The Multi-family Office: A Solution for the Ultra High Net Worth Client

Aimed at private bankers and wealth managers as well as those in client facing, sales, and marketing positions in wealth management organizations and law firms, this report provides an analysis of the fastest growing segment of the wealth market.

Demographics, global distribution and prospective growth are all presented and discussed along with a number of case studies illustrating the different types of family offices, multi-family offices and private investment offices present in the market today.

Family offices” together with “family office services” have started to arouse considerable interest within the wealth management sector as an alternative to the traditional service model.

Anecdotal evidence suggests that the number of wealth management firms that either offer family office services, or use the family office moniker to describe the services they provide, has increased significantly since the start of the millennium, especially in the ultra-high net worth market segment.

With traditional service providers, such as private banks, stockbrokers and private client investment management firms, still under considerable scrutiny in the wake of their performance during the deep equity bear market of 2000 to 2003 and the near collapse of global financial markets in 2008, some experts think that family offices, and especially multi-family offices, offer a much more compelling alternative. As a consequence, family offices look set to move much nearer to the wealth management mainstream.

What is a family office?

How precisely does a family office differ from a more traditional wealth management service provider? And, more to the point, is the multi-family office model viable from the standpoint of both the client and the service provider?

This management report explores these and a number of other related questions. It argues that the differences between multi-family offices and conventional family offices are more marginal than at first seems the case. Indeed, in some instances, it can all come down to semantics.

Firms that use the family offices, or multi-family office moniker, can possess powerful positional advantages. But these are not unique to these institutions and are often shared with firms that eschew any connection with the family office concept, such as independently owned wealth management boutiques that cater to a very rich client base. SHOW LESS READ MORE >

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Executive summary

Chapter 1: The multi-family office opportunity set
A big market
The geography of wealth
Future growth
Conclusion

Chapter 2: The family office conundrum
Definitional difficulties
Marketing opportunism
A basic definition
Family office life cycles
The multi-family office (MFO)
MFO versus private banks
A regulator’s definition
Conclusion

Chapter 3: Multi-family office differentiators
More than an investment manager
Ownership and control
The service offer
Alternative MFO providers
The MFO distinction
Implementation
Bespoke holistic wealth management
SFOs versus MFOs
Conclusion

Chapter 4: Multi-family offices – An alternative service model
Demand factors
Supply factors
Virtual solutions
Enter the MFO
Conclusion

Chapter 5: Family office demographics
The SFO and MFO universe
The US
SFOs
The UK
Independent European and Swiss multi-family offices
Conclusion

Chapter 6: Multi-family office dynamics
Profitability
Costs
Investment performance and service quality
Conclusion

Chapter 7: Case studies
Bessemer Trust: The biggest and best?
Convergent Wealth Advisors: Ahead of the curves
Crossbridge Capital: Rapid growth and profits for new entrant
Elystone Capital: So good, a satisfied client acquired a significant stake
Fleming Family & Partners: Advancing rapidly through the MFO life cycle
Hanson Family Holding: A family office, a corporate finance house and a new asset management firm
Hawthorn: Protection and an extensive range of services from a bank-owned MFO
Harald Quandt Holding: A burgeoning investment management conglomerate
Iveagh Private investment House: A family office targets new markets
Lord North Street: London’s pioneering private investment office
Partners Capital LLP: The money managers manager
Rockefeller Financial: From SFO to diversified financial services company
Sand Aire: The UK’s pioneering commercial multi-client office
Silvercrest Asset Management: Building on and exploiting a legacy
Stanhope Capital
Talisman Global Asset Management: A private investment office targets external clients
Signia Wealth: Explosive growth for new commercial MFO entrant

Figures

Figure 1.1: Number of UHNW households with more than $100m of AuM
Figure 1.2: UNHW households as a proportion of total households
Figure 1.3: Number of millionaire Households
Figure 1.4: Proportion of millionaire households by market
Figure 1.5: Personal wealth growth forecasts, 2010-2015 (constant exchange rate)
Figure 3.1: Top US MFOs (year end 2008)
Figure 3.2: A typical MFO menu
Figure 4.1: Family office model
Figure 4.2: Servicing the UHNW – existing vs new model
Figure 5.1: UK-based MFOs and private investment offices
Figure 5.2 Independent Swiss-based ‘commercial’ family offices
Figure 5.3: European MFOs Family Office
Figure 6.1: Return on Assets (RoA) By Business odel (basis points) 2009
Figure 6.2: European offshore institutions, weighted RoAs by client size

Family offices have played a significant, though often understated, role in the development of the wealth management sector over the past 130 years or so. No definitive data of either the number, or volume of wealth overseen by institutions currently exists. But anecdotal and impressionistic evidence suggests that both the number of these institutions, together with the volume of assets they oversee is substantial.

