When it comes to high-net-worth and ultra-high-net-worth families, advisors and assets managers have plenty of opportunities–and plenty of ways to blow it, according to a report released Wednesday by Cerulli Associates.
The solution? Financial professionals have to do their homework before and while they are engaging in work with this client base.
Assets under management for multiple family office–or clients–increased nearly 70% from 2007 and 2011 to $777.3 billion, says the Boston-based research firm in its December asset-management newsletter.
“The term family office is synonymous with wealthy families and the impressive wealth of the ultra-high-net-worth and high-net-worth investors is attractive to asset managers,” said Bing Waldert, director at Cerulli, in a statement.
Cerulli defines a family office as an organization set up to “serve the financial and non-financial needs of families with significant wealth by providing integrated wealth management that is completely independent and customized for each client.” Many multiple family offices, but not all, are structured as a registered investment advisor and focus on a well-established portfolio construction process.
“High-net-worth investors tend to be incredibly fickle. They are aggressive investors, but seek capital preservation,” Waldert explained. “They also maintain multiple advisory relationships.”
These relationships, he adds, involve several significant advantages and disadvantages. For instance, the familial nature of these clients involves a decentralized and complex decision-making process. At the same time, these clients have long-term time horizons.
“The family dynamics present in this market make it significantly different than any other market,” Cerulli stated in its report.
Many of the ultra-wealthy families have members that live all over the globe and have multiple homes inside and outside the United States. This, of course, means that there are domestic and foreign tax issues for financial professionals to consider.
Most important, the research group notes, family offices can have a range of decision-making methodologies when it comes to selecting external managers. An example of an asset manager in the space is GenSpring, owned by SunTrust, which manages more than $17 billion for wealthy families.
On the plus side, high-net-worth investors are willing to consider and purchase both aggressive and illiquid investments that may not be appropriate for many other investors.
“When considering the reasons why a wealthy family would start a family office in the first place, it is not for profits, but rather for privacy and control,” Cerulli’s December report explained.
“While the structure and implementations of family offices have broadened from those originally set up by the industrial titans of the 1800s, the key concept of these entities acting as prudent stewards for multi-generational wealth remains constant,” it concluded.