For wealth management firms targeting ultra high net worth clients, not providing non-financial fiduciary “soft-side” services is no longer an option. An “enhanced” family office model will be de rigueur for firms competing in the extremely competitive UHNW market, according to a recently released Optima Group white paper on the family office market.

For wealth management firms targeting ultra high net worth clients, not providing non-financial fiduciary “soft-side” services is no longer an option.

“These offerings are increasingly becoming a market differentiator for appealing to new clients and retaining and deepening relationships with existing clients,” said Dennis Dolego, director of research for Optima Group.

Indeed, an “enhanced” family office model will be de rigueur for firms competing in the extremely competitive UHNW market, according to a recently released Optima Group white paper on the family office market.

In the wake of the financial crisis, very wealthy families have made capital preservation, risk management and “the responsibilities of family stewardship” their top priorities, the white paper said. “They were going in this direction before the crisis,” Dolego said, “but this change in sentiment has really accelerated since 2008.”

Leading players in the UHNW market have taken notice

Abbot Downing, Wells Fargo’s newly re-branded UHNW division; Ascent Private Capital Management, US Bank’s new entry in the market; GenSpring Family Offices and Wilmington Trust all have high-profile staff dedicated to non-financial mainstays such as family governance, legacy and communication, education and philanthropy.

Other major players in the market such as Northern Trust, BNY Mellon Wealth Management, Citi Private Bank, Morgan Stanley and Bessemer Trust also offer plenty of non-financial services, including conferences and workshops on educating the “next generation” of family members and other issues impacting wealthy families.

Abbot Downing: new kid on the block

The spotlight this month is very much on the market’s new kid on the block, Minneapolis-based Abbot Downing, which launched last week with an impressive $33 billion in assets under management as a result of being an amalgamation of Wells’ Lowry Hill and Wells Fargo Family Wealth units.

Abbot Downing, which is targeting clients with $50 million or more in investable assets or $100 million or more in net worth, has its own soft-side division, Family Dynamics, a legacy that began life as part of Wachovia Bank’s UHNW Calibre family office, the progenitor of Wells Fargo Family Wealth.

Family Dynamics is an “integral part” of what Abbot Downing offers, said Pat Armstrong, managing director of the division. “We believe that the focus on the impact of wealth is as important as focusing on the technical management of wealth,” Armstrong declared.

Wealthy families are increasingly worried about how their children will be affected by growing up with and expecting to inherit so much money Armstrong said, an observation widely shared by other professionals in the field.

“These families are concerned that the family fortune can become the misfortune of their children,” said Armstrong, who holds a doctorate in counseling psychology. “They want to prepare their children for their inheritance and have very practical questions about what age they should being talking to their children about wealth and how much should they give to them. Tax efficient strategies for transitioning the family’s wealth are important, but they’re not the most important thing.”

In addition to the various governance and educational services Family Dynamics provides, it also hosts an annual multi-family forum for around 15 to 20 invited families. The theme of last year’s forum on Kiawah Island was risk management, while the theme of  this year's event in Chicago in mid-September will be the impact of wealth, inspired, Armstrong said, by the Occupy Wall Street movement’s focus on the richest 1 per cent of Americans.

“Impact investing” to promote social good will be on the agenda, she said, as will the impact of wealth on the next generation.

Abbot Downing will also co-sponsor a series on “NextGeneration Education” with the Institute for Private Investors this year, Armstrong said.

Ascent attacks UHNW market

The other high-profile newcomer to the UHNW market has been Minneapolis-based US Bank’s Ascent division, launched last October and headed by Michael Cole, a leading advocate of soft side services who ran Wells Fargo’s Family Wealth group and Wealth Planning Center for ten years.

Ascent is targeting clients with a net worth of $25 million or more, which does not have to be liquid. Those clients will be offered what Cole calls “wealth impact” services such as strategic planning for a liquidity event, succession planning, customized financial education courses, family governance and courses on  family leadership and communication. In addition, Ascent’s new offices will have specially designed rooms for family meetings as well learning and communication resources.

