multifamily sm office study · among the multifamily offices. client acquisition rates also...

MultifamilyOffice Study

e x e c u t i v e s u m m a r y

r e p o r t

2 0 1 2

e x t e r n a l c i o s t u d y

We Place Families FirstsM

2 n d A n n u a l

Firms confidently

reinvest and expand

offerings to Bolster their

competitive positions

copyright © 2012 Family Wealth alliance, llc. all rights reserved.

Welcomedear Private Family Members and advisors,

Welcome to our 2nd annual external cio study. Just a year ago we reported that a new breed had emerged in the family wealth landscape. it is gaining momentum and continues to have heft and significance in the marketplace. Firms in this study told us that they are confidently reinvesting in themselves – in better reporting solutions, client service enhancements, expanded research and even client education. this is a sign that these firms are in this for the long-run and they feel bullish about their futures.

Here are the highlights of our observations:

Heft continues: these firms experienced moderate growth in a largely sideways market year (their assets grew 5.5% and clients were up 5.4%) yet they managed a respectable share of assets. total taxable assets of the group were $551.1 billion, with the mean size of firm at $11.0 billion. alliance research predicts that the total taxable assets of this universe to be over $1.5 trillion.

Growth Gap noted: We note two main types of firms in this study: the investment firms and the Multifamily office firms who offer their investment services à la carte. this report reveals that their growth rates differed, with the former providers having almost three times as much growth of acquired new clients, with asset growth showing even more of a gap.

opportunity in new landscape: Marketplace awareness is the number one challenge facing this new breed, as one would expect of a nascent industry. the deck continues to shuffle early-on among the list of the most-mentioned competitive firms. We expect both trends to continue in the near-term, as the opportunity for new entrants remains high.

Key trends: We have been predicting for several years that the twin drivers of scalability and human talent would be forcing the outsourcing to the Four scalable Pillars of services: investments, trusts, reporting, and administration. We also foretold that these types of firms would experience higher growth than their full-service counterparts, and that M&a activity would result, once the recovery was under way. While the former predictions have held nicely and are becoming documented in our research, the real-world, recently-announced mergers are getting the most attention.

the purpose of alliance research is to chronicle the family wealth industry and, with what we learn, better serve our constituents. led by our research and consulting, the alliance is known for innovation and adherence to its core value, “We Place Families First.” We invite you to visit our website www.FWalliance.com for updates, as well as information on our newest initiatives such as the alliance report and the alliance security council.

our sponsoring partner firms are a significant part of this annual effort. Without their unique insights and support, this ground-breaking research would not be possible. the alliance is honored by and truly grateful to these outstanding organizations who continue to demonstrate their commitment to education and research.

respectfully submitted,

thomas r. livergoodchief executive office

F r o M t H e P u b l i s H e r

investment consultants, managers of managers, separate

account managers and multifamily offices.

Participating firms reported an overall 5.5% growth in

assets under advisement in 2011, though that figure masks

wide variations among individual firms. thirteen of the 50

participants say their assets declined in 2011, with the larg-

est drop recorded at 11.4% (the biggest gain was 139%). For

purposes of comparison, stocks in the standard & Poor’s 500

index posted a total return of 2.1% last year, while the bond

market, as measured by the barclays capital u.s. aggregate

bond index, showed a gain of 7.8%.

Growth diverged sharply between investment firms—

those calling themselves investment consultants, manag-

ers of managers or separate account managers—on the

e x e c u t i v e S u m m a r y

assets are rising and compe-

tition is intensifying in the

rapidly growing market to

provide private families and

family offices with external

chief investment officer ser-

vices, according to the Fam-

ily Wealth alliance’s 2nd annual external cio study.

a total of 50 external cio firms took part in the study,

with taxable assets under advisement of $551.1 billion as

of yearend 2011. Mean size in terms of taxable assets was

$11.0 billion, up from $9.8 billion in last year’s inaugu-

ral external cio study. Participants represent a range of

firm types all offering external cio services, including


F i r M s c o n F i d e n t ly r e i n V e s ta n d e x Pa n d o F F e r i n G s

to b o l s t e r t H e i r c o M P e t i t i V e P o s i t i o n s

one hand, and multifamily offices on the other. invest-

ment firms made up 58% of participants, while the other

42% were multifamily offices. asset growth at the invest-

ment firms was 6.8% on average, compared to just 1.0%

among the multifamily offices. client acquisition rates also

diverged sharply. overall, the private client rosters of partici-

pating firms rose by 5.4%, with investment firms reporting an

11.8% gain, while multifamily office clients were up just 3.9%.

