The authors of this article for the UHNW Institute set out a narrative of how US wealth management came to be what it is today.
First published on Family Wealth Report on May 15, 2019.
Many UHNW individuals are and can be confused about the array of business models pitching for their business. This article - the first of a five-part series - explores the terrain.
As part a continuing series of analyses of ultra-high net worth client issues in North America and beyond, here is the first of a five-part overview by Jamie McLaughlin. He is chief executive of J H McLaughlin & Co, a member of FWR's editorial advisory board, and also a founder of the UHNW Institute, the not-for-profit organization. (FWR is the exclusive editorial partner of the Institute.) To view other UHNW Institute content, click on the button marked “UHNW Institute” under the “categories” section on this news service’s homepage. Readers can also find the Institute's website here.
Ultra-high net worth clients, including the most discerning families, are confused and challenged to understand the different wealth management models, their operating dimensions, service platforms, and capabilities.
The firms that serve them do not make it easy. One of the reasons potential clients hear the same thing from different firms is that the firms genuinely believe they are doing or delivering the same thing (or won’t admit that they don’t).
This muddle about who does what in wealth management is made worse by the fact that the term itself is undefined almost universally. Imagine, if you will, an industry that has not developed a generally accepted definition of its primary product. Welcome to wealth management.
How did we arrive at this juncture? A look at history offers some explanation. The industry that is wealth management today represents a loose amalgam of four different business models operating under four distinct regulatory regimes - all competing in the same space. They are:
-- Commercial banks;
-- Broker dealers;
-- Registered investment advisors; and
-- Trust companies.
Our intent here is to offer a five-part series (this being the first and introductory installment) that will unpack each of the four business models across several dimensions, including:
-- What are their ownership and capital structures?
-- What are their cultural norms?
-- What are their investment and non-investment processes, service platforms and resources?
-- How do they price their services?
-- What are the drivers of their business economics?
-- What are their conflicts of interest?
-- How do they comply with the “fiduciary standard”?
-- As putative “trusted advisors (1),” how do they manage their client relationships?
The accompanying article, A History of Wealth Management, is offered as a survey overview of the industry’s history and represents an essential element of our series. Our overall goal is to help investors better understand the various models and service platforms, and thereby to be able to better assess what they read and hear.
Defining the term
To start, we need to help clear the muddle by nailing down an important definition. We define wealth management as comprehensive, integrated financial planning and administrative services for people with a lot of money. Wealth management is not the same thing as money management. Money managers manage assets, whereas wealth managers manage their client families’ financial lives.
How much money is a lot? That could mean many different levels of wealth, but for a definition of ultra-high net worth we’ll proffer two tests or thresholds: enough so that meaningful assets will remain at the death of a surviving spouse, and thus wealth transfer planning in respect of the estate and gift tax regime is appropriate. In practice, when assets exceed the estate tax exemption. (2)
Enough so that there are excess or surplus funds available for investment management purposes beyond cash or household management requirements and asset-liability funding (i.e. education, retirement, longevity risk, etc.). Those assets could be “risk assets” invested for total return and/or require philanthropic planning for their tax-optimized disposition.
Given the above tests, a working number might be $25 million or $30 million. (3)
Only a decade ago, it was common for some firms to offer investments and nothing else yet call themselves wealth managers. This was often misleading and certainly confusing to client families. Today, in a welcome turn, comprehensive planning is showing signs of reasserting its rightful place as the foundation of wealth management.
As wealth management evolved over the past three decades, firms’ service models have come to incorporate a host of integrated disciplines and techniques of comprehensive planning to serve the needs and expectations of wealthy clients. It now includes non-investment advisory services that address wealth transfer, asset protection, tax planning, risk management, and philanthropy among an array of other services to serve the administration of their households. More recently, for the super-wealthy, the dialogue now includes issues related to family systems, family sustainability, and the very purpose of the money.
Finally, with the rise of information technology and an emerging FinTech industry, client expectations have also come to include data transfer and data assimilation for household financial management and consolidated reporting with the emergence of a host of digital, tech-enabled solutions. The importance of quality assured, secure data cannot be overstated.
The economic framework
Contemporary wealth management can be seen as part of a broader asset management industry or complex. In fact, the industry exhibits many of the same common economic aspects as other industries whose supply chain economics include a continuum of manufacturers, distributors (i.e. sales) and consumers.
Applied to wealth management, the asset management complex includes asset management companies who produce various investment products, their distribution agents and the clients who buy or consume these products. An additional role of advisor emerges sometimes as a distributor or salesman and sometimes in a role as agent for a consumer. The advisor advocates for the best terms and conditions for their clients, often with the intent of disintermediating the manufacturer and/or the distributor.
When we examine the four primary wealth management business models, firms can play various economic roles - manufacturer, distributor or advisor - each having its own set of standards and incentives.
The agency dilemma
All financial advice has some inherent conflict of interest. Any form of compensation for the advice creates some level of self-interest and is unavoidable. However, clients can be better informed of their advisor’s objectivity, how their firms’ incentives effect their behavior and objectivity, and the potential for conflicts of interest when they render advice. Understanding agency theory can illuminate some distinctions between the various business models.
