Outlook 2010: More Consolidation, Due Diligence, Cost Concerns Seen

Charles Paikert, Family Wealth Report, Editor, New York, January 4, 2010


Consolidation in the family office space, more due diligence by wealthy families, more outsourcing and a burgeoning opportunity for estate and tax planning will be top of mind issues for the wealth management business in 2010, industry executives say.

Consolidation in the family office space, more due diligence by wealthy families, more outsourcing and a burgeoning opportunity for estate and tax planning will be top of mind issues for the wealth management business in 2010, industry executives say.

Margin compression, talent needs (and costs) and investment and business models will also continue to be sources of concern, they add.

Surviving multifamily offices are expected to be stronger going forward, while single office families are expected to have a much tougher time this year.

“I think you’re going to see a lot of deals in the first quarter,” said Brian Hughes, managing director, strategic relationships, for Threshold Group, a multifamily office based in Gig Harbor, Washington, which itself is set to combine with Philadelphia-based Ashbridge Investment Management next year. “Firms that have not recovered from what happened over the last 16 months need a solution, and firms in a position of strength will be opportunistic.”

“A push for holistic wealth management and the desire among high-net worth individuals to share resources will continue to pressure the asset allocation-centric model of the single-family office resulting in attrition and consolidation,” said Rick Flynn, head of the family office group at New York-based accounting and financial services firm Rothstein Kass.

“At the same time, these conditions will support the continued expansion of the multifamily office space, which offers a greater range of options to clients while allowing providers to achieve economies of scale,” Mr. Flynn said.

According to a new research study  by U.S. Trust and Campden Research released last month, ultra-high-net-worth families “are taking a long, hard look at the performance of their family offices as events of the last year have laid bare weaknesses and strengths.”

And many family offices, the report stated, “are considering offering services to outside families, consolidating with other family offices or closing.”

The post-Madoff skepticism of wealthy clients towards their advisers is also expected to gain momentum this year, wealth management executives say.

“We are seeing more due diligence from clients who are concerned with safety and security, and we expect it to continue,” said Leslie Voth, president chief operating officer of Pitcairn, the Jenkintown, Pa.-based multifamily office.

“We’re getting requests for proposals that are running 70 pages,” said Robert Elliott, senior managing director for Bessemer Trust in New York. “In the past, potential clients would consult with their attorneys about a firm, but now they’re asking how you manage a balance sheet and policies and procedures around safety and soundness. And there’s more talk about compensation in the firm, transparency and fees.”

Ironically, the prospect of higher taxes for the wealthy and the expiration of the current estate tax are bringing smiles to the faces of wealth managers.

Higher taxes and the likelihood of a permanent estate and gifts tax means “planning heaven,” said Jamie McLaughlin, chief executive of New York-based Geller Family Office Services LLC.

Uncertainty surrounding estate planning will indeed “create opportunity within the wealth management space in 2010,” according to Mr. Flynn.

“With higher rates likely in 2011 and retroactive application of a new law possible in 2010, many high-net worth families are struggling to understand how to most effectively manage generational wealth transfers,” he said.

Bessemer’s Mr. Elliott agreed.

“We think there will be more emphasis on planning with the concern about estate planning and tax issues,” he said, “and it may be heightened if the capital markets return.”

But wealth managers’ smiles turn to frowns when asked about margins.

Declining assets and revenues and fixed operating costs meant a squeeze on profit margins last year, and firms working with ultra high net worth clients will continue to be vulnerable, industry observers say.

As one industry consultant told FWR’s sister website WealthBriefing last month, “There are less potential buyers in this space and more competitors. The ultra-wealthy are better at negotiating, which means that margins are thinner.”

Firms with investment-only platforms will continue to meet price resistance from wealthy clients, said Mr. McLaughlin.

A number of firms say they want to hold the line on the basis points they charge as a percentage of assets under management fee and charge clients more for planning and other services, but fierce competition makes it easier said than done.

Nonetheless, some executives say a surprising number of clients understand that if the firm can’t make money, their clients won’t get better service.

“Pricing is a huge issue,” said Greg Rogers, president of Greenwich, Ct.-based RayLign Advisory LLC, a consulting firm to wealthy families.

 “But smarter families don’t want to put a firm out of business. They prefer to have a partnership.”

Talent also remains a perennial challenge for wealth managers and family offices.

The good news is that a surplus of experienced advisers and brokers are expected to remain on the market.

The bad news is that wealth management firms and family offices are extremely selective and obsessed with finding the right cultural fit for their firm, which means hiring tends to be a long, drawn out process.

And the really good, highly skilled people who can talk to –and bring in – clients don’t come cheap.

“Recruiting will be up and client-facing talent highly sought after,” said Allan Starkie, partner for Knightsbridge Advisors, a New York-based executive search and consulting firm.

“Attracting and retaining top talent will be a priority,” said Steve Aucamp, executive director for Convergent Advisors. “There is lots of talent available but a lot of firms are doing deals that don’t make sense. The issue is how to scale growth profitably and use technology to grow without adding the commensurate number of employees, in order to increase margins.”

Outsourcing is one approach, and will be even more prevalent next year, according to a number of industry executives.

“Wealth management firms will increasingly seek to outsource functions that fall outside of core competencies,” according to Mr. Flynn.

Non-core functions will also be candidates for outsourcing, said Norman Jones, chief executive of Denver-based Wealth Touch, a reporting platform for family offices.

“Both single family and multifamily offices are critically evaluating their cost structure in light of reduced revenues,” Mr. Jones said. “For the first time, some well known MFOs are breaking even at best and many are losing money.

“Key questions are being asked, such as ‘Should we have a large IT department?’ ‘Are we safe maintaining our own security infrastructure?’ and ‘Do we really need an office on Fifth Avenue?’

Mr. Jones and others also think family offices – and their clients - will re-evaluate how much they outsource money management.

“Families will have a more active hand in investing their own money,” he said. “Many ultra-high net worth families realized that they over outsourced the management of their assets. Too many managers invested in too many assets, sometimes too many of the same assets, which led to confusion and in some cases cost millions of dollars in reduced asset values.”

Mr. Starkie agreed.

“I think there will be a very large movement back to proprietary product,” he predicted. “It will be a new form of branding and a response to the demand for more performance accountability.”

New business models are also expected to emerge this year.

“The business models at the wirehouses will finally take shape,” said Jeff Spears, chief executive of the San Francisco-based consulting firm Sanctuary Wealth Management LLC. “Compensation plans and product and service offering will be defined. At Merrill Lynch, for example, I think we’ll see a strong emphasis on cross-selling Bank of America products and services. But at the bigger firms, the product and service offerings will most likely not be appropriate for wealth clients who demand customization.”

And according to the U.S. Trust/Campden study, 28% of single family offices are considering opening to non-founding family clients.

The main motivation, the study stated, is being able to increase access to investment opportunities by having more assets under management. These families also believe they would then be able retain top investment professionals by providing them with an opportunity to earn more money and manage a bigger investment pool.

Bessemer’s Rob Elliott is skeptical, however.

“I think it will be very hard to merge families in one office,” he said. “You’re likely to have a clash of egos and a different set of priorities. People want the better expense ratio of an MFO but with the control of an SFO, and those goals are difficult, if not impossible to reconcile.”

But nearly everyone agrees that fee-based, advisory models will continue to crowd out transaction-based business models.

“Those advisers who survive and deliver value going forward will increase market share and will increasingly be compensated for their intellectual  capital and not product sales,” said Boris Blum,  president and chief executive of  Woodland Hills, Calif.-based Wealth Planning and Management.

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