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When Big Means Bad

One problem with focusing on big-game clients is that sometimes they grow too big a fact one West Coast wirehouse broker learned the hard way. The client in question was a good one who got even better when he sold his business, netting a cool $150 million in the process. Ordinarily, such a windfall would have been cause for rejoicing by the broker, except for one thing: The client decided he had enough

One problem with focusing on big-game clients is that sometimes they grow too big — a fact one West Coast wirehouse broker learned the hard way.

The client in question was a good one who got even better when he sold his business, netting a cool $150 million in the process. Ordinarily, such a windfall would have been cause for rejoicing by the broker, except for one thing: The client decided he had enough money to leave the broker to form a family office.

“Competition for the wealthiest clients isn't from Goldman Sachs anymore, it's these multifamily offices,” says the West Coast wirehouse rep. “I do some business with them now but no doubt they've shrunk my pool of potential clients…It's happening in every wealthy community in this country.”

For an increasing number of ultrawealthy clients, the family office (and the multifamily office) is an attractive option, for the simple reason that they offer such a wide range of services. By assembling a cadre of experts in a variety of fields, family offices can handle a client's every financial task — from basic check writing and bill payment to the restructuring of a large estate — all with the sort of tailored service the ultrarich expect in other facets of their lives.

Full Service, No Waiting

The central issue in the push-and-pull between traditional brokerage and family offices is service. In short, the ultrawealthy don't think brokerages are full-service operations, despite the firms' best efforts to the contrary.

Though the top brokerages strive to provide a wide range of services, many of these services end up being relatively generic in nature — something ultrawealthy clients are increasingly unwilling to abide. In growing numbers, these clients are bringing their complex financial situations and legacies to the discrete, high-touch environs of multifamily offices.

The traditional platform of the family office, originally conceived as a way to manage and monitor the long-term needs of a single ultrawealthy family, has been expanding in the last 10 years. Once focused primarily on wealth preservation, the multifamily office platform now is far more concerned with profit/cost ratio for the involved advisors and families.

In addition, multifamily offices, as their name suggests, typically are comprised of dozens of households, with each family's net worth typically falling somewhere between $10 million and $50 million. By pooling these assets, a multifamily office can spread around costs and gain access to a wider variety of sophisticated investment resources. For instance, Rockefeller & Co., one of the nation's oldest family offices, opened its doors to other families to achieve this superior economy of scale.

Though the scope of services provided by a multifamily office ultimately depends on an account's asset size, the high end includes everything from integrated planning (estate, tax and financial), investment strategy, risk management (liability and insurance) and trusteeship, record keeping and reporting, family philanthropy and lifestyle management. The “softer services,” such as family counseling and concierge are typically outsourced, as are risk management and trust.

Family-Friendly Environment

According to research done by the Family Office Exchange, a multifamily consulting firm in New York, multifamily offices constitute one of the fastest-growing sectors of the financial services industry.

The trend is being fueled in no small part by the large numbers of wealthy individuals. In its 2003 World Wealth Report, Merrill Lynch, together with Cap Gemini Ernst & Young, found that 6.5 million people worldwide have between $1 million and $5 million in investable assets. Meanwhile, 446,000 individuals hold between $5 million and $10 million and another 166,000 hold between $10 million and $20 million.

It's an article of faith that people with this sort of wealth have requirements beyond those of the average investor. Some say multifamily offices are uniquely capable of providing these, and that brokerage firms — encumbered by sales cultures and resource limitations — can't successfully compete.

Frank Campanale, former CEO of Smith Barney's Consulting Group, agrees. He says no brokerage firm can currently match the comprehensive nature of multifamily office services. He adds, however, that big firms have an advantage in the capital department, and thus are capable of ramping up their services. Still, just about any effort to construct multifamily-style services will require “a little bailing wire and bubble gum.”

The major hurdle to competing effectively with multifmily offices is the ingrained nature of the wirehouses' sales cultures.

When this fact is combined with research about wealthy investor attitudes and desires within the financial realm, the continued growth of multifamily offices seems assured for the foreseeable future. According to a 2003 Spectrem Group survey among ultra-high-net-worth investors, only 30 percent of respondents reported using a full-service brokerage firm, an 11 percent drop from 2001. Of investors using an independent advisor, 65 percent said they intentionally avoided advisors affiliated with a brokerage, bank, insurance or mutual fund company. The top three reasons for going to an unaffiliated source were: more objective advice (50 percent), more personalized solutions (25 percent) and greater expertise (17 percent).

All in the Family

Pat Soldano, CEO of Cymric Family Office Services, says brokerage firms cannot provide these things to her clients. (Cymric manages seven families with $25 million-plus each.)

“Brokerage houses buy and sell stocks and bonds, and they want to gather assets under management. That's their game,” says Soldano. “The culture of the family office model is very different. Here, the advisor is on the same side of the desk as the client..” Illustrating this is the selection of investment managers — chosen solely on performance.

By contrast, “a brokerage house is not going to recommend a manager who doesn't pay them,” says Soldano. Cymric makes all investment and referral decisions based on providing best-in-class service for her clients, she says.

Responsible for handling the day-to-day care for each client is a senior relationship manager.

“The RM is the quarterback for the whole operation,” says Lisa Gray, CEO of Gray Matter Strategies and author of The New Family Office: Evolutions in Wealth Management for Consultants to the Affluent. The relatonship manager is the director of the office and the liaison between the family and the various specialists (attorneys, investment managers, family counselors) he has enlisted to be his team.

Campanale says “a good multifamily office understands not only the goals of the family but those of each family member.” This is a seemingly easy task, but one that can derail a smooth estate or family-business succession plan.

This is where the “high-touch” part of the job comes in. Gray, like Campanale, says the brokerage firms do lot of things right, but in the client-touch area, many brokers just do not have time to focus attention on a small number of clients.

“Separate accounts and unified managed accounts are a good start but those only integrate the products,” says Gray. “It's a great advancement, but it leaves out the knowledge of the softer side.”

Another lacking in the brokerage industry: education. No organization offers certificate or degree programs specifically for advisors seeking a career in multifamily offices. However, help is on the way. Tom Livergood, president of Family Office Management, is volunteering on a committee started by the Family Firm Institute to develop a two-year course that will provide advisors with multifamily certification. In the meantime, says Gray, a CIMA and/or CFP designation are helpful.

“The multifamily office industry is much like financial planning was 20 years ago,” says Livergood. “While it figures out margins, outsourcing, career development and technology requirements, its growth will be constrained,” she says. “Financial planners have now arrived. Multifamily offices are still in their infancy, but they're next.”

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