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 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.

    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.

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