assets at participating firms represent about 35% of

the taxable u.s. external cio market. We estimate total

taxable external cio assets at $1.5 trillion. roughly half

this amount comes from single-family offices, with the

remainder coming from private clients investing directly

without a family-office entity. among the study’s other

preliminary findings:

employee headcount rose by a sharp 7.5% as partici-

pating firms beefed up their professional staffs to bolster

their competitive positions. Headcount grew by 9.4% at in-

vestment firms and 4.4% at multifamily offices. Higher staff

levels and modest asset growth contributed to declines

in assets per employee—$165.2 million at the investment

firms (down 2.4% from the previous year) and $75.6 million

at multifamily offices (down 3.3%).

to stay competitive, external cio firms are investing

heavily in their service offerings. the most frequently cited

service enhancement was introduction of new investment

strategies or products. others mentioned most frequently

include better performance reporting, an expanded lineup

of managers and manager research, and enhanced client

communications and education programs. “our expanded

investor education kit now helps family offices address

market volatility issues with clients,” says one participant.

“We have developed new presentations on past bear mar-

kets, recoveries, the perils of trying to time the market,

volatility cycles, and the merits of sticking with a long-

term investment strategy.”

Fallout from the dodd-Frank financial re-

form law, which threatens some single-family of-

fices with regulation, has been expected to ac-

celerate the existing trend among single-family

offices toward outsourcing their investment function

to external cios. roughly a third of them already

do so, according to Family Wealth alliance research.

Factors behind this trend have been at work for several

years. However, while external cio firms are adding

many family office clients, they say the new business

has little to do with dodd-Frank, at least so far. almost

two-thirds of participants (61%) say they have seen no in-

crease in private-client business because of dodd-Frank.

another 35% say they have had discussions because of

dodd-Frank with prospects but those prospects have not

become clients. only 4% of participants say they have

added clients as a direct result of dodd-Frank.

Many external cio providers started business in the

institutional world of pensions and endowments where

their mandates did not include investment discretion.


n

e x e c u t i V e s u M M a r y | e x t e r n a l c i o s t u d y

at a Glance (preliminary results)

Firms Participating 50

taxable assets under advisement $551.1b

Mean asset size (taxable) $11.0b

Mean number of Family clients 206

client Growth year over year 5.4%

total assets under advisement $659.7b

asset Growth year over year 5.5%

year established (Mean) 1988

First offered external cio services 1998

as of year end 2011

assets at tHese FirMs rePresent about 35% oF tHe taxable u.s. external cio MarKet. rouGHly HalF tHis aMount coMes FroM sinGle-FaMily oFFices, WitH tHe rest coMinG FroM PriVate clients

inVestinG directly WitHout a FaMily-oFFice entity.

t H e r o s t e r o F P a r t i c i P at i n G F i r M s

altair advisors chicago, il 2,791.9

arlington Family offices birmingham, al 2,108.0

ascent Private capital Management of u.s. bank san Francisco, ca 3,000.0

atlantic trust atlanta, Ga 15,857.0

balentine atlanta, Ga 923.9

bnr Partners chicago, il 1,500.0

bofa Ml Private bank investment Group new york, ny 143,900.0

brinker capital berwyn, Pa 1,644.6

cambridge associates boston, Ma 59,838.0

constellation Wealth advisors llc new york, ny 3,978.7

ctc consulting llc Portland, or 23,500.0

edge capital Partners atlanta, Ga 1,040.0

Fortigent llc rockville Md 12,000.0

Genspring Family offices Jupiter, Fl 17,446.0

Glenmede Philadelphia, Pa 11,984.0

Greenway Family office st. louis, Mo 115.0

Gresham Partners llc chicago, il 3,228.6

Greycourt Pittsburgh, Pa 7,400.0

Halbert Hargrove long beach, ca 830.4

Hall capital Partners llc san Francisco, ca 21,442.0

Harris associates chicago, il 48,760.9

Harris mycFo chicago, il 13,597.0

Hawthorn Philadelphia, Pa 33,300.0

Hillview capital advisors new york, ny 1,229.1

Hirtle callaghan West conshohocken, Pa 12,000.0

taxaBle assetsunder advisement

in $millionslocationFirm name

in the wealth management industry are not sure what an

external chief investment officer does, so it’s not surprising

that potential clients remain in the dark. says one partici-

pant: “in a world that tries to lump all types of solutions

into one category, it is essential that prospective clients un-

derstand how we differentiate our firm and the outsourced

cio model from other investment alternatives.”

Participants say their no. 2 challenge is difficult invest-

ment markets, which gained in rank from no. 5 the previ-

ous year amid the european crisis and concerns about the

However, private family clients increasingly prefer dis-

cretionary management and most external cios now

offer it. of study participants, 48.1% say their typical cli-

ent arrangement provides for full investment discretion;

19.2% say they typically provide partial discretion (likely

at the manager level); 17.3% typically provide no discre-

tion and 15.4% say they take no typical arrangement and

will offer whatever the client wants.

