Family Office

Mounting Costs For FOs Give Rise To "New Breed Of Firm" - The Family Wealth Alliance

Harriet Davies, Editor - Family Wealth Report, 20 May 2011


Factors including escalating in-house management costs are changing the way wealthy families and family offices invest, bolstering the external chief investment officer industry, according to a new study by Alliance Research, part of the Family Wealth Alliance.

While many single family offices looked after their own liquid assets in the past, the challenging environment now facing these organizations means an increasing number are outsourcing this function to an external CIO firm, Alliance Research said. Difficulties contributing to this trend include troubled markets, mounting costs, and the threat of regulation – particularly the Dodd-Frank financial reform bill.

The study comprised 43 companies providing CIO services, with total taxable assets under advisement of $421.7 billion as of year-end 2010, which the FWA estimates as representing some 30 per cent of the total assets in this group of firms. This puts the size of this growing industry at around $1.4 trillion. The mean size of participating firms was $9.8 billion in assets under advisement.

"The recent financial crisis and increasing pressure on single family offices to improve performance and control costs have led to outsourcing that is hastening the acceptance and growth of external CIO firms," said Robert Casey, senior managing director of research for the Family Wealth Alliance.

When asked to identify their top three competitors, respondents ranked Cambridge Associates as top, based on its weighted score. This was followed by Goldman Sachs and Northern Trust. The top 12 competitors included seven consulting firms, three large financial institutions and two multi-family offices.

“The study found that investment consultants currently have an edge over other types of firms in the external CIO marketplace in terms of assets under advisement and the strength of their position as perceived by competitors. Despite this edge, firms were most likely to cite marketplace awareness as their biggest challenge,” the FWA said in a news release.

Furthermore, the market for outsourced services has become highly competitive, “attracting scores of firms of several different types,” the study found, and while providers tend to be relatively small and independent, the CIO space is also attracting large financial institutions such as banks and brokerages.

Services provided typically include top-down investment consulting advice, investment policy development, asset allocation and manager selection, with some firms also offering separate account management. According to the FWA, the trend is towards offering advice on a discretionary basis; however, non-discretionary mandates are still predominant.

The research was underwritten by FWA partners Babson Capital, OppenheimerFunds, State Street Global Advisors, State Street Wealth Manager Services, and the World Gold Council.

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