Over the past decade and a half the multi-family office (MFO), a development of the SFO, has attracted considerable interest as an alternative to private banks and wealth management firms to managing the wealth of very rich individuals and families. This reflects a number of perceived shortcomings associated with conventional private banks and wealth management firms in the wake of the deep equity bear market experienced between 2000 and 2003 and the near market meltdown of 2008 and its aftermath.

Critics of conventional wealth management firms contend that these institutions often compromise the interests of their wealthy clients. The interests of the private bank or wealth management firm are rarely completely aligned with the client. Shareholders, together with management and employees, also constitute a powerful group of interests. And these can often assume primacy.

As a consequence service, together with investment performance, can also suffer significantly, for example. The need to maximise revenues, to satisfy external shareholders and the bonus expectations of employees, may put the onus on the need to sell “product” to wealth management clients rather than providing solutions to real needs, much less managing their wealth in a prudent and responsible manner. Moreover, many of these products may emanate from the private banks or wealth management institutions, rather than from third party producers that may offer better value and, in the case of investment products, better performance.

Advocates of this point of view claim that the events of 2000-2003 and 2008 and its aftermath fully illustrate the shortcomings of this model which ultimately alienated many clients. This precipitated an exodus of clients from the conventional sector. Clients either tried to take much greater direct responsibility for managing their wealth. Or they started to look for alternative models, such as the family office.

Since 2000 there does appear to have been an uptick in the number of firms that either launched, or re-badged themselves as MFOs, in Europe and North America. In addition, not to be outdone, many private banks and big wealth management firms have started to offer “family office” services as part of their offering for very rich individuals and families. And the MFO moniker appears to have moved much nearer to the wealth mangement mainstream.

As the term implies a MFO provides the wealth management and other services typically provided by a SFO, to a number of family groups and/or very rich individuals. By spreading the costs associated with operating a MFO across a number of clients, this enables a much bigger clientele to avail of the services typically provided by a SFO.

Advocates of MFOs claim that the ability of these institutions to provide a better alignment of interests with the client than conventional wealth management firms enables them to provide a better and more cost effective service than more conventional alternatives.

Unfortunately, however, the difference between conventional wealth management firms and MFOs may not be that clear-cut. This is not the case with a SFO, for example, which is probably owned by, and will almost certainly cater to the members of one family. It may also not be the case with a small group of families that have decided to pool their resources together to create a MFO to oversee their wealth. But once it assumes a certain size, especially in terms of client numbers and assets managed the distinction between a MFO and a conventional wealth management firm may become much more marginal. The only difference may be that “commercial” MFOs tend to have a much richer client base than their more conventional peers.
This is especially the case when a MFO is operated along commercial lines instead of being a cost centre. Once this occurs there is always the danger that client interests may once again become compromised to satisfy commercial imperatives. Moreover, a number of former SFOs have metamorphosed into “conventional” or “full service” investment management and/or wealth management firms.

Most regulators tend to ignore any distinction between MFOs and conventional wealth management firms. If they provide investment management services MFOs are treated as just another investment management firm and regulated accordingly.

The United States' Securities and Exchange Commission (SEC) has attempted to provide a working definition of a SFO and MFO within the context of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. Provided that they are owned and controlled by founding families, confine their activities to family clients or employees and do not make their services available to external clients they may be absolved from the requirement to register with the SEC as investment advisers. Unfortunately, the latter requirement rules out all “commercial” family offices.

So what differentiates a “commercial” MFO that caters to external clients from conventional
wealth management firms? If it is impossible to provide a satisfactory definition of a MFO this has implications for the claim that these institutions are an improvement on conventional wealth management firms.

In summary it seems that there are three possible basis for differentiation between a commercial MFO and a conventional wealth management firm.

(i) Ownership and operational Independence
MFOs tend to be independently owned. In many instances they are either privately owned companies or partnerships. As a consequence, are not subjected to the same conflicts of interest as public shareholder-owned firms or the wealth management arms of integrated banks and investment management firms.

This may provide the necessary prerequisite for a closer alignment of interests between client and wealth manager and higher standards of service and investment performance.

The only problem is that this distinction is hardly mutually exclusive. Indeed, there is no shortage of “independent” banks and investment management/wealth management firms. Furthermore, as with so-called MFOs the independent boutique segment of the wealth management sector appears to have experienced a boom since 2000. This is largely because of the same reasons put forward to explain an increase in the number of firms using the MFO moniker, i.e. the alleged shortcomings of big integrated wealth management firms.