Marketplace awareness continues to pose the top

challenge for external cio firms, participants say. Many


t H e r o s t e r o F P a r t i c i P at i n G F i r M s

Holt capital Partners Forth Worth, tx 135.0

Kinsight llc birmingham, al 323.0

lattice strategies san Francisco, ca 145.0

lGl Partners llc West conshohocken, Pa 803.0

lowenhaupt Global advisors llc st. louis, Mo 878.6

Madison Family offices llc sunrise, Fl 70.0

Mirador Family Wealth advisors Grand rapids, Mi 1,100.0

northern trust investment Program solutions chicago, il 9,400.0

okabena investment services inc. Minneapolis, Mn 890.3

Partners capital investment Group boston, Ma 2,500.0

Pitcairn Jenkintown, Pa 3,714.0

Presidio Group san Francisco, ca 3,030.0

Prima capital denver, co 34,308.0

the Privatebank chicago, il 3,614.0

rcl advisors llc new york, ny 783.9

rockefeller Financial new york, ny 17,900.0

sapere Wealth Management llc Matthews, nc 500.0

scs Financial services llc boston, Ma 7,800.0

silver bridge boston, Ma 2,603.0

silvercrest asset Management Group llc new york, ny 9,148.0

spruce Private investors llc stamford, ct 2,929.0

threshold Group Gig Harbor, Wa 2,133.2

tolleson Wealth Management dallas, tx 300.0

Vogel consulting brookfield, Wi 2,400.0

Zevin asset Management boston, Ma 269.6

taxaBle assetsunder advisement

in $millionslocationFirm name

their competitive positions as perceived by study partici-

pants. Goldman sachs moved up to no. 1 competitor from

second place last year. J.P. Morgan jumped from eighth

place to no. 2 and bessemer trust co. advanced from no. 4

to no. 3. cambridge associates dropped from no. 1 to no.

4, while northern trust co. fell to no. 6 from third place.

the rankings were derived by asking participants to iden-

tify their top three competitors and their responses were

then weighted by whether the firms were identified as no.

1, no. 2 or no. 3.

u.s. economy. no. 3 was managing client relationships

and expectations about investment returns. and no. 4

was managing growth, an issue that was not among the

top concerns cited by participants in last year’s study.

“our biggest challenge is the administrative aspects as-

sociated with managing the growth of the investment

programs we oversee,” says one participant.

a variety of players have converged on this mar-

ketplace, creating a highly competitive environment.

in this year’s study, three brand-name leaders advanced


e x e c u t i V e s u M M a r y | e x t e r n a l c i o s t u d y

u.s. Vs. euroPean loans:HiGHliGHtinG relatiVe Value diFFerences

By BaBson capital

in tHe inVestMent coMMunity, it is an

accepted paradigm that by investing globally in a

particular asset class it is possible to improve portfolio

alpha by exploiting relative value across markets.

For u.s. and european loans in particular, relative

value analysis can be straight forward when considering

dual-country loans issued by one company. ignoring

for the moment potential differences in jurisdiction and

governing law, a simple analysis can be made by comparing

the effective three-year spreads between the two loans, and

concluding that the loan with the premium spread would

be over-weighted in the portfolio. this ease of comparison

is due to both loans having the same issuer-level default

rate and leverage multiples. extrapolating this security

level analysis to the market level becomes more complex.

taking into account market level spreads, leverage and

default rates, we believe that the premium in european

loans is compelling on a risk/reward basis.

the notion of relative value between u.s. and european

loans should be placed into context. While corporate credit

fundamentals have improved on a global basis, investors

who prefer a less volatile loan return may favor the u.s.

loan market as some of the macroeconomic factors and

technical dynamics are not as pervasive as in the european

loan market. a less risk averse investor may find the

potential for higher loan returns in the european loan

market appealing as they may feel the additional spread

premium offered in that market compensates for the

additional macroeconomic and market technical risk we

have previously described.

taking a step back to look at both markets holistically,

the u.s. loan market has had an easier time post-crisis, with

a reviving clo market and growing retail and institutional

segments. the european loan market, on the other hand, has

had a tougher time post-crisis, with its clo market yet to

be resuscitated and a non-existent retail market. as a result

of this imbalance in demand for loans, we would expect the

premium in europe to be sustained in the near term.

While europe still has a ways to go to address

macroeconomic concerns and the european loan market

continues to sort through its supply/demand imbalance,

global investors should have an opportunity to benefit from

the higher premium of european loans.

Compliance code: 12/604

W H i t e P a P e r s u M M a r y


For u.s. and european loans in

particular, relative value analysis

can be straight forward when

considering dual-country loans

issued by one company.

