US multi-family offices are steadily winning market share from traditional banks and wealth-management firms by focusing on what they are best at and quietly outsourcing esoteric financial advice to specialist firms, a new report discloses.
And rather than fight the trend, says the report’s authors, banks and financial advisory firms would do well to work with the MFOs on a partnership basis by contracting their expertise in areas such as trust administration and tax planning.
About US$8.4trn (£6.4trn, €7.1trn) was owned by high-net-worth (HNW) and ultra-high-net worth (UHNW) individuals in client assets at the end of 2016, up nearly 5% from the previous year, according to latest figures from global research specialists Cerulli Associates.
And while some 58% of those assets were under management by banks and traditional advisory firms – “wirehouses”, in US parlance – the report pointed to a significant rise among smaller independent practices offering high levels of service, what the report identified as MFOs.
This growth among MFOs means that they currently account for US$694bn (£527bn, €585) in assets, meaning that they have outpaced all other HNW channels over the past three years, growing at an annual rate of 9.8%, said the report.
This rise in MFOs can be attributed to a broader shift towards lower costs and greater transparency, said the researchers.
“Cerulli believes the channel will grow assets to US$1.15trn by 2021,” said Cerulli director Donnie Ethier, pictured above.
He pointed out that these “boutique” wealth-management firms go beyond simply managing clients’ investment portfolios, saying: “By acting as a cohesive wealth management solution, MFOs are better able to serve as a central source of information for an entire family’s financial matters.”
MFOs are also able to reduce costs and gain proficiencies by providing “a blend of in-house and outsourced investment solutions” in one place, said Ethier.
Cerulli analyst Asher Cheses notes that, over the past few years, his organisation has seen a number of MFOs cutting back on the number of services offered in-house, with many outsourcing certain tasks due to increased cost, with the goal of focusing instead on “what they do best”, typically around the “softer and non-financial areas of wealth”.
The most commonly outsourced services among MFOs, says Cerulli, are trust administration (58%), tax planning (53%), bill pay (47%), and risk management (41%).
In the face of rising competition from MFO, says Cheses, rather than carp about it, asset managers should look to “reinforce their relationships with family offices”, by establishing themselves as “thought leaders” in the industry.
“Family offices are increasingly looking for in-depth market analysis and advice from providers,” says Cheses, pictured left, meaning that asset managers can differentiate their firms from their rivals by sharing asset allocation and capital market insights that effectively help advisory teams better serve their HNW clients.
“The increased desire for transparent, unbiased advice, along with evolving preferences among the next generation of wealthy clients, indicates that the MFO model is well positioned to thrive for years to come,” Cheses concludes.
“In addition, the way HNW and UHNW individuals are allocating their money is shifting, with growing demand for ETFs, ESG/SRI, and direct investments.
“To keep pace and take advantage of the potential opportunities, asset managers need to differentiate themselves in the industry through specialised services, products, and technological expertise.
“Rather than pushing certain products, asset managers should concentrate on providing a high level of service that aligns with the needs and services of HNW investors.”
To read about purchasing the full report – though be warned, it costs US$19,000 – click here