But the independent sector is not just confined to newly established firms. It also includes much longer established institutions, such as Swiss private partnership banks, family owned banks such as London-based C. Hoare & Co and investment management firms like Cazenove Capital Management (CCM), where management and the client base may also own a significant amount of the equity.

The water is muddied even further by the increasing for conventional wealth management firms, and especially the private banking or wealth management arms of big integrated banks, to form specific units that function in the same manner, and on the same ethos as “independent” MFOs. Some banking groups have even acquired so-called MFOs.

(ii) Service offer

Commercial MFOs may offer a much wider range of services. Indeed some MFO advocates would claim that these institutions are much better positioned to provide an

holistic or comprehensive wealth management than their more conventional peers that are much more likely to specialise on a narrow range of functions.

Family Office Exchange (FOX), a Chicago-based industry association claims that a MFO is “a multi-disciplined firm that offers integrated financial advice to its clients in eight or nine categories. The MFO also may serve more than one core family group who is not a direct descendant of, or related to, the creator of the office”

The problem is that many other conventional wealth management firms have expanded their service offer to cover many of the activities identified by FOX as well. This is especially the case with wealth management firms that have always targeted the very rich market segment. Indeed, in recent years many firms, and especially the wealth management arms of big integrated banking groups have put considerably effort into expanding their service offer for very rich clients.

Moreover, many of the institutions associated with the MFO moniker offer a much more restricted range of services. Some confine their activities to investment management activities or family administration and accounting-related activities. Indeed, the former have given rise to a new sub-category: the private investment office.

(iii) An advisory focus

The tendency for commercial MFOs to focus on the provision of advice, with execution and day-to-day activities effectively outsourced to external specialists may provide another basis for differentiation.

Some MFO advocates go further and claim that a MFO-based service model provides a new wealth management paradigm in so far as it effectively unbundles ‘product' from ‘advice' to the benefit of the client.

In this scenario the MFO effectively acts as a knowledgeable and unbiased advisor or intermediary between the client and the providers of wealth management “product,” such as discretionary asset management services. Not only does the MFO provide advice, however, but it also assumes responsibility for executing and administering an agreed wealth management strategy, including reporting the results back to the client.

A basic problem with this scenario, however, is that it is hardly unique to MFOs. Many advisory firms, including genuine “independent” financial advisors (IFAs), function in precisely the same way, albeit not necessarily with as affluent a client base. They just don't call themselves MFOs.

Given these definitional problems it is difficult, if not impossible to provide definitive data on MFO demographics, much less performance, especially relative to conventional wealth management firms.

On the basis of the case studies included in this report, however, it seems clear most firms that call themselves MFOs or private investment offices are currently doing very well. Moreover, given the accounting data posted by some of these firms it seems that they are also performing very well in terms of profitability and return on equity.

The case studies also illustrate that the “commercial” MFO and private office sector is very heterogeneous, especially in terms of size, ownership profile and the range of services provided.

Some firms, such as Bessemer Trust, the biggest “commercial” family office, where the founding family still has a significant ownership interest, have developed into a full service wealth management firm with a network of offices throughout the United States.

Rockefeller Financial, is another former SFO that has metamorphosed into a full service wealth management firm. Unlike, Bessemer Trust, however, it is no longer controlled by the founding family. Paris-based Societe Generale now owns a significant minority stake in the firm.

A number of other big US commercial MFOs are either subsidiaries or affiliates of big banking groups, such as Philadelphia-based Hawthorn, which was explicitly established by PNC Financial Services Group to provide family-office type services for very rich clients.

Other commercial MFOs have attempted to diversify their client base by developing specific services targeted at other client groups. Rockefeller Financial has targeted advisers and other wealth management groups with an online consolidated reporting facility. Iveagh Ltd., a UK-based commercial MFO has leveraged its in-house investment management skills to launch investment funds targeted at European intermediaries and retail investors.

Commercial” MFOs and private investment offices have also started to increase their international focus. This is especially the case with Fleming Family and Partners (FF&P), for example. It currently has offices in London, Moscow, Vaduz and Zurich. But is has also had offices in Hong Kong and Singapore as well.

Institutions active in the “commercial” MFO and private office sector do, however, share a number of common features. The typical client is very rich and the firms tend to be very profitable.

If nothing else this should these enable these firms to prosper in the future and attract the personnel necessary to do so. The underlying profitability of the sector may continue to attract similar firms, although whether or not they use the MFO moniker is another question completely.

The number of institutions active within this sector of the market is also set to increase.

To a large extent this will almost certainly be a function of market growth. Bigger markets tend to facilitate greater specialisation. And with very rich clients perceived as one of the fastest growing elements of the wealth management sector it is almost certain that more specialist institutions will emerge as a consequence. But it is also likely that more SFOs will combine together, as well as opening their doors to external clients.