Agency theory is a management and economic theory that assumes both a principal and an agent are inherently motivated by self-interest. The predominant academic focus has been on the economic incentives and accountability frameworks between parties where the duty of an agent is to avoid conflicts of interests or the temptation of a potential conflict of interest when representing another party's interests.
When we apply agency theory to financial advice or wealth management, one reaches a simple interpretation - any financial adviser has a duty to disclaim and disclose all conflicts of interest to a client notwithstanding the interest of their firm or their affiliation to a parent company acting as a principal. This “agency dilemma” is at the heart of a pronounced shift in wealth management demand as the so-called fiduciary standard debate pits various corporate (i.e. principal) interests against a broadly applied fiduciary standard in the conduct of an advisor-client relationship.
Keep in mind, broker dealers who operate under selling agreements with asset management companies are distribution agents for another third party. Their agency duty is to a manufacturer (internal or external asset management firm). Selling agreements between manufacturers and distributors are not on their face wrong, but they are wrong when they’re non-transparent and/or where firm representatives intentionally mislead clients that they are acting as a client’s agent by calling themselves an “advisor” or other like-kind term that implies impartiality when in fact they are salesmen acting as distribution agents for a manufacturer of a product.
Despite recent efforts by the Department of Labor (DOL) in its jurisdiction over retirement plans and the Securities and Exchange Commission (SEC) pursuant to “Dodd-Frank,” the fiduciary standard issue has not been settled and can be expected to be debated for the foreseeable future. Certainly, “harmonizing” the application of a fiduciary standard across various business models appears unlikely.
Regardless of the regulatory outcome, the debate between various financial institutions has raised the issue as a matter of public discourse for investors. Clients are beginning to ask questions about their advisors’ alignment of interest with their own interests and about their advisors’ compensation systems and the incentives that those systems create.
The current focus on conflicts of interests and their disclosure can only be expected to increase. It will be arguably the fulcrum of client demand in the near future as clients become better informed and transparency in the information age becomes a sine qua non. While it is very hard to legislate ethics, with more information consumers have the power to force change.
In this context of the agency dilemma, who are clients to trust? "Trusted” means different things to different clients. Some clients view “trusted” with an emphasis on conflicts. Other clients view “trusted” as meaning an advisor who is candid and transparent and in practice puts the client’s interest before his/her own. There are some teams even at the most product-centric firms who do this and their clients are quite happy with them, despite the fact that there are real potential conflicts. Clients with these advisors value the advice they receive and are comfortable with the potential conflicts, either because they trust their advisors and/or they feel like they know about and can assess the advice they receive despite the conflicts.
While we have endeavored to define wealth management and apply the definition to the ultra-high net worth client segment, the term remains confusing for even the most discerning families.
Families tend to work with wealth management advisors for a host of reasons best summarized as relationship good will and not because they’ve examined each of the business models. They are too often ill-equipped to compare and contrast the various firm approaches and service capabilities.
With the above as context, in the next four parts, we will describe each of the four business models independently and offer observations on their respective advantages and limitations so that families can better understand the various business models and service platforms and thereby better put into context and assess what they read and hear.
1, While pursuant to the Investment Adviser’s Act both firms and individuals can be advisers, we use the term advisor.
2, For 2018, the exemption limit rose to $11.18 million per individual and $22.36 million per married couple. For 2019, an inflation adjustment lifts it to $11.4 million per individual and $22.8 million per couple. The increase in the exemption is set to lapse after 2025 reverting to its 2017 level of $5.49 million (plus an inflation adjustment).
3, Wealth-X and Deloitte define UHNW as $30 million. BCG uses a household definition of $100mm liquid net worth.
First published on Family Wealth Report on March 18, 2019
Ultra-high net worth families are confused by myriad configurations of advisors and commercial providers and often choose to serve themselves by forming a family office. This is the third part of a three-part feature.
The following article explores the many facets of a multi-family office, going into definitions, the reasons why they are founded and the challenges in doing so, as well as how they should be effectively managed and aligned tightly with clients’ needs. These issues are evergreen because the MFO market remains as busy as ever in North America. Indeed, last year’s falls in global equities and the enactment of new tax laws in late 2017 only serve to remind ultra-high net worth families of the value of a good family office model.
In the third part of this feature, (see part 1 and 2 here and here) Jamie McLaughlin, chief executive of J H McLaughlin & Co, a member of FWR's editorial advisory board, and also a founder of the UHNW Institute, a not-for-profit organization, examines the themes. The article was adapted from James H McLaughlin, “Proscriptions and Prescriptions,” Investments & Wealth Monitor, January/February 2016.
The editors of this news service welcome feedback from readers who can email the editor at email@example.com
The UHNW Institute, in partnership with Family Wealth Report, is a non-profit educational initiative serving UHNW families and family offices. The team of industry experts will provide a curriculum in the form of articles, webinars and events throughout the year for their readers, which can be highlighted on our site. For more information, please visit www.uhnwinstitute.org.
The single biggest economic challenge facing MFOs and wealth-management firms generally is rightsizing pricing in the face of increasing complexity and demand for non-investment services, i.e. services where firms traditionally have lacked pricing power due to an unsystematic demand from client families.
