People running multifamily and single-family offices for the wealthy are facing some unpleasant choices these days. Such offices are facing a period of economic uncertainty. Internal costs are rising while assets and revenues plunge. Single-family offices in particular are squeezed: Their primary costs are rising owing to the economics of their business model, but assets have dramatically declined. That forces them to face the prospect of cutting staff.
And with such a fussy, demanding clientele-people who sometimes need every kind of expert from a money manager to a dog walker-family offices have been forced to take on unusual jobs.
The environment is such that it's put increasing pressure on offices to do something they've always disliked-outsource. It's a difficult choice in this culture. Family offices have traditionally kept most of their services and products in-house, using big wealth managers only when they want to custody assets. But the current trying economic environment has forced some of them to go outside their own walls and palm off many services to other organizations. These range from personal client services to the professional training of office personnel.
"It's a trend we're seeing with single-family offices," says Marty Sullivan, senior vice president with State Street Wealth Manager Services. "They're asking more questions about their custodians and how much things cost to run internally."
"We believe the largest challenges today are the costs of operating a family office practice in the current environment," says Ed Orazem, president of Fidelity Family Office Services, which works primarily with single-family offices. "Outsourcing is probably the best way for family offices to avoid cutbacks in their operations."
But these are not the kinds of businesses that can simply outsource functions just to make them cheaper or more effective. Emotions also come into play. Wealth managers say that delegating too many functions or handing over clients to the wrong providers can poison a relationship with the wealthy.
Family offices were built internally, after all, Orazem says. And that's why many of them resist the idea of farming out functions to others. It's a heated debate in this industry, where the idea of outsourcing is often as popular as the idea of outsourcing American jobs to foreign countries.
Still, despite this initial resistance, in the last year everything has changed, notes Orazem. Declining asset values have put the family office executives under pressure to find ways to reduce costs.
The arguments for outsourcing are going beyond the need for savings. Outsourcing advocates have also pushed for what amounts to basic changes in the family office model. These changes, they contend, will save family office executives time and money, allowing them to focus on advisory services.
Outside firms can take on many types of services-they can select money managers, for instance, or find dog walkers for a client or even just help the family office become more productive. The latter is a critical factor because the typical family office's first concern in a bear market is its ability to survive, according to a recent poll (see sidebar, page 53).