Multifamily offices report double-digit growth, with smaller organizations leading the way.
Multifamily offices are still riding high. Growth
continued apace last year at 68 firms studied by The Family Wealth
Alliance LLC. Total assets under advisement in the study universe grew
by 15.3% to $226.5 billion. Small- and medium-size multifamily offices
did even better, as average growth for firms below $5 billion in assets
topped 20% for 2005.
Those are among the findings of the third annual
study of the emerging multifamily office industry by the Family Wealth
Alliance, an Oak Brook, Ill.-based consulting and research firm.
Multifamily offices provide integrated wealth management services to
families with investable assets typically in the $20 million to $200
million range. They constitute the most dynamic sector of wealth
management today.
The strong asset-growth figures, coming in the
context of lackluster overall investment market returns, indicate that
new client money and not just portfolio appreciation was a major
contributor to the expansion of assets. Firms with $5 billion or more
under advisement reported asset growth of 12.9%. Those in the
$1-billion-to-$5 billion range gained 21.4%. Asset growth was 21% for
multifamily offices in the $500-million-to-$1 billion range and 20.6%
for those with less than $500 million. By way of comparison, the total
return of the Standard & Poor's 500 Index generated a total return
of just 4.9% in 2005, and assets of the mutual fund industry grew by
9.9%.
Multifamily offices come from a variety of origins.
A significant minority (15.9%) grew out of single-family offices, while
most others (40.6%) started in business as multifamily offices. The
remainder evolved into multifamily offices from financial planning,
investment, accounting or law firms. As competition heats up among
advisors to the wealthiest families, more firms, particularly
financial-planning-based organizations, have begun to transition
themselves into multifamily offices.
To be included in the Family Wealth Alliance study,
firms had to have a client base consisting primarily of
multigenerational families. They also had to offer an extensive menu of
family office services. On average, multigenerational client
relationships represent about 85% of total assets and 65% of revenues
of firms in the study universe. Roughly one in four multifamily offices
(26.2%) is owned wholly or in part by families they serve. Of those,
62.5% are at least 50% owned by the families, with the remainder having
family stakes below 50%. Because they tend to serve a relatively small
number of wealthy clients, multifamily offices can find their revenue
sources to be highly concentrated. On average, firms in the universe
say 17.2% of their revenues come from their single-biggest family.
Managing the service menu poses a perennial
challenge for multifamily offices. Clients expect a full array of
traditional family office services-wealth transfer planning, accounting
and consolidated reporting, tax planning, trust monitoring, property
management and family counseling, just to name a few. Yet the cost and
complexity of supporting a full menu of services in-house is beyond the
capacity of many firms. In response, multifamily offices increasingly
have turned to outsourcing, a trend that seems to be accelerating,
while cutting back in-house service offerings.
For example, financial planning is now offered
in-house by 82.6% of firms , down from 92.9% of firms in last year's
study universe. Estate planning is outsourced by 30.4% of firms, up
from 15.7% last year. For the first time, this year's study tracks
service utilization by clients. The numbers show that some widely
offered services are barely used. Bill paying, for example, is provided
in-house or through outsourcing by 75.3% of firms, but only 6.9% of
clients on average use it. Asset allocation is the most popular
service, with firms reporting usage by 48.5% of their clients.
The most-pressing concern of management centers on
human capital issues, such as recruiting, developing, motivating and
retaining professionals. Respondents were asked to identify the three
biggest challenges facing their firms. When responses were weighted to
reflect frequency and importance, human capital topped the list with a
score of 47. As an example of the challenge, 18.6% of respondents, or
almost one in five, said their firms have a senior-level vacancy they
are trying to fill with an outside candidate. A third (36.4%) had
engaged a search firm and the vacant position had been open for a
median of six months. Most-cited job to be filled: client
advisor/relationship manager.
The study was sponsored by Fidelity Registered
Investment Advisor Group and Fidelity Family Office Services, HUB
International Personal Insurance, Investors Bank & Trust and
Saybrook Capital LLC. Other highlights follow.
Growth And Personnel
The largest firms report sagging growth and
personnel cutbacks. More than half (54.5%) of the $5 billion-plus
multifamily offices saw their assets grow by less than 10% in 2005.
Half the banks, which tend to be among the largest firms, grew at less
than 10%. While employee headcounts were flat in 2005 at small and
medium-size firms, the biggest firms were cutting back. They reduced
total employment in 2005 by 13.6%, notwithstanding an increase of 15.3%
in client relationship managers.
Mergers
Mergers among multifamily offices may be about to
heat up. The merger scene in the industry has been quiet in recent
months. But many multifamily office executives expect that to change.
More than a third (36.4%) of respondents at firms with $5 billion or
more in assets say their organizations are either likely or somewhat
likely to acquire a smaller firm in the next 12 months. Likewise, a
third (33.3%) of respondents at the smallest firms (under $500 million
in assets) also say they are likely or somewhat likely to make an
acquisition. Overall, 13.3% of firms said they have been involved in a
merger in the past three years.
New Clients
More than a third of firms (34.8%) specify a
required minimum net worth for new clients, while 59.4% set a minimum
amount of assets under advisement and 65.2% want a certain minimum
annual fee revenue. Those minimums tend to vary with the size of the
organization. For example, the largest ($5 billion and up in assets)
multifamily offices want a median net worth of $50 million, assets
under advisement of $17.5 million and minimum fee revenue of $100,000 a
year. The smallest firms (under $500 million in assets) require a
median net worth of only $8.4 million, assets under advisement of $4
million and annual fee revenue of just under $50,000 for new clients.
Competitors
Goldman Sachs turns out to be the most formidable
national rival for multifamily offices. The Wall Street powerhouse
garnered the most mentions from respondents asked to identify firms
that were their top three competitors. Goldman was mentioned 15 times,
leading all other national firms, including Northern Trust (13), U.S.
Trust (6), Merrill Lynch (4), J.P. Morgan Chase (3), Morgan Stanley (2)
and UBS (2). Most executives cited regional competitors as their
biggest rivals.
Current-Year Initiatives
Client acquisition has become Job One among
multifamily office executives. It ranked at the top of a list of
current-year initiatives by study respondents. Client acquisition is a
particularly time-consuming process for multifamily offices because of
the complexity of the client relationships they take on, and the
importance of ensuring a good fit with each particular client family.
Other top initiatives also centered on client issues. Ranked No. 2 was
improving the quality of client services, and increasing
service-delivery efficiency was voted No. 3.
Investment Portfolios
Multifamily offices report small but noteworthy
shifts in their investment portfolios away from individual securities
and toward mutual funds and exchange-traded funds during 2005. Mutual
funds and ETFs represented 31.2% of client investment accounts last
year, up from 28.8% at year-end 2004. Separately managed securities
(in-house and outside managers) comprised 42.2% of portfolios vs. 46.0%
a year earlier. Hedge funds, at 11.4% of client portfolios, and private
equity, at 4%, showed just slight percentage gains from 2004. A small
number of firms that said they planned to add investment services in
the next 12 months primarily mentioned private equity or consulting
expertise in alternative investments.
New Players
New players continue to emerge in the multifamily
office industry. This year's study roster includes two organizations
whose principals previously were part of the asset management
operations of Ernst & Young LLP, and now operate as independent
firms. They are Acacia Wealth Advisors of Los Angeles, with $1.35
billion under advisement, and Southern Wealth Management of San
Antonio, with $700 million in assets. Another new entry is Cherry Tree
Family Office of Minnetonka, Minn. The firm was formed by a group of
experienced family office executives and currently has $550 million
under advisement.