Firms must demand to be paid for services rendered at a reasonable level of profitability. They must eschew families buying their services on price alone by simply walking away. The definition of an attractive and actionable client segment in any service industry is one where a firm can acquire and retain a client over a full business cycle, and at a predictable and attractive price point. Currently, there are woefully few firms with unique value, just good ones - so for good firms it’s all about doing just enough to acquire a client family and then ruthlessly managing costs. Sharper, more-disciplined pricing practices can get firms off this treadmill.
The first, immediate observation related to pricing is the remarkable variation of fee arrangements that exist. They are primarily bundled (where investment and non-investment services are combined), but unbundling due to increasing client demand for non-investment services is occurring.
Where firms use asset-based fees there are some clear clustering patterns, but almost all firms that use asset-based fees use non-uniform discounts for clients above $50 million. These discounts may be offered to gather assets, but it’s economically perverse because these families are predictably more complex.
Where firms offer unbundled arrangements separating investment from non-investment services, there is little evidence that the non-investment service fees are derived from any reasonable or systematic cost-accounting model or controls. Many firms use a notional price for non-investment services best described as a professional service firm “time and effort” pricing model where the firm is taking a mark-up on its presumptive cost of time. In the absence of time tracking systems this is, at best, a notional pricing system where, in the absence of controls mitigating against “service creep,” there is ample evidence that many firms are delivering many of these discrete services at a loss.
Pricing for non-investment services
Supply and demand suggests that clients will pay a fair price for any service rendered, but this has been largely, untested for non-investment services such as planning and administration (i.e. accounting, household financial management, and related data assimilation).
In fact, given firms’ traditional asset-based pricing models, clients have been socialized into thinking that they can get non-investment services for free embedded in a single bundled price. Firms have long used the pricing power of the investment mandate to cross-subsidize the non-investment services, but with demand shifting, families increasingly rank non-investment services as high-value prerequisites in their choice of provider. Further, they don’t want or expect to receive something for nothing, but firms have been too passive and have lacked the collective will to confront this issue.
While few firms can demonstrate sustainable economic value by their investment performance alone, many can demonstrate their value by delivering an array of non-investment services, most notably integrated planning-related advisory services such as tax and wealth transfer counsel whether directly or in conjunction with outside professional advisors. As
Wally Head, Vice Chairman of Gresham Partners, attests, “firms that provide documented economic value from non-investment services, lengthen and deepen their relationships with their clients.”
A final comment related to complexity deserves to be mentioned. MFOs must recognize complexity and anticipate it in their pricing, and not rely on families to understand their peculiarities or level of complexity because how are the families to know? Generally, they have no reference group. Some of the markers of complexity include the following:
-- Lots of professional advisors
-- Lots of decision-makers
-- Weak family-governance structures
-- Multiple generations and households
-- Varying levels of sophistication of family members
-- Transnational families/multiple jurisdictions/domiciles
-- Weak information-technology systems for information exchange and security; and
-- Widespread illiquidity including interests in closely-held operating businesses, real estate, and other limited-partnership (LP) investments.
Serving complexity confers pricing power
Complexity lies at the heart of why commercial service-providers either don’t serve the UHNW market segment or do so accepting (intentionally or unintentionally) lower margins and, as important, why families perceive they are not well-served by most commercial models, often choosing to do it themselves.
Wealth-management and professional service firms of many different stripes (ranging from investment management-only outsourced CIOs to accounting firms) covet larger, inherently more-complex clients, but they are too often unable to deliver the needed services and, somewhat self-destructively, unable to be profitable serving these highly customized, idiosyncratic needs.
With the above as context, clients are increasingly aware that their complex service requirements have eclipsed many of their incumbent service providers such as investment firms, accounting firms, or other professional advisory firms.
Consequently, demand increasingly favors an approach anchored to a fully-integrated service platform that requires specialized staffing and is at the heart of serving the “whole client.” Such an integrated platform will place MFOs in a position to earn client primacy and, in time, improved business economics as primacy confers pricing power, which will act as a prophylactic against increasing asset-based fee compression.
Business economics collide with client experience
Separately, all wealth-management businesses, including MFOs, depend on top-line growth to some degree where performance and compensation management systems often favor asset gathering over client service delivery. Consequently, the discovery process is not fully disinterested and often comes with a sales bias where persuasion trumps analysis and the more nuanced feathering out of the true client need is often overlooked or neglected.
In summary, there is a great tension between firm business economics and the client experience.
In this environment, clients will increasingly seek to disintermediate manufacturers and distributors and should be more willing to pay the true costs for advice. Firms need to commit capital to staff at appropriate levels to provide this advice and or confederate with other advisors to meet this demand and, importantly, they need to have the derring-do to test clients’ willingness to pay. Discounting and pricing concessions in this environment are a race to the bottom. Firm business economics are weakened, and families remain unserved.
MFO success depends on four interdependent factors: capital, leadership, strategy, and disciplined execution.
Finally, both MFO strategy and execution are far too variable. Too few firms have adopted best practices from their industry peers. The best-in-class firms will be deeply networked, have competitive field intelligence and will be innovators ready to modify their strategy and execution in anticipation of client demand.
This article was adapted from James H McLaughlin, “Proscriptions and Prescriptions,” Investments & Wealth Monitor, January/February 2016.
Core vs Adjacent
The economic future for all MFOs will be to stick to their knitting as they lead in the provision of myriad core or adjacent services. Families don’t believe that any firm can do everything well and firms are fooling themselves if they think that they can provide everything.
