Multi-family offices have a tantalizing window of opportunity to meet a surge of demand by wealthy families looking for a primary provider of investment, planning and administrative services, according to Jamie McLaughlin, a veteran industry executive turned consultant.
But too many firms are hamstrung by inadequate capital structures and leadership, ineffective strategies and poor execution, McLaughlin contended in a provocative keynote speech at the New York Society for Security Analyst’s annual Family Office Conference last week.
“The role of primacy, being the first call a family makes, is where the opportunity is,” McLaughlin said. “But the challenge facing multi-family offices is so severe that few are making it.”
McLaughlin’s observations, which are likely to become widely circulated in the industry, are the result of a six-month, nation-wide field study he conducted last year after stepping down as chief executive of Geller Family Office Services. The well-respected executive said he wanted to take advantage of a “once in a lifetime” opportunity to take the pulse of the industry. All told, McLaughlin said, he ended up interviewing top executives at all multi-family offices with over $2.5 billion in assets as well as hundreds of other executives at a wide range of firms catering to “the higher wealth segments.”
Daunting Challenges
Multi-family offices face a host of daunting challenges, McLaughlin told executives at the conferences, including:
· “Grossly inadequate” business models to meet “the current and forward demand of families of great wealth and complexity.”
· Limited capital sources and “[no] access to private equity.”
· “Pronounced and increasing levels of client complexity which are systematically eroding profitability and which need to be incorporated into pricing considerations.”
· Inadequate operating skills by principals who have investment management or sales expertise.
· Diminution of firm valuations, caused in part by “the aging of key executives.”
· A “great tension” between the desire of firms’ to replicate services and families’ desire for customization.
· A lack of meaningful market share and brand recognition, which has undercut firms’ pricing power.
· Few professional development programs for the next generation of advisors.
But multi-family offices can right the ship, especially if they are able to differentiate themselves from the competition, according to McLaughlin, who was also a managing director at Convergent Wealth Advisors and a regional vice president at Mellon Private Wealth Management.
Differentiation Key
“Differentiation is everything,” he said, “and until firms can differentiate themselves, a long-held assumption that there will be price resistance will remain valid.”
McLaughlin urged family offices to focus on what they do best, outsource or share most of their non-core capabilities and hire business-savvy professionals to oversee day-to-day operations. He also emphasized improving client satisfaction and acquisition performance, as well as the quality of internal talent.
“Businesses with the best client acquisition strategies have better operating margins and enterprise values,” McLaughlin stated. And if clients are well taken care of and happy, he argued, the resulting “client satisfaction multiple” will pay enormous dividends.
“If you execute they will repatriate you,” McLaughlin said. “They want to validate their decision by telling everyone they know about you.”
Client satisfaction, of course, can’t be achieved without high-quality advisors, and according to McLaughlin, “the quality of senior client-facing professionals is the single greatest determinant of firm value and client demand.”
Firms not only need professional development programs for young advisors, McLaughlin said, they also need to “pay up” for experienced wealth managers by offering an equity stake in the firm. “There is a large mid-career class of non-owners, particularly at RIAs that can be attracted by firms willing to use long-term compensation awards, including equity” he said.
Banks Strong Competitors
Banks, not wirehouses, currently pose the biggest competitive threat to multi-family offices, according to McLaughlin. “Banks are winning right now,” he said. “Their main advantages are scale and capital, a combination that gives them operating leverage and the ability to exploit this market cycle for clients and talent.”
McLaughlin also cited banks’ ability to make a profit on net interest margin, the spread between their cost of capital and what they charge clients for lending and deposits, calling it “their sweet nectar.”
In an interview after his presentation, McLaughlin clarified that “not all banks are necessarily winners. The winners are larger multi-line-of-business commercial banks, such as JP Morgan, a nonpareil, Wells Fargo, and US Bank, and trust banks, such as Northern Trust, Bank of New York Mellon and the crown jewel, Bessemer Trust.”
Bank of America, he added, “has monumental integration issues with Merrill Lynch and U.S. Trust, which will inhibit them.”
Favorable Reaction, With Caveats
McLaughlin’s address was well-received at the conference, albeit with some caveats.
Aviva Pinto, senior vice president, client service, for Hillview Capital Advisors in New York said she “wholeheartedly agreed” with McLaughlin that the “most important variable for multi-family offices going forward is the quality of the client advisor” and that “keeping human talent will require equity.”
But she said that she “was not convinced by his argument that the large banks are currently ‘winning.’ In our experience, the large banks are losing clients due to the turnover of key relationship people and the inability to provide the client service experience that is required, inherent conflicts and focus on proprietary product."
Most of McLaughlin’s observations rang true, said Philip Strassler, a partner for Greenwich, Conn.-based SFO Advisor Select. “He’s right when says that multi-family offices don’t have as much value as people think,” Strassler said, “and that they are not being treated as businesses and need professional operating staffs.”
However, he took issue with McLaughlin’s emphasis on customization, and said that while clients obviously have different characteristics, they have more similarities, and as a result the industry needs to consider standardized practices to serve clients more efficiently.