access to records. Adding to the complexity, multifamily office firms with Securities and Exchange Commission registrations must meet increasingly stringent regulatory requirements for reporting and security.
As the multigenerational wealth management market continues to expand, a blurring of lines between traditional wealth management and family offices may be inevitable. Many multifamily office professionals from established brands have noted a trend toward start-up firms functioning as a sort of multifamily office light, taking in assets from less wealthy families and acting as an access point to external specialized service providers. “These firms aren’t really what they present themselves as,” critiques one multifamily office executive who requested anonymity, “but they are probably offering their clients a higher level of service than would be available through traditional retail platforms.”
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