I use a “Master List of Services” (see table A1) as an analytical tool for multi-family and single-family offices to explore the efficacy of their service platforms. Should an MFO or family office faithfully complete this as an exercise, it presents a host of implications for maintaining client primacy and for their economics.
Core services are internally delivered services - services no one else can do better, that secure client primacy and that can be delivered profitably.
First published on Family Wealth Report on March 11, 2019
The UHNW Institute, in partnership with Family Wealth Report, is a non-profit educational initiative serving UHNW families and family offices. The team of industry experts will provide curriculum in the form of articles, webinars and events throughout the year for their readers and be highlighted on our site.
Part 2: The Concept of Design
The market leaders in wealth management understand there is a pronounced demand shift and have moved from delivering products and solutions to a focus on how solutions are provided. In this post-product era, we have entered a design period where firms differentiate themselves by designing a client experience. Designing the experience can improve the level of diagnostics and discovery and affords opportunities for a firm and advisor to become more deeply connected with a client.
Such experiences, first conceived in consumer and retail product sales, are applicable equally to wealth management. Names such as Tiffany, Lexus and Ritz-Carlton come to mind. Design discipline requires input from employees, clients, and, potentially, other alliance partners and professionals, on how they want complex products and services delivered. It includes a careful review of all interactions such as work flow and work process and their effect on the ultimate delivery to the client.
The process can take time and is often iterative as firms explore and determine client preferences, rationalizing what matters most.
The Client Experience
In this post-product setting, some clients are yearning for something more existential, even impactful, best described as an experience. “Existential” is not so abstract as to be transcendent; rather, it’s an experience that goes beyond a discussion of a family’s prosaic financial affairs to a deeper level. Unfortunately, most clients have little reference for other possibilities that lie beyond their customary relationship with their advisors and they have only modest or low expectations.
The most successful firms understand this need to create a client experience and will be led by business managers who have had client-facing duties and know what drives this client experience.
What is this experience?
First and foremost—a compatibility in values and culture
An alignment of interests—true disinterest and impartiality
A relationship with an advisor and team where no one “owns” the client relationship
Solutions not products—access to the best thinking (contemporaneous information and advice) whether in-sourced or out-sourced
Privacy and security
Data assimilation—simplicity in the face of increasing information complexity
MFO Business Economics
The post-2008 period has been challenging for all wealth-management firms, particularly the smaller, less well-capitalized MFOs. Like many emerging industries, the relatively brief history of the MFO is one where the business economics remain extremely challenging. Costs are high, and few firms have any scale and, therefore, few firms enjoy any operating leverage.
Further, and perhaps most importantly, no firm has any meaningful market share or brand. Consequently, pricing power remains with the client/buyer. If there is pricing power it’s been with the investment component of the MFO delivery and not with the non-investment components, principally, planning-related services and the administration of household financial management. Unless firms are very disciplined and “stick to their knitting,” delivering on the non-investment components has tended to systematically erode their operating margins.
If the historical context is not challenging enough, the effect of the 2008 market collapse put pressure on MFO economics with an ugly combination of asset-based fee compression, lost business, negligible new business with less money in motion, increased service requirements, and increased costs, primarily for staff, compliance, and technology. Although the promise of the MFO remains noble, woefully few MFOs have succeeded in scaling their businesses or achieving any operating leverage in this extremely challenging market cycle.
Despite Inherent Weakness, Outside Capital Shows Interest
With few exceptions, MFO capital structures are weak and concentrated and, until recently, capital sources have been limited. While firm valuations (i.e., multiples) have expanded during the current, extended business cycle, the continued aging of principals, delayed succession planning and tepid organic growth have combined to have a dampening effect on potential UHNW firms’ valuations as compared to firms who serve the mass affluent and high-net-worth segments.
Leadership also must adjust - MFOs are often led by two general archetypes — either dynamic, externally oriented principals and/or investment or capital markets mavens. Firms will need a new generation of internally-focused business operators to develop a more sustainable, institutional character.
In spite of these weaknesses, capital sources and the low-interest-rate environment have spawned increased interest in the MFO segment and portend continued merger activity, recapitalizations, consolidation and internal equity transitions.
The Sales Paradox
Given their strict conflict-free agency mission and service cultures, MFOs continue to wrestle with an affirmative approach to sales, preferring to use the more benign term “client acquisition.” Organic growth rates (i.e., compound annual growth rates) in the low single digits are common, but there is hope as MFOs increasingly understand and are implementing client-acquisition strategies (i.e., client-to-client propagation rates, development of external referral channels, and improved onboarding processes) that can drive both margin expansion and firm enterprise value.
In the third and final part of our series, we will explore the elements of a successful MFO in the context of business economics and pricing, the latter one of the most challenging and complex topics facing not only MFOs but all wealth management firms today. We will explore the great tension between serving the economics of the firm while delivering on the elements of a successful client experience highlighting four key factors necessary to obtain success in both of these areas.
This article was adapted from James H. McLaughlin, “Ultra-High-Net-Worth and Multi-Family Offices: Proscriptions and Prescriptions.” Investments & Wealth Monitor, January/February 2016, pp. 21–25.
