Robert Casey, senior managing director of Alliance Research, and Thomas Livergood, founder and chief executive of The Family Wealth Alliance, exploreD what they see as the biggest trends in family wealth.

Introduction

Akin to estate planning in the ‘70s, investment planning in the ‘80s, financial planning in the ‘90s, and wealth management in the last decade, family wealth has emerged.  Serving approximately 35,000 households with over $5 trillion of assets, it is a force.  Known by different monikers such as family office services, multi-family offices and the like, the North American family wealth industry continues to evolve.  In this two-part review, we highlight some of the most significant trends shaping that evolution. 

In part one, which can be viewed here, we looked at four of the biggest trends: A renewed emphasis on integrated financial planning; the challenge of increased complexity; security and risk mitigation for private families; and still seeking better investment outcomes.  

Firms struggle to demonstrate value, rationalize pricing

Pricing is a knotty problem for any business, and today's wealth manager firms are no exception. Issues involving fee structures and pricing are particularly vexing for multi-family offices. These firms offer complex, bespoke professional services to multiple generations in multiple households of client families, and pricing is among their biggest headaches.

The traditional pricing paradigm—a bundled package of services at a bundled asset-based fee—is no longer optimal for these firms, albeit still widely used. Bundled fees, or what might be called “all-you-can-eat” pricing, encourage service creep among clients and limit the ability of multi-family offices to price their customized and complex offerings appropriately.

Of all the issues surrounding fees and pricing, a new Alliance Research study has found, the most challenging one is communicating the value that the firm delivers in the context of the price being charged (source: Inaugural Fees and Pricing Study, Aligning Price with Value Delivered: The Challenge of Family Wealth, 2015). The problem is two-fold, note many study participants, which included multi-family offices, wealth managers and firms serving as external chief investment officers to families.

First is being able to demonstrate the worth of the firm's services to the client. The second part of the problem is helping the client to make an informed comparison based on what competitive firms are actually charging and actually delivering. Different business models, different service menus, and different levels of transparency regarding all-in fees combine to make comparisons difficult. "We provide very comprehensive family office services but usually compete against firms providing fewer services, which creates a mismatch in terms of fees," one study participant complained.

Half (53 per cent) of multi-family offices and a third (33 per cent) of the external CIO and wealth manager firms say they charge flat annual fees or retainer fees, but mostly as a supplement to asset-based fees. Unfortunately, those figures overstate the progress made by the industry in reducing dependence on assed-based fees.  Multi-family office participants report asset-based fees as a share of revenue were 77 per cent for the year 2010 and—four years later—75 per cent for 2013. For the external CIO and wealth manager firms, the comparable figures are 80 per cent and 78 per cent. The needle is not moving much at all.

Here come the Millennials

It’s wise to be skeptical about over-the-top predictions regarding the impact of this or that social or demographic trend.  They can be overwrought and fizzle out quickly. That’s not the case, however, with the hoopla surrounding Millennials, also known as Generation Y, those born from 1982 to 2003. They are the real deal, and are living up to their billing as every bit as transformational a generation as their parents, the Baby Boomers. Along the way, they have started posing some new challenges for firms that serve multigenerational families of wealth.

Name it, and you can find a study or two showing how Millennials feel about it. (They hate shopping malls. They love craft beer, etc.) We’ll focus here on issues relevant to family wealth providers. First, Millennials are much less trusting than their elders. They are two-thirds as likely as Generation Xers (born 1965 to 1981) to believe that most people can be trusted, and only half as likely as Baby Boomers to trust most people (source: Pew Research Center, Millennials in Adulthood: Detached from Institutions, Networked with Friends, 2014). They shun the stock market, have a favorable view toward socially responsible investing, and keep more of their money in cash than do older generations. They don’t like banks much, but a remarkable nine out of 10 Millennials do their banking online, and half of those use a mobile device such as a smart phone to do so (source: TD Bank, The Millennial: Financial Behaviors & Needs, 2014).

