The past decade has seen a large increase in multifamily investment offices in the wealth management market. Keel Point Chief Economic Advisor Steven Skancke spoke recently with Institutional Allocator about this trend and one of its newer manifestations: the boundary extension by wealth management firms to incorporate multifamily offices into their wealth management services. The growth of the multifamily-office sector within the wealth management industry provides a cheaper route for affluent families to improve their wealth management with access to greater investment expertise, Skancke asserts.
The growth in the need for family offices, which are the private wealth management firms for families of significant wealth, has been driven by the massive creation of new family wealth in recent decades.
Keel Point is a Huntsville, Ala.-based wealth management firm with offices in seven cities across the United States. It manages approximately $2.1 billion and advises on additional assets for its high-net-worth investors.
A December 2018 article by Forbes points to a “significant increase in the number of family offices globally over the last ten years,” noting that there are currently some 10,000 single-family offices, representing a ten-fold increase since 2008. According to the article, research done by Campden Wealth shows that family offices currently have more than $4 trillion in assets. Campden Wealth is a global membership organization providing education and research to families of substantial wealth.
And as early as March 2017, the Wall Street Journal reported that “Clans with nine-figure fortunes are increasingly investing through unregulated firms known as family offices, impinging on the business of investment banking and private equity” and that “Today their ranks are ballooning, and many, put off by the high fees and sometimes weak performances of Wall Street money managers, are shifting to investments they can pursue directly through family offices.”
According to Skancke, technology and innovation have played a major role in creating new businesses and new ideas that ultimately get sold, resulting in sudden new wealth divided by only a few people. When affluent families and business owners experience a liquidity event, or desire to monetize their work, they can generate anywhere from $15 million to $150 million, and in some cases billions of dollars, to be managed, he explains.
“With a hundred-million-dollar family, if you were going to spend 1% of your wealth per annum, are you going to hire a really top investment strategist?” Skancke asks, “Or are you going to hire someone who’s really good at planning? Are you going to hire someone who is really good at…I’ll just call it family therapy? Because a million dollars doesn’t go very far if you’re looking for top talent in any of those areas. Better that you go somewhere that has the top talent already,” he argued.
Bringing it under one roof
The incorporation of a multifamily office allows a wealth management firm to provide solutions to high-net-worth families seeking management for their assets and answers to related questions, Skancke said. Those questions can include estate planning, wealth transfer planning, philanthropy—how they organize it, how they pass down their values to the next generations—next generation mentoring, and how they deal with what are sometimes the detrimental effects of wealth in a family. “Almost by definition, ‘family’ includes challenging relationships…no family is perfect,” Skancke said, adding bleakly that “Money can be an accelerant of those challenges.”
It can be very expensive to have one’s own family office versus connecting with someone who provides family office services for multiple families, Skancke argued. “But when you sign up with a multifamily office, it can hire the really top talent in all of those fields – strategies, next generation mentoring, family coaching, family meetings, philanthropy—the what and why of the money—and can handle the investment side, too, with the top talent.” According to Skancke, utilizing a multifamily office would probably total one-tenth of the cost of creating a single-family office.
Ultra-high-net-worth families are concerned with what to do with their money and how they can use it in a way that’s in line with their values, Skancke continued. Further, they want to know how they can pass on their wealth generationally. So, their wealth management needs are complex, and families seek different investment options depending on the weight of their goals, which firms can provide through a multifamily office domain.
“Some families sort of bifurcate their pots of money,” Skancke explained. “They will have a pot of money to provide for the living expenses for the family over time. That allocation of their wealth will be invested in what would be, typically, a more moderate or intermediate portfolio—sort of a 50/50 equity/bond risk profile. And then they’ll have another pot of money for future generations and philanthropy. For that, they’ll have a different risk profile, maybe something like a 70/30, to build for future generations and future use. Those decisions by the family come out of, first, understanding the family mission.”
The growth of the multifamily office sector within the wealth management industry provides a less expensive route for affluent families to harness wealth management. Wealth management firms with family office functions can provide the services necessary to accommodate the complexities of these services because they already have the talent on staff, Skancke said. This is driving an increase of multifamily offices in the asset management sector.
According to Forbes’ article, “Moving beyond 2019, both single- and multifamily offices will continue to expand their focus to include much more than just wealth management, legal and governance. Other main areas that will see a lot of attention include working toward real-time consolidated reporting, developing soft factors like defining a clear mission and purpose and negating new risks like the complex universe of cybersecurity.”