First published on Family Wealth Report on March 4, 2019
The UHNW Institute, in partnership with Family Wealth Report, is a non-profit educational initiative serving UHNW families and family offices. The team of industry experts will provide curriculum in the form of articles, webinars and events throughout the year for their readers and be highlighted on our site. For more information, please visit www.uhnwinstitute.org.
PART 1: The Challenges, Opportunities and Trends of a Multi-Family Office
Serving complex families is, well, complex. And the market that provides these services has likewise become complicated. Ultra-high-net-worth (UHNW) families are confused by myriad configurations of advisors and commercial providers and often choose to serve themselves by forming a family office.
For most families, a family office cannot be recommended simply given the costs. The number of family offices in the United States is uncertain—some estimates put the number at more than 5,000, but a more helpful guideline is to consider when a family office is economically efficacious. I put that number at $1 billion, which is a rarified level of wealth where Forbes estimates there are 585 families in the United States. This might imply a very large number of family offices don’t make economic sense, but one needs to understand the complex anthropology of wealthy families to make any judgment on the merits of forming a family-office structure based on the economics alone.
In this context of an abundance of wealth, wealth management firms increasingly assert they provide a "comprehensive" array of services including a suite of "family office services." Many self-identify as "multi-family offices." The reality is far different as most firms don't or won't recognize their shortcomings and the implied challenges.
Such a service delivery requires a significant investment particularly in an ensemble staff configuration, an acceptance of lower margins, and, importantly, a different cultural adaptation to client demands from the traditional demands of serving the mass affluent and high net worth (HNW) segments.
Further, over the past decade and accelerated by the market tumult of 2007-2009, the dialogue has changed. UHNW client demand has shifted beyond investment management to include an array of non-investment services (NIS). For the super-wealthy, the dialogue now includes issues related to family systems, family sustainability and the very purpose of the money; an existential discussion for which few traditional advisors are trained or emotionally equipped to facilitate.
In the above context, why do wealth management firms want to compete in the UHNW space? It’s neither glamorous nor profitable. With great care and discipline, it’s possible to deliver on the implied service promise, but some forbearance is in order for both firms and UHW families.
In this article, we’ll cover some of the challenges, opportunities and trends.
A Family Office Ecosystem - Not a Market
Although there may be an ecosystem of families and professionals with some common interests, we fall into an easy trap when we refer to a so-called family-office “market” or “industry.” There is no such monolith and there is no such market, at least not yet.
This ecosystem has some economic aspects of a market, but many other identifiers are entirely unmarket-like; some are even economically perverse. As a result, the configuration and execution of many family offices, across staff models, delivery platforms and processes, varies widely. What is common, however, is a preference for disinterested advice, a desire for sustainability (not simply growth) and sufficient resources to manage risks.
In this environment, many prudent UHNW families conclude they need outside, supplemental resources to manage a morass of processes and information.
Defining a Multi-Family Office
While many families are confederating formally and informally, this article will focus on commercial MFOs. Models vary widely and cut across regulatory channels. A large majority are organized as registered investment advisors (RIA), and the cohort also includes trust companies and commercial bank private banking lines of business. All generally stand on the presumption of an agency relationship with a family. This relationship is anchored to advisory services rendered in an alignment of interest with the family as distinct from the more transactional models of firms operating as manufacturers and distributors who have some principal/agency conflicts.
The highly fragmented RIA channel is perhaps best positioned to serve families who are looking for an alignment of interests between the firm and client, but they suffer from weak capital structures, indistinct brands, poor organic growth, and deteriorating cost-income ratios—all of which pose challenges. If this isn’t clear to families, contrast the RIA channel with wirehouse brokerages that enjoy national brands, strong organic growth, and an abundance of capital, and which, targeting the UHNW, have shifted largely to a comparable fee-based model.
Clients are Confused
In this narrow context, the MFO submarket is predictably confusing for even the most sophisticated families. MFOs lack brand awareness as individual firms and as a cohort and are best described as heterogeneous with varying types. Some are integrated “whole client” providers; some are more investment-centric/outsourced chief investment officer (CIO) service platforms; others primarily offer noninvestment “family office services.” As a result, each has differing staffing models, cost structures, and pricing models.
Demand is Shifting
The good news for MFOs is that we are in the very early stages of a secular global transformation of client demand. Without unduly oversimplifying, the root of the shift lies in the premise that the ultimate economic buyer will favor firms that provide advice largely free of conflict. In tandem, pricing power could shift to advisors despite what remains a fragmented industry, which would suggest the opposite effect. Clients, long yearning for advice (and often unsatisfied), increasingly will be willing to pay for impartial and differentiated counsel.
Transactional business models, where firms act as manufacturers and distributors of products and also advise clients on those same products, struggle with an inherent conflict. They will be forced or induced to adapt to a new reality where transparency and disclosure will be increasingly in favor. A sub-theme fueling this demand shift is the client expectation of an improved level of technology that can provide greater data visibility and assimilation.
In summary, a secular trend is underway that portends the disintermediation of an increasingly concentrated group of manufacturers and distributors and favors a more fragmented market of firms and professionals that provide impartial, quality advice.
Further, at the very high end of the market, there is widespread evidence that clients now value the non-investment components of firm service models at least as much as investment performance. However, firms have been slow to use this latent demand to modify their pricing strategies for noninvestment-related services.
