Look for more customization and consolidation in the multi-family office business in 2011, say industry executives.
Multi-family offices traditionally sign on wealthy families for a broad array of services that include investing, administration, trust and estates, philanthropy, governance and comprehensive planning. But with costs expected to rise amid a new regulatory environment this year, and demand for more customized services growing, many firms are re-thinking the way they do business.
“We need to be more flexible and take on more specialized functions,” said Brian Hughes, managing director, strategic relationships for Threshold Group, a multi-family office with $2.7 billion in assets. “Relationships with clients may start more slowly and in smaller, customized pieces, which will put us in a much better position to do more down the road. We're clearly moving in that direction and I think you're also seeing other multi-family offices re-thinking the flexibility of their offerings.”
Harris myCFO in Chicago, which is the multi-family office division of Harris Bank and has $18 billion in client assets under management, is one of them. The myCFO business is planning to create more customized offerings in financial reporting, expense management, tax compliance and family education for its family office clients, says John Benevides, president of family office services for the firm. “We don't have to be the entire solution,” he says.
Citing high costs, especially for top talent, and a need for scale, MFO executives say they expect more firms will join forces through mergers or acquisitions this year. The past year already saw several high-profile multi-family office acquisitions, including Pitcairn's takeover of New York-based Shelterwood Financial and Threshold Group's purchase of Philadelphia-based Ashbridge Investment Management.
Manchester Capitol Advisors, a Vermont-based multi-family office with $1.5 billion in assets, says it is considering making an acquisition in 2011, for example, but is proceeding with caution, says President Murray Stoltz. “The same challenges exist for all MFOs,” Stoltz says. “There has to be a cultural fit and leadership has to be able to work together. The consolidation has to be truly strategic and leverage-able.”
Threshold's Hughes thinks there will be more in 2011. “I don't think there's any question,” Hughes said. “I think you'll see boutiques who will not survive because they couldn't get to their margins and will become strategic targets.”
Benevides, who until this summer was president of the Family Office Exchange, agreed, adding he thought the M&A pace would pick up throughout 2011 and “crescendo” in 2012.
“Economics are dictating it,” he said. “There's increasing demand for breadth of services, and you need scale to provide it.”
That demand for more services has led to a vexing problem: as families take advantage of services such as bill pay, family governance and concierge amenities, profit margins are eroded, because the fee for most multi-family offices is only based on a percentage of assets under management.
“You need to offer those services that wealthy families want, and you can't afford not to because you would be at a competitive disadvantage,” maintains Benevides. “Service creep is a tribute to the value of advice being delivered to clients today.”
And the problem isn't going away anytime soon, executives say.
“It's an issue that has always been around and will continue to be, because I don't think the pricing model of percentage of AUM ever goes away,” Stoltz agrees. “People don't want to have a fee for everything you do for them, and every client demand is competitive, because you know that you're not the only firm they're talking to.”
Given the reality of service creep, multi-family offices are trying to make the best of it by promoting the services they offer and striving for efficiency, target goals and scale, when possible.
“It's a business where every family has unique needs,” notes Stoltz, “and firms can distinguish themselves by providing services to meet those needs. But it's critical to do it as efficiently as possible.”
Keeping an eye on margins is also key for multi-family offices, adds Threshold's Hughes. “You may not get to 30 percent, but you have to get to 15 or 20 percent, or else the business isn't sustainable,” he explains. “You have to know what you're good at and track time, expenses and human capital costs. And measure constantly.”