Several new business models are fueling the growth of these firms.
The family office universe, where some of the world's most affluent individuals reside, is anything but fixed. Indeed, it's expected to grow apace in the next few years, thanks to the desire of the wealthy for preferential treatment and the interest on the part of financial services firms and advisors to give the affluent what they want. But while those in the industry expect the number of family offices to continue to grow, they also expect the affluent clients who open or join a family office to become more demanding, more discriminating and more cost-sensitive.
Over the past few years, in fact, the number of family offices in the United States has already grown in large part due to modified models-the multifamily or commercial family office-where the barrier of entry can be as low as $5 million, compared with the $100 million traditionally considered to be the price of admission. The level of service varies depending on the number of families in the family office; the single-family office is still in a class by itself when it comes to personal attention. But even those in commercial family offices can enjoy economies of scale, perks and access to financial products and services that they might not be able to afford on their own, including hedge funds and private equity offerings. Not surprisingly then, our research showed that family offices would be more and more interested in such products and services in the years to come.
Our Research
We surveyed 653 family offices with a combined net
worth of more than $2 trillion, including investable assets of $1.2
trillion. The offices were divided into three types: the single-family
office, which had an average net worth of $773 million; the multifamily
office, which had an average net worth of $260 million and which was
built around an "anchor" family that had at least 30% of the total
assets; and a commercial family office, where there was no anchor
family and where the average net worth was $53 million.
Over the past few articles, we've examined the state of the market today, the degree of wealth, the motivations for being part of a family office, the financial products and services used and the qualifications of the executive directors who are in charge. Now we'll turn our attention to the future of this market, and consider the impact of the intense competition among financial services firms and advisors for the wealthiest clients with the largest portfolios and greatest profit potential.
Specifically, as more wealthy individuals and firms move into the field, where is it headed? What will those already in the business have to do to keep up or stay ahead? What should those who aspire to open a family office be doing or thinking? And how will those offices operating make a profit and stay competitive?
A Look Ahead
Take a growing private wealth market and add the
very high level of risk-adjusted profitability for investment
management services, and you have a recipe for a booming competitive
environment that will only intensify. That explains why the majority of
family offices in our study said they were already feeling the
competitive pressure, and there was near unanimity that the pressure at
the investment management end of the family office business would only
increase (Exhibit 1).
When this competitive trend was coupled with the projected growth in the ranks of the exceptionally wealthy, our respondents anticipated a dramatic increase in the number of family offices by 2008. However, while there will be more competitors, we believe the high level of professionalism and capabilities typical of today's family offices may well drop as new family offices open-there simply won't be enough people around with the experience and expertise to run them or oversee investing.
As a result, the exceptionally wealthy will be obliged to become more discerning as they decide which family offices to work, or not work, with. The rich are demanding, as we know, and they are expected to become more so. And that more intense scrutiny will be most keenly felt at the single-family office level where the wealthiest families dwell, particularly if there's not enough managerial talent to go around.
Furthermore, cost sensitivity will become part of that closer scrutiny, and though it's not an overwhelming concern-less than half of the respondents were worried, and our research among the affluent over the past few years has shown that they are willing to pay top dollar as long as they get top products and services and people in return-the cost of running a family office will still be an issue to be contended with. This could mean a migration to new pricing models, such as product-based pricing, and also a tighter rein on the office's fixed costs.
Even so, it's the value, not the price tag, that's a burning issue with the exceptionally wealthy, with 95.6% of the respondents saying they expected family offices to have to deliver greater value-and also have to make clients aware of the value being delivered by better defining it. Based on our research, advanced planning and lifestyle services might be one of the ways to bring that added value.