Part 2 of this series will dive into the demand shift we are seeing from UHNW clients from strictly a product solution to a focus on how solutions are delivered. The design of an effective client experience will ultimately empower firms and advisors to grow and retain clients based on values-based relationship building verses retail product sales.
This article was adapted from James H. McLaughlin, “Ultra-High-Net-Worth and Multi-Family Offices: Proscriptions and Prescriptions.” Investments & Wealth Monitor, January/February 2016, pp. 21–25.
Guest Article Series: An Interview With Bill Woodson: The Needs of Family Offices and The Business Models To Serve Them
At the recent Family Wealth Report Family Office Summit held on November 1st, industry thought leaders shared the latest thinking on the needs of the UHNW, what it means to integrate a family’s full balance sheet and examined specific wealth strategies that families and family offices can deploy to ensure their financial and emotional well-being. The closing panel brought it all together by exploring specific wealth management business models available to these families in context of the current state of the industry.
Despite the number of options and business models available to clients today, the panel concluded that there isn’t one single model fully satisfying the unique and dramatically different needs of the UHNW. Each business model faces a number of challenges that impact their ability to deliver the value needed to clients.
The biggest issue discovered facing these families however, is not just the lack of one business model capable of satisfying all of their needs, it is the confusion in the marketplace, compounded by a lack of transparency and education available to these clients.
As part of Family Wealth Report’s new educational initiative, we will begin to specifically explore the needs of family offices and the business models serving this client segment today. To kick off that process, we have chosen to interview an expert in this space, Bill Woodson, Managing Director and Head of the Family Office Group at Citi Private Bank, to gain his perspective on the topic.
Steve Prostano – Do you believe that family offices should they be treated as a separate and distinct client segment?
Bill Woodson – Absolutely. As the number of family offices has grown, they have become an even more important and distinct client segment for wealth management firms. They not only control a substantial amount of wealth and do a significant amount of business with Wall Street, but they also have needs that are truly distinct from typical UHNW investors. As a result, family offices can be quite challenging for wealth management firms to serve. A few key distinctions to note are:
Family offices act and have requirements best categorized as both "private clients" and "institutional investors". They require a high level of expertise and service and often demand institutional accommodations and pricing.
Family offices are also unique in that they manifest themselves in many different archetypes. They tend to be a heterogeneous group of investors who control a significant amount of wealth, invested across multiple asset classes where decisions are being made by in-house professionals. These professionals must then address the complex and interrelated service and advisory needs of the family, while simultaneously navigating the unique dynamics of working for private families. This can be extremely challenging, time consuming and complex.
As a result of these distinctions, family offices are emerging as a unique client segment that are perhaps better viewed as companies in a diverse industry; companies with similar needs but vary greatly in a number of important respects. It is these differences that challenge both traditional family offices and wealth management firms that grew up serving a more homogeneous population of UHNW families and individuals.
Q – Is there a particular business model today that family offices are using in an attempt to satisfy all of their needs?
A – I haven’t seen a single model that is addressing the full suite of needs. I believe family offices are using multiple firms to satisfy their broad-based set of needs. Family offices are finding it very hard to identify the right wealth management firm and distinguish between the various business models. This challenge extends into finding the right advisors within these firms because many wealth management teams do not work with family offices on a focused or dedicated basis. For example, while wealth management firms have a significant number of family office clients across the company, these relationships are managed by separate and unconnected teams, each of whom have relationships with only a handful of family offices. Therefore, these advisors have varying levels of contacts in the family office space, insights into their buying behaviors, and understanding about how best to approach, sell and advise them.
Q – How can firms better distinguish themselves?
A – I believe wealth management firms have the opportunity to distinguish themselves with family offices by outlining their approach, service model, and programs in a clear and transparent way. These firms should be able to articulate that they understand the distinct advisory and service needs of these clients, while ensuring their firm’s entire suite of capabilities is available to them in a seamless manner. They also need to be able to round out their financial offering by providing value-added services including consulting, education, conferences and opportunities to meet and collaborate with other family offices.
Q – How can firms better serve this new client segment?
A - Many wealth management firms are already working to expand their current offerings or develop new ones – which is great!
While most wealth management firms have institutional capabilities that proclaim to meet the needs of even the largest and most sophisticated family offices, the nature of both this client segment and the wealth management firms, makes bringing these capabilities to family offices challenging. Despite the fact that a number of family offices oversee a significant amount of wealth, very few have experience trading and investing with the volume or frequency, that makes them comparable to true institutional investors; such as asset managers, sovereign wealth funds, or hedge funds. As a result, the institutional side of many wealth management firms are unwilling or reluctant to take family offices on as clients particularly given the time and resources needed to properly serve them.
This illustration compares how and where family offices are likely to be served by wealth management firms across three key investor-client attributes: amount of wealth, level of sophistication, and volume of trading/investing activity. As illustrated in the accompanying graph, family offices must, for the most part, meet a minimum threshold in all three of these areas before working with the institutional-side of a wealth management firm makes sense.
In order to be successful, they must evolve their private client offerings to address the differentiated needs of family offices that, on average, are more sophisticated and complex than UHNW clients, but typically do not rise to a level where they can become traditional institutional clients.
