The Endowment-Style Offices Raking in Ultra-Rich Clients

Private banks are becoming passé in some elite quarters.

Illustration by II

Illustration by II

A retired hedge fund manager who made a fortune investing probably wants it managed by hedge-fund-caliber investors.

Increasingly, ultra-wealthy people are opting for just that, Cerulli Associates research shows. They’re leaving behind the traditional white-shoe private banks, wirehouses, and trust companies that have long dominated the up-market.

What’s winning out are multi-family offices: lean, independent, secretive, and run with investment cultures similar to a foundation or an endowment. This category has grown at least twice as fast as its staid competitors, compounded over the past three years, according to Donnie Ethier, Cerulli’s wealth management director.

“In many cases, talent from endowments and foundations is moving over to the multi-family office space,” Ethier said in a phone interview.

[II Deep Dive: The Allure of the Family Office]

Between institutional and retail investing, these niche businesses are the center the Venn diagram, with retail clients but institutional talent, portfolios, and cultures.

“A lot of these multi-family offices were born out of the hedge fund space,” Ethier said. “In many cases, these ultra-high-net-worth individuals are worth more than the [family] foundations themselves.”

Multi-family offices are small but growing category in high-net-worth wealth management. Wirehouses led with 31 percent of market share in 2016, the latest figures available from Cerulli’s industry report. Private banks followed at 26.8 percent. But both have lost ground in recent years, while multi-family offices grew in terms of absolute assets and market share.

“I think the number one driver of growth right now still comes down to talent migration,” Ethier explained. “We’re seeing big traditional wealth management practices lift out of the major firms and choose the independent model. Client loyalty lies with the advisor, not the firm. If the advisor leaves, there’s a high likelihood the assets will follow.”

The key factor attracting talent and clients to multi-family offices is institutional-style investment culture, Cerulli’s research found.

“When you see these larger broker-dealers and banks cross-pollinating and cross-selling to wealth management clients, some advisors don’t want to be in that business,” Ethier said. Nor do savvy clients want their advisor pushing the firm’s own product on them.

Plus, Ethier added, there are the additional services. “Multi-family offices have strong due diligence teams, strong analyst teams, but for many clients, that’s an expectation. Their view is, what else can you do for me?”

This is where multi-family offices veer from their endowment and foundation cousins.

According to Ethier, “for a lot of ultra-high-net-worth people, yacht and jet services are a real need. For most, it’s more about educating family members on the risks taken to build wealth — not to mention retain it.”