November 23, 2010

Single Family Offices' Top Challenge Is Investing

Family Wealth Alliance study outlines concerns and trends for SFOs

“Investing remains the number-one challenge for the single-family office,” says Thomas Livergood, CEO of the Family Wealth Alliance. Livergood (left) announced the findings of the “Third Annual Single-Family Office Study ’10,” on Friday in the library of GenSpring Family Offices in New York, one of the sponsors of the study.

 

These sentiments echo findings of the AdvisorOne.com/Wealth’s 2010 Top Wealth Managers survey, in which 82% of the registered investment advisors (RIAs) participating ranked investment management as the first or second most important service they provide for clients. Nineteen percent of the Top Wealth Managers are multi- or single-family offices. The findings in the Family Wealth Alliance Study are relevant to many wealth managers, as so many run smaller firms akin to single-family offices.

“Concerns have eased” about markets and the economic climate, but single-family offices (SFOs) still see challenges regarding “transition and family dynamics,” Livergood says, and “regulation is on the radar.” 

The Family Wealth Alliance interviewed 34 family offices for the 2010 study, 35 in 2009 and 32 in 2008. Livergood estimates that there are “2,500 single-family offices in America, with assets of $1.8 trillion.” The median SFO serves seven families.    

Sustainability” of the SFO itself is an ongoing concern for participants, along with challenges about “human capital,” Livergood notes. The study found that SFOs in the smallest tier, with less than $100 million in AUM, are concerned about retaining their talent. All sizes of SFO are seeing the compensation for their top executive climb; the top tier ($5 billion plus) paid its CEO an average base salary of $531,000 for 2009, up from $408,000 in 2008, while the smallest SFOs paid their CEOs an average $156,000, up from $147,000 in 2008. But finding the right non-executive professionals is also a challenge.

Mergers of SFOs

Many SFOs are exploring mergers with other SFOs or even moving over to a multi-family office. Why? “Scalability…talent pool…human capital” challenges all play into merger activity for family offices, Livergood asserts. These challenges were exacerbated by the market issues of the past few years. Some SFOs are outsourcing, and it’s not just administrative or back-office types of services. For instance, he explains, 33% outsource their chief investment officer.

Answering the challenges of “scalability and human capital,” Livergood says, is vitally important. The firms that will be most successful will pay close attention to four scalable services: the “external CIO,” “trust company,” “back-office consolidated reporting” and “administration—custody, bill paying, and accounting.”  

‘Sustainably Profitable’

Livergood says that to be “sustainably profitable,” a multifamily office (MFO) must be $5 billion in assets or more. The “big eight” MFOs approach $20 billion in assets. In the SFO world, $5 billion is the highest asset tier—one reason so many SFOs are thinking or talking about merging. There are “five strategic options” open to the SFO, according to Livergood: “remain an SFO; become an MFO client; outsource the scalable services noted above; create a closed SFO—(through SFO merger) create a joint venture office—combining an SFO-MFO.”

Regulation

Regulation catapulted to the list of SFO concerns as the SEC published in October a new definition of family office and requirements for some to register as investment advisors. Certain family offices will still be exempt from registration, but depending on the number of clients and types of activities a family office undertakes, the exemption is no longer a given.

New Security Alliance

The Family Wealth Alliance also announced formation of a new entity called the Alliance Security Council, with the “critical mission of safeguarding the lives and livelihoods of private families,” according to Livergood. Years in the planning, the Council’s advisory board articulated “The 10 Threats” to families in Sept. 2009, brought the launch team aboard last summer, and expects a soft launch in January and full operations by May 2011.  The Council intends to address threats that include personal, privacy, physical, medical, collections of valuables, staffing, sustainability, reputation, enterprise and philanthropy risks.    

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