With more advisors chasing high-net-worth clients, family offices have officially entered “buyer's market” territory, which is bad news for those who dislike tending to the nonfinancial demands of ultrawealthy clients.
One of the earmarks of a family office is its handling of a wide variety of “lifestyle” tasks for its clients — from educating family members about philanthropy and protecting them from con artists to finding a good cosmetic surgeon or keeping the yacht shipshape. Based on our research, clients of family offices expect to make greater use of such services in the future.
This complicates life for advisors engaged in family offices for two reasons. First, it piles distractions on top of the advisors' main concern (managing the office's investments). Second, there's very little money in the lifestyle services themselves, though they are useful for attracting clients and cementing relationships.
In short, the future of family-office managers is filled with more hoops to jump through in order to keep their clients happy.
We recently conducted an extensive survey of the executive directors of 653 family offices in the United States to learn about their clients' motivations and preferences and about the products and services they use. Broadly speaking, we defined a family office as an organization dedicated to the investment, administrative and personal needs of one or more wealthy families. The offices surveyed had a combined net worth of $2.1 trillion and investable assets of $1.2 trillion.
The study was prompted in no small part by a steady increase in the number of firms offering family offices. These advisors have been attracted by the assets, references and higher margin products the consumers of such services bring with them.
A second driving force behind the survey was the emergence of multifamily offices, which made the high-end services available to clients with as little as $5 million (compared to the $100 million threshold common at single-family offices).
Multifamily offices give something away, of course — it's impossible to be as attentive to the needs of 50 or more families as to just one. Still, they remain attractive to the affluent for a number of reasons. For starters, multifamily offices provide perks unavailable to many run-of-the-mill high-net-worth clients. In addition, multifamily offices let the wealthy combine their money with that of other families to achieve economies of scale and get institutional pricing and leverage when it comes to their investments. Further, they gain entrée to investment opportunities they might not otherwise be privy to, such as hedge funds and private equity deals.
Not surprisingly, every family office in our study offered investment management services. Almost all of them also provided administrative services, such as bookkeeping and accounting. To a lesser extent, they offered advanced-planning services — wealth enhancement, wealth transfer, asset protection and charitable giving.
On the other hand, they were typically unlikely to offer lifestyle services, but based on our study of expectations three years down the line, there should be increased attention given to every lifestyle service we asked about.
A good starting point for examining lifestyle services is fiscal education. Many ultrawealthy families are intent on inculcating a sense of responsibility in their heirs — teaching them to manage their money responsibly and charitably (as opposed to blowing the trust fund on a fleet of Ferraris).
Family education also involves rooting out unrealistic expectations about investment performance. Those who have never had to worry about money might well assume they'll never have to worry, no matter how much they spend. To fight this dangerous assumption, experts can give 101 courses on the risk/reward equation, the basics of financial decision-making and the investment policy statement. Such education helps the advisor do his job, because the more informed family members are, the easier it is for the family office to do its job.
Other family-office services, such as concierge services, exist purely as relationship cement. Concierge services vary from office to office and family to family, but can include walking the dog, transporting horses, getting the corner table at an exclusive restaurant, booking the best rooms at the most exclusive hotels and getting into the swankiest clubs without having to wait in line. Concierge services can also cover vetting, hiring and managing nurses and au pairs; running a wedding or birthday party; and more prosaic tasks such as mowing lawns, raking leaves and shoveling snow.
Another relationship-enhancing service is supporting a wealthy family's hobbies and artistic interests. For instance, over the course of decades, many families have put together world-class collections of books, cars, art, coins or stamps. In some cases, the family office becomes a companion in collecting, keeping an eye on the public and private market to see what might be coming up for sale, assessing the value and provenance of any purchase being considered and bidding at an auction where the family member might want to keep a low profile. The family office also typically arranges for insurance and security.
The latter of these two is no small item; the ultrarich can feel like targets — and not without reason. Serious money attracts all manner of con men and other undesirables, and family offices can go a long way to making the clients feel more secure by arranging for physical security, conducting background checks on prospective employees and arranging for the transport of art or other valuables.
Strange as it may seem, wealthy people often want help spending their money. It's not so much an issue of what to buy as how to get the most bang for the buck. To address this “problem,” family offices can deploy personal shoppers to ferret out deals and make the purchases.
Then there's the caretaker issues. A second — or third — home, a jet, a helicopter and a megayacht are all typical possessions for the very wealthy, and they all need to be looked after. Bars have to be stocked, crews have to be found, maids have to be hired.
Perhaps a little surprisingly, the desire to have health care taken care of is a leading motivation for having a family office. To meet this demand, some family offices have a medical director on staff or retainer, just as they might have an investment specialist. The director's job involves making sure all the health care needs of the family — from choosing a nursing home to tending to a medical emergency abroad — are well attended. A director can also be responsible for finding the right doctors, surgeons or other specialists, the best hospitals and even for choosing medicines and treatments.
The Juice and the Squeeze
But for all of the increasing demand, lifestyle services are seldom cost-effective, even when outsourced, because of the coordination time involved. Nonetheless, the executive directors of the family offices in our study said such services were of great strategic value when it came to serving clients and to staying competitive. (It should be noted that the competition issues are less significant to single-family offices, which essentially compete with no one.)
In conclusion, as family offices proliferate, so will the demand for services that are part and parcel to the lifestyles of the rich and famous. And though such services are not profitable for firms offering family offices, they're attractive to the families whose money those firms would like to manage, and that is reason enough to provide lifestyle services now.
Writers' BIOS: Russ Alan Prince
is president of Prince & Associates.
Hannah Shaw Grove
is managing director at Merrill Lynch Investment Managers.
This article is excerpted from the authors' latest book, Inside the Family Office: Managing the Fortunes of the Exceptionally Wealthy.
|Lifestyle service||Currently provide||Expect to provide in three years|
|Collection advisory services||34.0||62.6|
|Manage residences, jets, helicopters and megayachts||6.3||26.3|
|Family health care||1.4||14.9|
|Key to serving the needs of clients||91.7%|
|Key to staying competitive||65.7|
Source: Prince & Associates, 2004