Many wealth management firms have addressed this issue by selectively making institutional products and services available to family offices based on a family’s specific needs, capabilities, and volume of business. This is typically done in areas such as debt/equity capital markets (for research, trading and execution) or investment banking (for direct investing) where many firms have developed referral or co-coverage arrangements between the private client and institutional divisions of the company. These programs allow select family offices to be considered as institutions for these specific needs, while they remain a private client for traditional private banking products, services and advice (e.g., cash, custody, lending and traditional investments).
Q – Can you discuss the needs of Family Offices vs. the UHNW in terms of advice and ancillary services?
A – That is a great question. As an emerging industry with new and distinct needs, family offices and the professionals they employ are increasingly looking for assistance and advice about how best to address similar challenges. Wealth management firms are in a unique position to provide this advice given the number of their family office clients and the insights these clients provide the firm and their advisors. This is similar to the advice these firms already provide UHNW families and individuals in areas such as estate planning, philanthropy and wealth education.
What is different, however, is that many of the issues family offices face extend beyond estate planning, philanthropy and acclimating children to growing up with wealth. Family offices are increasingly looking for best-practice advice in areas such as formation, outsourced technologies, cyber-security, compensation and retention, governance and investing. These clients are also looking to connect with each other to collaborate, share experiences, and occasionally co-invest.
Wealth management firms that are able to provide these ancillary, segment-specific advice and services to family offices will distinguish themselves and most likely be rewarded with new or additional business. The most effective and relevant wealth management firms for family offices will be those firms that deliver these resources and capabilities across all of their advisors, on a recurring basis, for each of their products and services.
In conclusion, this has been a tremendous opportunity to discuss specifies around family offices and business models currently available to support them with Bill Woodson. We’ve learned that family offices are a truly unique and distinct client segment whose needs are more sophisticated and complex than traditional UHNW. They require much more intentional servicing and comprehensive offerings to satisfy their “private client” and “institutional” characteristics. Education and transparency will also be absolutely critical in success for both parties. The various business models serving this segment need to not only understand this, but they also need to be transparent in terms of what their individual firm and business models can provide.
This topic leads me into the exciting launch of Family Wealth Report’s new UHNW and family office educational initiative coming in January 2019. The curriculum will involve a careful examination of the business models available to these client as they set out to achieve their personal, financial and business goals. An emphasis will be placed on education and key issues and trends affecting these models. Participants can look forward to a glossary of industry terms, expert content specifically dedicated to these topics, conferences, networking events and a due diligence guide to support important decision-making; such as choosing a wealth manager for their family. I look forward to sharing more with you in the weeks to come and wish everyone a safe and healthy holidays season.
To read previous articles written on this topic, please click here.
Guest Article Series: Business Models Serving the UHNW - Education and Transparency are Key According to our Recent SummitIt is clear that the needs of UHNW families and Family Offices are unique and dramatically different from the needs of affluent clients. Their lives are extremely complex and they require the most comprehensive set of financial and non-financial services, a fully integrated approach, objective advice and best-in-class products. Unfortunately for many firms - satisfying these needs is easier said than done!
The recent Family Office Summit, held on November 1st in New York City, brought together a “Who’s Who” of thought leaders in the UHNW and Family Office space, including Charles Lowenhaupt, Michael Sonnenfeldt, Mel Lagomasino, Joe Calabrese and Bill Woodson, among many others.
These leaders, who have had decades of experience advising these client segments and operating wealth management businesses, shared their latest thinking on the needs and what it really means to “integrate the full balance sheet”. Our concluding panel, moderated by Jamie McLaughlin, focused on the wealth management options available to the UHNW and Family Offices and the current state of the industry. Topics discussed included:
Business models available
Challenges and benefits of each model
Where the industry is evolving
What we need to do as Fiduciaries
Despite the number of options available to clients today, the panel’s conclusion was that there is no single business model that can fully satisfy the needs of UHNW families and Family Offices, but there is a dire need for education and transparency. According to Mel Lagomasino, Managing Partner & CEO of WE Family Offices, “The key is that clients need to understand the differences in each model, so they can make informed decisions for their families”.
Other panelists echoed these sentiments when they were asked what their key takeaways were. An example of this is from Jamie McLaughlin, CEO of J.H. McLaughlin & Co., when he responded, that “US wealth management business models vary widely, and clients remain completely confused. Client acquisition remains largely client-by-client and most are not informed buyers; rather they are sold by a given firm or advisor. Firms don’t make it easy either. They either fail to demonstrate their distinctive attributes or differentiation or make hollow or misleading service promises that are not backed up by a cohesive staff configuration or the human talent who have the professional expertise to carry the dialogue for increasingly complex families.”
Similarly, Joe Calabrese, National Head of Investments at Key Private Bank said, “Often the music and the lyrics don’t match in our industry, which creates confusion. Having different business models subject to vastly different standards (e.g., suitability vs. fiduciary) is fine if disclosures are appropriate and there is transparency. The biggest issue for clients is that most firms in the marketplace present themselves in the same way, even though there are material differences in their approach - fee and compensation models, product distribution incentives, investment strategies – and it can be confusing.”
Today, “families have the burden of cutting through the clutter to understand the business models and the implications each of these models have for them. The probability of a good match between the family and the provider are slim,” according to Mel Lagomasino, CEO and Managing Partner at WE Family Offices.
