|Multi-Family Offices at Crossroads Business Models Challenged|
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Multi-family offices are finding themselves at a crossroads: while poised to benefit as single-family offices come under increasing cost and regulatory pressure, they are at the same time confronting formidable challenges to their own business model.
Last month’s financial reform legislation, which opened the possibility that family offices with fewer than 15 clients may have to register with the Securities and Exchange Commission, was just the latest concern for beleaguered single-family offices.
In May, Robert Casey, the author of Family Wealth Alliance’s annual study of SFOs, said family offices with $100 million in assets or less were at an “inflection point” brought on by rising costs and a difficult investment climate.
Indeed, some single-family offices have already partnered with larger multi-family offices, and it’s no secret that many more are currently in discussions to follow suit.
Accordingly, multi-family offices clearly believe their time has come: established MFOs, such as Pitcairn, Threshold, Glenmede, Silver Bridge and Aspiriant are expanding, and a number of regional multi-family offices, such as Covenant Offices in San Antonio, are opening up around the country.
What’s more, several big names in the wealth management business, including Peter Scaturro, the former Goldman Sachs and US Trust executive, are also reportedly preparing to open new multi-family offices before the end of the year.
Perhaps the biggest names to take the plunge so far this year have been Harris MyCFO veterans Steve Braverman and Allan Zachariah, who launched Pathstone Family Office in June with offices in New Jersey and Atlanta, and a Manhattan office set to open later in the year.
The two high-profile industry veterans have plenty going for them: stellar reputations, two dozen wealthy clients with $2 billion worth of assets who followed them to their new firm and interest from single-family offices who are considering partnering with an MFO.
“They have as good a sense as anyone of the needs of high-end clients, and they’ve already done the leg work to be able to hit the ground running,” said Jeff Spears, chief executive of Sanctuary Wealth Services, a San Francisco-based business support provider for wealth managers and family offices.
Headwinds for MFOs
But multi-family offices are also running into strong headwinds when it comes to areas like staffing, margins and services, according to industry observers.
“It can be a very tough business,” said Elizabeth Nesvold, managing partner for the New York-based investment banking firm Silver Lane Advisors. “There seems to be an inverse relationship between the margin potential and the size of the account, especially if the family spans multi-generations.”
And competing in New York, while potentially fertile ground for attracting wealthy clients, also means facing increased pressure to lower fees, Nesvold said.
“If you’re targeting New York, you have twenty other people you’re going up against,” she said. “Families don’t necessarily understand the value proposition from one model to the next, so decisions end up being a function of pricing.”
“Everyone is under fee pressure because of the return expectations of clients and their experience during the financial crisis,” Spears said.
Wealthy families have found that investment advisory fees vary dramatically and are “ultimately negotiable,” said Arthur Field, a New York-based attorney who advises wealthy families and is founder and principal of Field Consulting Services.
Nesvold agreed, noting that “everything seems to be negotiated and bundled. MFOs do themselves a disservice by trying to be all things to all people without pricing accordingly. But MFOs can do well if they price based on complexity.”
In addition to the traditional fee of charging clients a percentage of assets under management, Pathstone charges separately for work in areas such as tax preparation, trust and estate planning and bill paying for clients.
“We charge real fees for real work,” he said, “and we charge an appropriate level of basis point fees that generate a fair profit. It’s a partnership with the client. They understand that a fair fee that supports the growth of the business, retention of talent and investment in systems is in their best interest. After all, if you’re engaging someone to serve your family throughout your lifetime and beyond, you want to invest in their sustainability.”
Staffing is also a critical challenge for multi-family offices, especially a start-up, according to industry observers.
“Like every smaller firm, attracting additional senior client-facing talent is key,” said Jamie McLaughlin, an industry veteran.
“Multi-family offices still have a pretty high cost service model,” said Spears. “It’s a challenge for everybody. The question is can you meet the needs of the client in a profitable way?”
Pathstone currently has nine client-facing professionals, Braverman said, and eight have equity in the firm.
Offering equity stakes gives Pathstone an advantage over institutional firms and single-family offices, Braverman argued.
“We’re able to offer real equity in the ownership structure and a long-term growth proposition,” Braverman said. “We don’t have an institutional owner that demands an immediate return on equity. And if you’re in a single-family office, there’s no career advancement without a change at the top.”
Braverman also argues that Pathstone’s slow-but-steady approach will prove to be a winning formula at a time when multi-family offices appear to be at a crossroads.
He and Zachariah left Harris MyCFO because they wanted to “deliver a higher level of service to a smaller number of people,” Braverman said.
Growth will probably be limited to no more than four families a year, he added, and the firm hopes to keep a one-to-one employee to client ratio.
Pathstone is also positioning itself as “the best possible transition solution” for families before they sell the family business and have a liquidity event, Braverman said.
“Unlike Wall Street firms who are just interested in asset management we can do pre-liquidity planning and can see value even without investable assets,” he said.
Pathstone and other multi-family offices will have to navigate competing trends, say industry observers.
“Everybody is calling themselves a multi-family office now and it’s leading to confusion about what an MFO is and what it should offer,” said Nesvold.
Wealthy families are indeed conflicted about whether to join a multi-family office, Field said.
“They are used to owning their own business and making decisions themselves,” he said “and now they have to trust someone else’s judgment. And it’s awfully difficult for families to differentiate between firms. They all offer the same personal services which may or may not work out as well as investment advice.”
Families are also “sensitive to any so-called multi-family office that has an internal investment infrastructure” in the wake of recent financial scandals, said Charles Lowenhaupt, chairman of Lowenhaupt Global Advisors in St. Louis. “Wealthy families are throwing their hands up because they can’t get what they want in family offices and are flirting with banks, which is part of the shake-out that’s going on.”
But the good news for multi-family offices is increased pressure on single family offices brought on by regulatory uncertainty in the wake of financial reform legislation and rising costs.
Field estimates that single-family offices have to make close to a 10 per cent return on their investments just to break even.
“As costs go up, there’s a lot of pressure for single-family offices to join an MFO,” he said, especially for families who have assets in the $100 million range. “They are just not comfortable paying the cost of a single-family office anymore.”
Braverman said that reality has already resulted in discussions with single-family offices, which may result in more Pathstone offices, in addition to the one he will open in New York.
And as the MFO model attracts more attention, Pathstone’s progress will undoubtedly come under close scrutiny.
So far, McLaughlin said, the odds look good.
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Aug.31, 2010