Family meetings this year cover topics including human behavior, family values and mission and vision statements. Special events sponsored by Ascent will include luncheons for women and workshops on “exploring the taboo money conversation from a generational perspective.”

Ascent is “structurally different” than Abbot Downing, according to Cole, because it doesn’t present Ascent’s non-financial offerings as “soft side” issues but rather as “the difference between strategy and tactics.”

“Strategy includes the vision of the family, the role family members play and the leadership structure,” Cole said. “Tactics include investment management and tax and estate planning. They are equally critical parts of the equation.”

Non-financial services selling point for GenSpring

Among the more established firms in the UHNW space, GenSpring has long championed non-financial services as key components of the seven different types of family offices it offers potential clients.

Indeed, services like education plans for next generation family members, meeting facilitation and governance and strategic philanthropic planning are among the firm’s biggest selling points, said Daisy Medici, director of family governance at GenSpring.

“The biggest fear we see in wealthy families is that their wealth will have a negative impact,” said Medici. “They could live off of their wealth, but they have to have purpose and vision, and that’s why they appreciate these services.”

One of the biggest challenges for wealthy families, especially those that own an operating company, according to Medici, is how to go about making decisions. “The most important question we start with is what does your family own together, and what do they want to own together. It’s hard to justify family governance when the family doesn’t share ownership.”

Shared ownership’s non-investment implications are in fact the subject of an educational workshop GenSpring is offering this year on how family members may be putting each other at risk by not having prenuptial agreements, essential estate planning documents, adequate insurance coverage, and social media guidelines.

GenSpring will also sponsor a series of small seminars around the country this year centered on the theme of women and wealth and including topics such as “the emotional impact of money on relationships,” Medici said.

Rogerson’s big switch

Another indication of the growing importance of soft side services in the UHNW market was Wilmington Trust’s hire last summer of Tom Rogerson, who had spent the previous nine years as managing director of Family Wealth Services for BNY Mellon Wealth Management.

Rogerson said non-financial and governance services for wealthy families is on a similar growth path to that of estate tax planning, which is now robust and widely accepted but was only a “fragmented cottage industry” thirty years ago.

Among the biggest needs Rogerson sees now among wealthy families is the need for children to have a bigger role in family decisions and for families to work more effectively as a team.

“Family leaders are used to working with management teams at work, but seeing the family as a group of individuals,” he said. “One of the most valuable things we can offer is teaching families to work better as a team.”

Pricing and profitability

Some critics contend that the increase in non-investment deliverables by firms in the UHNW market all too often leads to “service creep” -  the erosion of profit margins as clients demand more services, while firms lose time and money to satisfy them without commensurate compensation.

But wealth management executives say flexible pricing policies have mitigated those concerns.

Abbot Downing will  be “testing and learning” how to best price its non-financial services, according to Armstrong, who said she sees a mix of offerings that include some services wrapped in a comprehensive assets under management fee and others priced separately. Medici also pointed to GenSpring’s mix of family office models that include different levels of non-financial deliverables.

Ascent clients have “multiple doors of entry” to its services, Cole said. “We will start with the client’s highest priority and go from there,” he said.

Illiquid clients who can’t pay Ascent the traditional percentage of assets under management fee will be charged based on the requirements of each “customized engagement,” Cole said when the division launched.

Six-months in, the business model is working, he asserted. “Our only criterion is revenue per client,” Cole said.

He conceded that competitively-fueled “institutional-based pricing” on the asset management side of the business has reduced margins as “clients recognize [asset management] is becoming more commoditized and expect to pay less and less.”

But Ascent teams can also provide non-financial services to “a reasonable amount of clients – no more than twenty,” Cole said. “If we can provide the right service to the right client, we can maintain a certain amount of revenue per client.”

For Rogerson, the potential profitability of non-financial fiduciary services lies in their appeal to potential clients.

“It’s a better way to open a door with a prospect than tax planning or investment management, [which] will ultimately be delivered and isn’t hard to find.” he said. “ If I bring tax planning or asset management up at a social gathering, it’s a nonstarter. But when I talk about the fiduciary side, people perk up. It’s not how you prepare the money for the family, but how you prepare the family for the money.”