Lastly, all panelists agreed that our industry and the regulators must do a better job educating the public and ensuring transparency. As fiduciaries, it is our obligation!
Where is the industry evolving?
Unfortunately the industry is not evolving as rapidly as we would like. A multitude of hybrid business models will continue to exist for decades and today the majority of clients lack the information they need to make informed decisions in the short term and over the long-term for multiple generations.
The panel did share a number of trends and predictions for the future, including:
Technology is an important tool to empower advisors
Joe Calabrese of Key Private Bank who shared how technology is empowering advisors in his organization to shift from the time they spend each day on administrative and regulatory tasks to higher value-added client-facing activities.
“Advisors are increasingly called upon to help clients with value-added advice such as how-to best structure philanthropic activities, how to structure a family office and how to set up governance practices to ensure that family legacy goals and values are as successfully transitioned to future generations – and technology allows them the time and resources to accomplish these requests.”
Objective and transparent advice is in-demand by families
The Panel also has seen a trend among a subset of the UHNW and Family Offices – those who have educated themselves and are more enlightened about the industry. These families are migrating toward independent, well-capitalized firms, focused on providing objective advice, who they believe are transparent and not conflicted by the financial products they sell. In fact, Mel Lagomasino indicated “that she finally created a firm, WE Family Offices, that can be exclusively on the side of families and help them protect their capital”
According to Jamie McLaughlin, the future “will be entirely about transparent and integrated advice across a wide spectrum of services. In this era of the “primacy of advice,” manufacturers and distributors of products will lose their pricing power. Pricing will consequently move from an asset-based fee model to a negotiated fee-for-service model”.
The winners will have the best people who can provide integrated objective advice serving both their clients’ needs and their firms’ economic objectives in a virtuous equilibrium.” In the interim, however, “the need for transparency and education for the UHNW has never been higher”, according to Bill Woodson, Managing Director at Citi Private Bank.
Where do we go from here?
In conclusion, the Summit Panel is committed to working with the Family Wealth Report to educate these UHNW families and Family Offices through the creation of a new educational initiative to address the confusion and help clients to make better decisions.
A dedicated team of experts will be launching this initiative through a series of articles, webcasts and events. Our primary goal will be to enhance your understanding of what each business model provides today as well as relevant trends, the challenges they face and how you can address the gaps and issues you encounter. Stay tuned for more information on this exciting initiative in the weeks to come.
To read the previous article in my guest article series, please click here.
Guest Article Series: Business Models Serving UHNW Families Today – Is Anyone Delivering the Full Balance Sheet?
Ultra-High-Net-Worth (UHNW) families have broad needs and complex lives that often include multiple generations, legal entities, family businesses, family offices, family foundations and multiple residences scattered across the globe. These families are seeking holistic advice and the integration of a comprehensive set of financial and non-financial services to address their needs and simplify their lives. Unfortunately, they are confused and don’t know where to turn.
At the upcoming FWR Family Office Summit in New York City, we will be examining specific wealth strategies that families and family offices can deploy to ensure their financial and emotional well being, in the fullest sense and across generations. Additionally, and as part of an ongoing series of articles, our concluding panel of thought leaders will have a frank discussion on the various Wealth Management business models available to the UHNW, as they seek to fulfill their needs, as well as the challenges that these models face today.
The Client Need
As many of you know, the adage “shirtsleeves to shirtsleeves in 3 generations” is still a harsh reality for many UHNW families today. Even the most well-crafted estate plan is useless if it fails to address a family’s qualitative goals, and if their heirs are unprepared to receive and manage their inheritance successfully.
70% failure rate in the transfers of wealth from one generation to the next
Only 30% of family businesses survive through the second generation
Only 13% of family businesses survive through the third generation.” * * Family Wealth Alliance July 2018
UHNW families need strategic family enterprise planning and wealth management professionals that proactively utilize an integrated multi-generational approach to set them up for success in the future. The planning needs to seamlessly integrate not only quantitative financial services such as tax, estate, financial, investment and insurance planning, but also the qualitative (non-financial) advisory services such as family dynamics, governance, education and philanthropy.
The Challenges We Face
For a number of reasons, most, if not all, of the wealth management business models out there today are falling short when it comes to helping families sustain their wealth for multiple generations. These models include Private Banks, Wealth Manager/RIAs, External CIO/RIAs, Trust Companies, Broker Dealers, Accounting & Family Office Service Providers and Single-Family Offices.
The challenges and issues that affect them include: the regulatory environment, being a public vs. a private company, their governance or ownership structure, consolidation, the lack of a continuity/succession plan, available capital, the cost of talent and fee compression (to name a few) have significantly impacted the ability of each business model listed above to deliver the value needed to families in the short term, which in turn impacts the sustainability of their family enterprise for the long term.
The Bright Future
We are excited to explore each of these business models in more depth with you in the coming months through a series of articles and in conversation with some of the most prominent industry experts in this field at the upcoming FWR Family Office Summit on November 1st.
Our goal is to support families and family offices in their understanding of what each business model can realistically provide for them today, how to strategically address the issues they uncover in these models and where we see the industry going, in hopes of preparing them for what is to come in the future.