From the February 2008 issue of Research Magazine • Subscribe!

February 1, 2008

In the Family

Research: What exactly is FOX and what do you do?Benevides: At our core, we are a research and advisory firm that provides service to a broad network of just over 550 entities focused in the family wealth part of the marketplace. That includes over 300 dedicated family offices and the remainder are multi-family offices and wealth advisory firms. In terms of what we do, we do a combination of proprietary research, strategy and benchmarking work on both wealth owners and best practices in running multi-family advisory firms. We bring the network together via a number of venues, including 24/7 list servers that connect the multi-family offices, their CEOs and the wealth owners themselves. This gives them a vehicle to ask questions and get answers directly and helps us at an aggregate level to understand how this part of the marketplace is evolving.

What are you seeing?As we look at this space, it's surprisingly fragmented in our opinion. We're probably at the end of the first inning of the game. In the classic evolution of any industry, that phase comes with lots of opportunity, lots of activity as people are trying to set their shingle out and stake their claim to a piece of real estate. That is, I think, where we are right now. The good news is there are lots of players and a lot of activity. The challenge is there's a lot of noise in the system right now; that creates a lot of confusion for everyone and like any other marketplace confusion, it always hurts some players and helps other players.

How do you help advisors navigate that confusion?We help them understand at a much more detailed analytic level not only what the buying behaviors of this marketplace are, but the drivers behind these behaviors. We help them understand their client or prospect like no one else. The second thing we do is if we're doing our job well, we help them understand how to best manage their own multi-family-office business. We're like McKinsey; we have a management consulting bent, so we help advisors think about team structure, pricing, service mix. If you are new to this marketplace, the value is evident. If you're an existing player who's been in this business for a long time, you want information on all the competition coming into the marketplace and all the new wealth at this level coming into the marketplace from the other side. The dynamic of the business is changing. It's not the same old business, so there's a benefit there in really trying to understand how the sands are shifting.

Your most recent Advisory Study addressed these shifting sands, didn't it?One of the most surprising challenges the study uncovered is that despite this being an alluring marketplace, profitability is more challenging than an advisor might think at first glance. It's expensive to deliver well to this population, and this is also a very insular and connected market. That sword cuts both ways. If you do something really, really well, word gets out. If, on the other hand, something's gone terribly wrong -- if it becomes clear there's nothing behind the shingle -- that word also gets out very quickly.

So these might be high-revenue accounts, but they're also resource-intensive to retain?The challenge around profitability really gets to the core challenges these multi-family offices have. I think without getting too deep into the research, on the uber-macro level, profitability is harder than you might think. First, you have the difficulty externally of being able to articulate and deliver value with enough concreteness that you can get paid for it. That's the key to success and everyone has that challenge. We're doing a deep dive in our next research initiative around this issue of pricing and capturing value. Second, there's the operational challenge of resources. Some firms are good at controlling service creep; firms that can build the right team structure or leverage their technology have a lot of strength operationally, so that's not a challenge. But there are a number of firms in this space that are smaller businesses and the principals often come from backgrounds that don't involve running a business. They might be great hedge fund managers, might be great planners, might be great XYZ, but they just don't have the business discipline to properly and most effectively run a business.

Why does everybody seem to want to get into this market?The opportunity side, I would say, is tremendous. Research we have seen and rely on indicates that the wealth effect is real, that the wealthy are getting wealthier at an increasing rate. And the real opportunity for this marketplace is that the complexity of managing that wealth is dramatically increasing. If you're dealing not only with $1 million today but $10 million tomorrow and $25 million next week, the complexity of what you have is increasing because you're generally talking about assets in less and less liquid investments that are more and more globally dispersed and the legal structures are much more involved and entangled. Your need as a client for qualified advisory help has exponentially increased. We believe that across the next 18 to 24 months, demand for this kind of service will outstrip qualified supply.

What kind of player does this complexity favor?What we're seeing is the emergence of a new industry; we could be wrong, but this kind of integrated provider may be the next evolution of private financial services. That's a pretty bold statement, but in the past, if you were the client who had this type of complexity, you had two choices. First, you could go to the institutional group at a retail or private bank, where you'd be served like a pension fund or a lot of other entities that are unfortunately tax-exempt. As an individual, you are not tax-exempt, so you're not well served there. Or you could set up your own family office. The challenge was that the client needed both the sophistication of product and capability of the institutional side and the intimacy, touch and involvement of the retail relationship. That's the distinction of the multi-family office offering, where the advisory functions of financial planning, estate planning, tax planning and investment planning are integrated with the full impact of each decision through all areas.

Does it make sense for a planner to try to build a de novo business of this type?I would say that it doesn't make sense to try to build a de novo family office business. A planner has a better shot, generally speaking, because their skill set is broad rather than deep. The key for them is out of the gate they need to define exactly where they fit, what will they do and what they will not do, and then do their absolute best to stick to that mandate. It's hard when they're trying to get as much business as they can to enforce those hard bands around the service offering, and that's often where firms go down. Their mandate is so heterogeneous, they do so many things, but not well enough to be more than just an also-ran doing the same thing as the guy across the street.

Can an advisor grow a star account into a de facto multi-family office model? This approach is probably the hardest thing to do, actually, and from where we sit and the experience we have, trying to take your own book up-market or bolt on another UHNW client is really inadvisable. I think that's a real challenge that's pervasive in the business. We see time and again the classic advisor who has a book where the main part is clients who have maybe $4 million, a few with $500,000 and one with $15 million to $18 million. The thought is, "I got that one and would really like to add a couple like it." The boss is thinking, "My God, he or she's got one and is doing a really poor job servicing that client. We as a firm are not delivering everything we can for that client, and we hope nobody who really serves that market takes that $15 million to $18 million away from us."

We would advise advisors to understand who they personally best serve. Be honest in that, and realize that all the research we've done indicates that they are better off being really good at serving their core base of clients than bolting on a couple of big accounts. If they really want to be in that market, not just dipping a toe in the market but really diving into the pool, they have to really be experts. You might have expertise with smaller fish. That's not bad, in our view.

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Robert Scott Martin is a New York-based contributing editor of Research.

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