“This unique Millennial sensibility will extend into the marketplace as the generation begins to think about which, if any, financial institutions to trust with their money,” say the authors of a Brookings Institution report (source: Morley Winograd and Dr. Michael Hais, How Millennials Could Upend Wall Street and Corporate America, Governance Studies, The Brookings Institution, 2014). Firms serving multi-generational families must find a way to engage Millennial clients and open dialogs with them, if they are to keep them as clients as they age.  Thus, Millennial outreach is the order of the day at smart family wealth providers. They are learning to communicate online or via mobile devices because Millennials don’t like printed materials or client reports on paper. And they are keen to hire younger advisors who can relate to the ways Millennials make decisions and define success. The Brookings Institution report authors predict “seismic shifts in the nation’s financial sector” because of Millennials. Stay tuned.

The challenge of technology:  chasing one’s tail

From back-office platforms, to front-office client reporting, to delivering information in a secure, yet mobile-friendly environment, technology remains the most elusive, time-consuming and expensive item on all family wealth firms’ plate.  According to a study by Alliance Research, family wealth firms see reporting as an issue of growing importance to clients but many also express unhappiness with their own reporting offerings (source: Inaugural Client reporting Study:  Firms Searching for the Holy Grail Are Eyeing High-Tech Solutions to Meet New Client Expectations, 2013). The study also noted a lack industry standards for client reporting and found that reporting vendors were poorly viewed by family wealth firms. Many expressed frustration at the difficulty in evaluating client reporting vendors, and the cost of upgrading their technology. On the other side, they acknowledged that clients are demanding easy interfaces and delivery via mobile devices, despite increased privacy and security risks.

In an age in which technology is driving extraordinary changes in everyday lives, the family wealth industry has been slow to adapt.  Despite demands from clients, particularly younger ones, change has been held back by daunting costs and rapid technological evolution. This year’s cutting-edge reporting technology may be obsolete in a year or two, a fact that makes firms understandably reluctant to commit to costly upgrades. Attitude –- the question of technology aside -- can also be an issue.  When one old-school private family office executive was asked about the risk of mailing out client statements versus having them available via highly secure electronic vault downloads, he replied that as long as he was sending them out on time, “what happens to them after they leave here is their problem.”   That mindset won’t prevail in today’s new world order, but until the industry learns to harness technology to strengthen and expand its ties to clients, it will continue to have one foot in the past.

Families remain confused: a random walk

Family wealth management has evolved remarkably over the past decade. Yet a surprising amount of uncertainty and misinformation persists. Families selecting providers are confused. Exactly what is meant, they are likely to ask, by the term wealth management? What is a multi-family office? Is a big brand name reassuring, or a contrary indicator? How do you evaluate service offerings that appear similar on the surface but quickly become different when you look under the hood? They see vastly different value propositions marketed under the same rubric. Can they all be bona fide?

This uncertainty is mirrored on the other side by the firms that serve as family wealth providers. For years, they have told Alliance Research that their biggest challenge is differentiating themselves in the marketplace. Their clients and prospects don’t know what they do. Likewise, when it comes to setting their fees, they say the biggest challenge is communicating the value of their services in the context of price. Their clients and prospects don’t know what their services are worth.

Unfortunately, there is scant guidance available to dispel this uncertainty. We believe this is the family wealth industry's chief challenge in the years ahead. It has significant implications ranging from too few private families being served, to an under-achieved market share by family office providers, and a general lack of understanding and trust on the part of families, their advisors, and the media. One executive of a leading multifamily office put it this way: “When a private family comes in to talk with us, asking about our services, they do not know enough to be able discern the difference between us and a pretender firm.  When we ask them how they found us and how they will make their decision, many tell us that they really don’t know.   It is totally a random walk.”

Conclusion

From out of the secretive corners in the most private of family offices, family wealth firms are an emerging breed, offering an integrated menu of services for client families that are not in the Billionaire Club.  While this industry has emerged, it still struggles with many issues, including appropriately pricing its services, scalability, talent, and technology.  Family wealth firms also wrestle with communicating to families as to how they are different.  Much like what financial planners experienced two decades ago, these firms – although they are well-respected and successful –will fail to achieve meaningful market share and awareness until they overcome the “random walk” on the part of private families who need and deserve their services.