HiGH conViction inVestinG: tHe beneFits oF actiVe ManaGeMent

By oppenHeimer Funds

in V e s t o r s t o d ay F ac e a c o M P l e x

investment landscape and need to consider

whether active or passive strategies will be more

likely to meet their return objectives. While passive

investment options are often offered at what

appears to be a lower cost, choosing passive investments

for this reason alone may be “penny-wise, pound-foolish”

because the opportunity cost of forgoing the potential to

outperform a passive benchmark may far outweigh the

higher active management fee.

Fundamental, bottom-up research can identify

investment opportunities that may generate solid

returns over time. We believe those portfolio managers

who exhibit high levels of active management, or high

conviction in their investments, have the best opportunity

to outperform. We also believe that portfolio managers

who charge active management fees but do little more

than replicate an index should be avoided. While past

performance does not guarantee future results, measuring

“active share” can help investors evaluate which funds

are actually actively managed, therefore offering greater

potential to outperform the index against which they’re

benchmarked.

active share is one tool investors can use to identify

funds that are focused on active management. We believe

that higher active share is evidence of a consistent, high

conviction approach to investing. With equity markets

likely to continue on a trajectory of higher-than-average

volatility, we believe there will be an opportunity for those

funds with high active share to outperform.

in this paper we identify:

• How active share can be used to differentiate active

managers

• Why active share is important in identifying funds with

potential to generate alpha

• How a boutique-style investment management firm

empowers portfolio managers to shape their investment

strategies and use their highest conviction ideas to bring

value to investors



Fundamental, bottom-up

research can identify investment

opportunities that may generate

solid returns over time. We

believe those portfolio managers

who exhibit high levels of active

management, or high conviction

in their investments, have the best

opportunity to outperform.



tHe PoWer oF liquidity

By tristate capital

the great financial crisis of 2007-08 was

triggered by a liquidity shortfall in u.s.

banking, brought on by the collapse of the

housing bubble. some of the biggest and

best-known names on Wall street fell victim

to an age-old miscalculation: not enough liquidity. the big

houses were not alone. countless smaller companies and

individuals suffered similar fates.

Financial pain due to insufficient liquidity happens all the

time. that’s why the prudent person of means and the well-

run company understand the power of liquidity: what it is,

why it’s important, and how to build and maintain it.

liquidity, in simplest terms, is the ability to meet your

financial obligations, to cover your interest, principal and

expenses. it is commonly thought of as ready cash or the

ability to convert assets to cash, quickly and without a loss.

Why is liquidity important? Having enough cash to handle

those shocks and surprises that inevitably occur will help

you stave off financial set-backs, even bankruptcy. Good

liquidity cash flow gives you both the wherewithal to take

advantage of opportunities when they occur and the means

to reverse a bad investment decision – an exit strategy.

studies show that, for businesses, liquidity correlates with

higher firm value and a lower cost of capital. in fact, when

banks judge the credit worthiness of lending applicants,

liquidity is the most important factor in their decision,

followed closely by cash flow. not surprisingly, there’s

growing anecdotal evidence that people and companies

with good liquidity fared better during the recent financial

turmoil than those without it.

Financial experts use at least four different ratios to measure

liquidity, all comparing assets to liabilities, or debt to equity.

these are useful calculations that all should understand, because

knowing your liquidity is the first step to strengthening it.

even with these formulas, though, figuring the right

amount of liquidity for you and your circumstances is not a

simple matter. that’s where a trusted financial advisor comes

in. Work with your advisor to determine your liquidity level

for current needs and future contingencies.

banks play an important role in liquidity through

personalized money management and liquidity management

services. Plus, at tristate capital bank, our bankers and

advisors can help you project the liquidity you need to

borrow at good terms and to correlate cash flow liquidity

coverage to your time horizon. this will let you see how

strong your liquidity position is.

bottom line: liquidity lets you take advantage of

opportunities and reduce your risk of financial losses, even

insolvency. liquidity should be central to your financial

plan. tristate capital can help!

studies show that, for businesses, liquidity correlates with higher

firm value and a lower cost of capital. in fact, when banks judge

the credit worthiness of lending applicants, liquidity is the most

important factor in their decision, followed closely by cash flow.


The Alliance Thanks Our Premier Partner Firmsof the

Second Annual External CIO Study

n

Without their unique insights and support,this groundbreaking research would not be possible.

The Alliance is truly grateful to these outstanding organizations who demonstrate their

commitment to education and research.

We Place Families First sM

AWe Place Families First sM

240 e. Willow avenue | suite 102 | Wheaton, il 60187-5426 | usaPhone 630-260-1010 | Fax 866-410-5532

www.FWalliance.com

multifamily sm office study · among the multifamily offices. client acquisition rates also...

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