External CIO firms clocked up asset growth of 5.5 per cent on average last year, according to a study from The Family Wealth Alliance, but with growth varying wildly between firms.

External CIO firms clocked up asset growth of 5.5 per cent on average last year, according to a study from The Family Wealth Alliance, but with growth varying wildly between firms.

A total of 50 companies took part in the External CIO Study, representing taxable assets under advisement of $551.1 billion at year-end 2011. The Family Wealth Alliance said this represents around 35 per cent of taxable assets in the CIO industry, which it estimates at being worth around $1.5 trillion in terms of client assets – with around half of these from single-family offices and half from private families investing directly.

The study, unveiled yesterday at the Alliance’s Annual Spring Event in Oak Brook, IL, found that the growth rate of assets at individual firms ranged from a decline of 11.4 per cent to an increase of 139 per cent. What’s more, there appeared to be a divergence between growth registered at companies labeling themselves as “investment firms” and “multi-family offices,” with assets at the former type expanding by 6.8 per cent compared to 1 per cent on average for the latter.

In the study group, 58 per cent of participants were investment firms – made up of investment consultants, managers of managers, or separate account managers – while 42 per cent were multi-family offices.  

But in a competitive marketplace for private client wallet share the biggest challenge external CIO firms face is awareness about the business model, says The Family Wealth Alliance, as many in the wealth management industry remain in the dark about the exact nature of the offering.

"In a world that tries to lump all types of solutions into one category, it is essential that prospective clients understand how we differentiate our firm and the outsourced CIO model from other investment alternatives," one participant to the study said. However, this challenge is to expected in a “nascent industry,” remarked Thomas Livergood, chief executive of The Family Wealth Alliance.

The mean firm size in the survey was $11 billion in taxable assets, compared to $9.8 billion in last year’s inaugural CIO study.

The study was initiated to track the trend of single-family offices tending to outsource management of their liquid assets, as “several factors have converged in recent years to prompt outsourcing of this function,” The Family Wealth Alliance said in a statement. The organization estimates that roughly one-third of SFOs currently outsource management of liquid assets, with factors such as the difficulty and cost of hiring an internal chief investment officer and market volatility driving this trend.

Dodd-Frank financial reform was also widely predicted to accelerate this outsourcing trend by creating a narrower definition of a family office, but little evidence of this in actuality was provided by the survey.  

“While external CIO firms are adding many family office clients, they say the new business has little to do with Dodd-Frank, at least so far. Almost two-thirds of participants (61 per cent) say they have seen no increase in private-client business because of Dodd-Frank. Another 35 per cent say they have had discussions because of Dodd-Frank with prospects but those prospects have not become clients. Only 4 per cent of participants say they have added clients as a direct result of Dodd-Frank,” said The Family Wealth Alliance.

Meanwhile, to win new business firms are ramping up their service offerings, with new investment strategies and products being the most frequently cited development. Better performance reporting, an expanded lineup of managers and manager research, and enhanced client communications and education programs were other commonly cited improvements.