MFO Industry Bolstered By New Assets But Battling Constraints - Family Wealth Alliance

Harriet Davies

14 May 2013

Net new assets are flowing into the multi-family office industry, fueling a confident environment, but firms are having to overcome challenges to grow, according to the Family Wealth Alliance’s latest annual study of the sector.

Despite a lackluster market environment in 2011, the 51 participating firms achieved asset growth of 9.6 per cent and revenue gains of 11.3 per cent that year (the study was conducted in 2012).

“Growth has emerged once again as the watchword after several very tough years,” said the organization’s chief executive, Thomas Livergood.

Total assets under advisement for all the firms stood at $367.7 billion at end-2011, while the average relationship size with a client family was $40.9 million.

Mean client asset size at the group of firms was $7.4 billion, while the median figure was $2.5 billion, which is perhaps more representative of the “average firm” given the influence a handful of large firms exert on the mean.

These figures imply net new money flowed into the MFO industry in 2011, which is reflected in rising confidence among the players, with a vast majority of these businesses (nearly 90 per cent) saying they felt in a stronger competitive position in 2012 than three years earlier.

The tables produced by the Family Wealth Alliance, detailing the relationships of some of the leading family offices, demonstrate just what a varied group of businesses this is. For instance, only one family office (Rockefeller & Co) features on both the top ten by number of client relationships and the top ten by size of client relationships.

The largest firm in terms of the size of its average relationship is Lowenhaupt Global Advisors, which has an average relationship size of $224.7 million, followed by US Trust Family Office, with $181.3 million. Meanwhile, Atlantic Trust and Bessemer Trust top the list in terms of number of relationships, with 2,281 and 2,162 client families respectively.

Challenges

Despite burgeoning confidence many family offices identified constraints arising from both the business model and the marketplace. The number one challenge was a lack of marketplace differentiation for multi-family offices and a lack of awareness about the model.

One firm, for instance, mentioned the “overuse” of the MFO term in the marketplace, which adds to confusion among clients about what this model actually is, and draws out the sales process.

Many firms also mentioned a lack of business development activities as a barrier to growth. Only the largest firms commonly use dedicated business development officers and most advisors are operating at full capacity. However, there were signs that more business development officers are being employed, as their headcount rose much faster than overall staff.

“Indeed, the industry may be nearing a tipping point on this issue as the cultural disdain for the dedicated sales function gives way to business necessity,” the Alliance said in its report.

Meanwhile, many of the old challenges continued to rear their heads, with firms continuing to cite human capital, recruiting and development as a business challenge, as well as a lack of scale and consistent process.

Innovating

Firms are continuing to reflect on and tweak their business models, with around one in five now looking at values-based pricing, for example, and using this either in setting fees or communicating them. This is where a firm tries to put a dollar value on all the annual services it delivers to a client.

Generally, price continues to be a focus, with six in ten firms reviewing their fees (type and level) at least annually. However, the reliance on asset-based fees in the industry remains, with these fees providing around four-fifths of revenue, according to the study.

Meanwhile, to increase the pool of potential new clients, multi-family offices are creating “two-tier” service models. For a full family office service the relationship is generally around $20 million - $30 million, but firms are looking to create slimmed-down service offerings that suit clients with lower balances, which tend to focus on the investment offering.

MFOs are also pursuing strategies like speaking engagements and publicity, events for small groups of families, educational programs, and co-sponsoring with luxury brands to raise their profiles and grow their client bases.

Many firms (for example, around half of firms with over $5 billion in AuA) are using social media to publicize events, speeches and media appearances, as well as to blog and Tweet about issues. Directors are often required to maintain up-to-date LinkedIn profiles too, which would allow clients looking up senior staff online to gauge how experienced they are. Strategies such as positioning CIOs as experts and connecting with younger clients are also used.

Single-family offices emerged as an important target market for MFOs, the Family Wealth Alliance said. Nearly 70 per cent of the firms in the study work with single-family offices in some way, and invest significant development efforts in this area.

Merger activity was also buoyant, with around a quarter of firms in the survey saying they have been involved in a merger over the past three years – most commonly acquiring a smaller firm.