"We don't see a huge surge of new single-family offices opening up," says William Rankin, chief executive of Shelterwood Financial Services. "What we are seeing instead is families with single-family offices questioning whether they want to maintain them, and considering options to partner with other single-family offices and become a multifamily office."
These two trends are coming from different directions, says Rankin. Ultra high-net-worth families who have historically relied on large financial institutions are either migrating away from or more typically, redefining how they want to work with them. Driving this trend is the fact that some of those institutions--such as Lehman Brothers--no longer exist, while others have been the subjects of disturbing headlines. Families are also questioning whether these large financial institutions are really operating in their best interest rather than the institutions' best interest.
"The business model for private banks has been increasingly sale of product," says Charles Lowenhaupt, president of Lowenhaupt Global Advisors. "It's difficult for a private bank to customize because it develops an infrastructure that requires a number of clients to support it."
Moreover, says Rankin, families with their own offices are finding that the expense base to support a family office, as well as the challenge of attracting and retaining talent, is pushing them in the direction of thinking more open mindedly about consolidations or partnerships with other single-family
offices or other multifamily offices.
The Family Wealth Alliance study found that sustainability is the biggest challenge a single-family office faces today. This encompasses the firm's financial viability, the family's sense of commitment and cohesion, and the ability to negotiate the transition to each new generation of family leadership. Staff recruitment and retention is another major challenge, the study found.
Both these trends point in the direction of well run, well structured multifamily offices--as a viable alternative to the single-family office, and to help them manage and work with their existing financial institutions better and differently, says Alanson Houghton, Shelterwood's chief investment officer.
Still, some entrepreneurial families want to control their own fortunes, Houghton adds. "Among families that sell their businesses, there will always be a subset that starts their own family offices; it's a DNA issue," he says. But come the next generation, the dynamic changes as far as staying competitive, getting good people and getting good advice. He believes that this will cause the family to rethink its single-family office premise.
Other players are also entering the multifamily office market. Registered investment advisors are evolving into MFOs, and banks are setting up these operations in their trust departments. In addition, seasoned professionals are leaving large institutions to set up MFOs, the better to serve their clients. "One of the most remarkable trends I've seen in the past year is the number of private bankers who are finding they can't service families the way they want to at their banks and are leaving their banks," says Lowenhaupt.
All this activity wouldn't be possible, however, without the proliferation of technology systems that enable them to support investments from a portfolio allocation standpoint: implementation, trading, performance reporting and accounting--all the critical areas for the family office, says Bill Crager, president of Envestnet.
"There's a lot of dislocation," Crager points out. "But dislocation is impossible without foundational technology. In the past, for that trust officer who wants to be an advocate for his clients to jump out and begin his own firm was a near impossibility because he would have to begin from scratch. Now, he can begin with access to product across multiple providers--all the big banks, all the big brokerage firms, all the niche investment providers."
Shelterwood is a multifamily office sponsored by a fifth-generation family. "The company that started us, which is owned by the operating business of one of our families, wanted to create a multifamily office not to make a huge profitable business, but hoped to benefit from working together with like-minded families and sharing costs of finding the best people," says Houghton.
Lowenhaupt set up his eponymous firm 10 years ago when he realized that his children would not continue to serve several of his client families, some in their seventh generation. He considered moving those clients to another institution, but couldn't find one that would give the families what he felt they needed--a conversation around what they wanted to accomplish with their wealth; and a conversation that did not have a preconceived platform, where they had to end up--"lot of the things that are connected with private banks' failures."
For Maria Elena Lagomasino, chief executive of GenSpring Family Offices, "The idea of the multifamily office is to be able to work exclusively for the families and only receive payment by the families. But because you are working for a group of families as opposed to just one family, you are able to get some good benefits."
One is that it's easier for a commercial enterprise that works with many families to attract talent because the ability to grow from a career perspective is greater in an MFO environment. "The benefit for the families, besides their access to this talent, is that the cost is a fraction of a single-family office's cost," she says. "And the family client gets to learn from the community of families' best practices."
The product lure
Commercial multifamily offices, like the private banks, are vulnerable to product orientations because of the commercial demands on them, whereas those started by families are less susceptible. That is because their family sponsors want experience, independence and high quality advice, says Rankin. They're looking for a sense of comfort and trust that's not product dependent. "The family sponsored MFOs have a big investment center of gravity," he says, "but there's a real understanding for the families that while the investments are important fiduciary services, helping with the education of the next generation children is also really important. Even though someone doesn't pay you a lot of money for that today, it has tremendous value for the family in the next generation. The family-sponsored MFOs maintain that balance better."
But even large multifamily offices that are employee owned, such as Ballentine Finn & Company, face the product lure. "It's a big temptation," says Roy Ballentine. "We've talked about it here; we think we're well past the size where we could have done that." How tempted was the firm? "Not very, because of the problems we see with it," he says.
Ballentine figures that adding proprietary products would have necessitated hiring 10 or 15 more people than the firm employs today. "The problem with it is, even if you try to structure your proprietary products to have low fees so you're not financially incented in any obvious way to steer client money into those products, the fact remains that we would still have 10 or 15 extra people on our payroll, and their support could only come from those products." Either that or drain resources from the practice to support a non-profitable activity by overcharging clients for other services or not invest in people and systems to keep up with best practices. "So, we can't see how that story has a happy ending for clients no matter how we approach it."
There was another consideration, says Ballentine. "We surveyed the universe and saw a plethora of products, enough of which were well structured with reasonable fees and good stuff behind them. We asked ourselves whether we were going to be able to do this better than anyone else. So, we decided to outsource."
GenSpring, though majority owned by SunTrust Bank, doesn't offer product either, according to Lagomasino. She says SunTrust's investment in GenSpring was strategic. "They felt there was a certain level of wealthy families they couldn't acquire, retain or serve from a banking platform because what these people were looking for was a totally unconflicted, unbiased, nonproprietary product, a very high touch, very technical, highly integrated approach. They decided to invest in this company. An important part of the deal: We have no SunTrust products. We don't push our clients to SunTrust; SunTrust pushes its clients to GenSpring. We have a written agreement that we don't push SunTrust products."
Trust, but verify
Earlier this year, Lowenhaupt Global Advisors endorsed 15 Principles of Wealth Management for Private Wealth Holders and Related Parties. This checklist covers such matters as investment portfolio diversification, separation of custody from management and transparency of fees and expenses. "We believed that if wealth holders said, this is how we want our money managed, the industry would have no choice but to build itself around these principles," says Lowenhaupt.
"The biggest challenge for the investment community is the restoration of trust," he says. "Two people said to me recently about [convicted Ponzi schemer Bernard] Madoff: 'Bernie had integrity, and everyone trusted him.' What's wrong here? Every good crook starts by building a reputation for integrity--Crook 101."
Trust, Lowenhaupt notes, is a very subjective concept. "We've reached a point where, for many people, trust was the end of the road, end of the process. In fact, trust has to be the beginning of the process. You start by saying, Bernie has integrity, and I trust him. Now, I go through a process to decide whether to use him."
Today, the due diligence process is being challenged, and the whole essence of liquidity is being evaluated, says Envestnet's Crager. "Many of the most affluent clients in the U.S. found themselves exposed not only to fraud, but also to just horrific investment performance. So, there is some soul searching going on about how those investments were selected, what the process that identified those firms was, whether the investment structures were correct. Coupled with that were liquidity issues. As the market turned bad, there were a lot of lockups, the inability to withdraw, which forced other assets to be liquidated." It's still unclear what kinds of investment solutions will emerge to address these issues, he says.